Absolute returns - a marketing person’s dream
Over many years, the investment industry has been masterful at constructing and selling products which play to the most basic and powerful of human emotions, including fear and greed, as well as ‘loss aversion’, ‘regret avoidance’ and ‘social influence’ and a good recent example in this respect is so-called ’Absolute Return’ funds / products.
We know that markets are always uncertain and that short-term market losses are a normal part of investing. We also know from behavioural finance research that human beings, with some variation person-to-person, are inherently pleasure-seeking, yet feel around twice as much pain from losses as they feel pleasure from gains. In some older investors, this emotional asymmetry can be even more pronounced and these deep-seated behavioural traits have a tendency to result in investors overpaying for / losing money on both gambling-like activities (such as speculating on investment opportunities) and downside protection (such as insurance).
It is perhaps unsurprising, therefore, that products that combine – or seem to combine – the potential for both significant gains and risk mitigation, such as ‘structured products’ and ‘absolute return funds’, tend to sell like (expensive) hot cakes. After all, given the willingness of people to speculate – or alarmingly, even base their entire financial future – on winning lotteries, even though the odds of them winning / losing their stake money are appalling (a 35 year-old man who buys a lottery ticket on a Monday has more chance of dying during the week than winning the lottery ), we probably shouldn’t be surprised at just how alluring these types of products can be.
However, in an investment context, it is always worth remembering that there are no risk-free returns to be conveniently and reliably collected above the so-called ‘risk-free rate’ delivered by cash (and even that bears inflation risk and the risk of the bank failing), since any such returns would be quickly pocketed by the vast number of extremely bright and hardworking professional investors, as well as the relentless computer-driven trading algorithms employed by many.
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