10 May 2021

Fear of losing

It was mid-March 2020 and Robert was at his wits’ end. His share portfolio was down 30% in the space of a month and the thought of further losses made him feel ill. Distraught, he rang his financial adviser Helen with a simple instruction: “Get me out!”

Helen listened to Robert sympathetically and said she completely understood how he was feeling. “It’s a worrying time, no doubt”, Helen said. “You’re not the first client to ring me today about what’s happening in the markets and I suspect you won’t be the last.”

But Helen asked Robert to reflect for a moment on what he was proposing. “You’re in your early 40s. The money that you’re investing won’t be drawn on until you retire. Markets will run through multiple cycles over the next 20 years. If you sell now, you’ll only be turning a paper loss into a real one.”

Robert wasn’t even facing a loss. Global equity markets only a month before the pandemic crisis were at record highs and he had been investing for nearly 20 years already so had achieved gains of 10% annualised in that time.

A primordial response

This man’s desire to dump his portfolio entirely was understandable, but it was exactly the wrong decision. What had kicked in, deep inside his brain, was a primordial response to an external threat. His impulse was to act to save himself.

Robert told Helen he felt he was risk averse. Yet, he had been quite happy with his portfolio when it was accumulating steady gains. In fact, his behaviour was not of someone who was risk averse but of someone who was loss averse.

By seeking to get out of the market to avoid a loss, Robert would not only realise the fall in market values to that point from a month before, but have created significant risk. He was taking a very big gamble to avoid feeling further emotional pain. And if he acted, he would only add the further stress of having to decide when to get back in.

This behavioural bias, known as loss aversion, is well-documented in academic literature. Researchers such as Tversky and Kahneman found that the possibility of negative repercussions will often weigh heavier on us than positive ones. So we demand a bigger payoff for the chance of a bad outcome than we would for a good one.

Say, for example, you are offered to bet on the flip of a coin. If it comes up heads, you lose £100. If it comes up tails, you win £100. Tversky and Kahneman found that to take that bet, most people would require tails to pay twice the cost of flipping heads.

Looked at from Robert’s perspective, he was more sensitive to the possibility of the market going down even further, than to it going back to where it was in February, which as it turns out is exactly what happened. He wanted to avoid that loss so much that he was willing to risk an even greater loss by getting out of the market altogether.

Setting expectations

Fortunately, Helen was a good adviser. She reminded him that in their initial meetings they had talked about how markets work. Share prices do not go up in a straight line. His portfolio would likely experience many up and down cycles over the years. What was important to him was what happened over his time horizon.

Helen had also been careful to keep reminding Robert that nothing lasted forever. So when his shares had a great year, she would say “this won’t last”. Equally, when the market had had a bad year, her advice was exactly the same: “This won’t last”.

When shares were down, she also would use that window to strategically rebalance Robert’s portfolio, bringing him back to his target asset allocation and keeping him on track. This way he was buying low and selling high, but without trying to time the market. He was subsequently aware of the risks and of the wide range of possible manifestations of those risks over the lifetime of his investments.

Of course, Helen also knew that even her most relaxed clients could panic from time to time. But she saw her role as being the person who sits between the client’s completely understandable emotions and the danger of them acting impulsively.

Robert finished the call with Helen and immediately felt better about things. Helen had built a plan for him and the probability of this sort of volatility was hard-wired into it. If he stuck to all the things he could control, he would remain on track.

The names in this blog have clearly been changed, but this is what we do, day in, day out. We build a plan for our clients and we’re there by their side to help them stick to it. That’s the power of long-term client/adviser relationships.


Matt Duncan is an Associate Director at Carbon. Contact him via email at


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