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BLOG: Gosling’s Grouse – Unhappy returns

Lawrence Gosling
Written By:
Lawrence Gosling

Psychologists have long known we are more likely to react to a perceived risk than a perceived good.

This aversion to risk does not just manifest itself when we are in fear for our lives, it comes in many other facets of life, from seeing what we think is a scary face, to being confronted with a scene with which we are not familiar.

Our perception of a gain or a loss is affected by a number of factors – the original amount invested, the time period, what an investor expected to make from the investment, or what they might have made from an alternative investment.

It was almost a national sport five years ago to play ‘what I would have made from a house in such and such an area’ as house prices rose.

This seemed to ignore the fact most people buy a house or flat to live in and only bought what they could actually afford at the time.

All these issues to do with risk and our psychology are brilliantly outlined in the book I am currently reading – Thinking, Fast and Slow by Daniel Kahneman.

It should be required reading for everyone – investors, fund managers and, importantly to my mind, regulators and politicians.

Investors have a pretty clear understanding of risk – most of us do not want to lose money. Most fund managers, in my experience, operate in much the same way – do not lose money first and, over time, it will slowly accumulate.

Regulators are keen on some form of risk ‘checklist’ for clients, which is frankly unrealistic because a person’s risk tolerance changes over time.

If I inherit £1m from an aged aunt (I wish) then my level of tolerance for an investment of £10,000 in Mongolian smaller companies is higher than the same investment if ALL I had to invest was £10,000 and I had not inherited anything.

It was with this in mind that a recent story on Your Money‘s sister title, Investment Week’s, website caught my eye. The story was about Stuart Rhodes, who runs the M&G Dividend fund.

This fund returned in excess of 17% over the three years to early April, at a time when cash on deposit at the Halifax has returned about 2% pa.

Rhodes’ fund, a multi-billion pound equity offering, found itself in the bottom half of its Investment Management Association category over this time period, and the manager was called upon to ‘justify’ this return.

So, let us get this right. An equity manager returns his investors 17% over three years, and that is not a good investment. There is either something wrong with our minds, or we are doing the manager an injustice. What a strange industry we work in sometime, when we criticise someone for doing their job so well.

Lawrence Gosling is editorial director at Incisive Media. His views are his own, any comments to him at