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B Srinivasan discusses how he uses the concept of mental accounting to make retired clients embrace equity and shun their risk aversion. “Risk is not losing money, it is your inability to go through a cycle”, he begins. He explains that there is typically a 25-30 year retirement bracket for clients which gives them a significant amount of time to break up money into buckets.
The first bucket is for the first 5 years wherein investments are in debt to ensure liquidity and availability of emergency cash. The second bucket has an increased equity exposure. “Equity is a proven inflation-beating asset”, he says as he explains to his clients that they will not need that money for the next 10 years which will give them enough time to go through a full cycle and grow their money. He states that teaching a client to view their assets in buckets based on time instead of viewing it as a collective mass helps reduce their risk aversion, often making them want to increase their equity exposure as they gain confidence over time.
He ends with some important advice he gives his clients – to invest based on the inheritor’s risk profile or they end up losing long-term.
Beautiful and apt explanation in the simplest way to love equity. Cheers
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