Who needs protection if the market's going up?
At Liontamer we also hope that markets will rise - that's why we are designing products to take advantage of market growth. We also design products with differing degrees of capital protection, but we certainly hope that the protection is not needed. If we did, it would be like an insurance company hoping your house would burn down, for the sheer joy of being able to replace it for you!
Very simply, capital protection gives clients confidence and the peace of mind that their portfolio is insulated from further market shocks. And most importantly, it keeps them invested for the full term. When markets wobble, clients being hurt by losses behave in quite a different manner. They are prone to selling into a downturn, giving up and not having the stamina to last the distance. After prolonged downturns, the risk of clients realising their losses, rather than hanging in, increases dramatically. While many financial planners have the confidence that markets will rise and recover, investors often don't have this foresight. How many times have we all seen retail investors take big hits as the market falls? Capital protected products change investor behaviour.
Bear markets and short term wobbles become less relevant. They feel content in the knowledge that full or partial protection is in place and this has a very powerful effect on their investing behaviour. But all the arguments are not just emotional or behavioural. From a financial planner's perspective, capital protected products provide a very powerful tool. When used as a 'hold to maturity' investment, they provide important exposure to equity markets with significantly less risk. Lowering portfolio risk in one area gives planners far more flexibility with other parts of the portfolio. It also gives the ability to invest greater amounts in equities than that prescribed by normal portfolio construction theories because the risks are quite different. Clients who would normally only be prepared to commit small amounts to the sharemarket have the confidence to invest more.
Key points:
- Protection provides a change in investing behaviour and the confidence to ride out market downturns
- Protection lowers overall portfolio risk
- Protection provides planners with more flexibility when constructing portfolios
- Protection leads to investors having the confidence to increase their equity exposure
