But, even so, decisions remain. While downside is an important consideration it needs to be weighed against the desire for a good upside outcome.
Let’s take the practical example illustrated below. Say you are faced with wheels A and B, with four possible outcomes on each. Which would your client prefer to spin?
Many investors choose wheel A as the guaranteed £2,400 return is seen as better than wheel B where they could in the worst case get nothing. So even though in the long run (with repeat spins) wheel B should deliver a better outcome, psychology leads the investor to choose A as they prefer a return over no return.
Let’s look at another – attitudes to losses demonstrate similar behaviour. Which out of wheels C and D would your client prefer to spin? The majority choose wheel D as it has the chance of avoiding a loss, even though in the long run you’d expect to get the same return from both.
While this is only an analogy, this ingrained behaviour does affect the investor’s journey, which is an important part of the investment experience.
Such attitudes to loss are important when considering the function of most structured investments. The protection element and trade-off with potential gains may be simpler to explain than the function of an open-ended fund, the outcome – both positive and negative – of which is largely down to the abilities of its manager.
With investors placing differing importance on growth, income and capital protection from their investments, there will rarely if ever be a ‘one size fits all’ structured investment. Having said that, away from either extreme of the risk spectrum, it is possible to design products for almost anyone. Aims will differ – income or investment growth, perhaps both.
Richard Henry is a director of investor solutions at Barclays Capital
