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Missing the Upside is the Same as Participating in the Downside
Article publishedBy: David Richman  |  Article published on:August 1, 2024

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Missing the Upside is the Same as Participating in the Downside

By David RichmanManaging Director, Advisor Institute

Recent market action to the upside is leading to interesting perceptions and conversations regarding risk. Rather than debating a prospective client's view of today's lofty markets, how might you lift the conversation to a higher level?

Leverage an intriguing ism from Jim Caron, CIO of the Portfolio Solutions Group, "Missing the upside is the same as participating in the downside." Consider the following back-and-forth between an advisor and a prospective client.

Prospective Client: "I'm happy to be sitting on the sidelines with this market continuing to run. I'm convinced it's headed for a big correction."

Advisor: "Missing the upside is the same as participating in the downside."

Prospective Client: "What does that mean?"

Advisor: "People typically think about investment risk as a market fluctuation to the downside, yet markets also fluctuate higher. There's risk to the upside if you measure it as a missed opportunity to achieve a positive return. Risk is symmetrical: There's both upside and downside risk. It's important to consider hedging the upside risks."

What is likely driving our prospective client's point of view? Biases. We all have them. In this case, it sounds like:

  • Overconfidence bias: The tendency for a person to overestimate their abilities and opinions.
  • Binary bias: The tendency to seek clarity through oversimplification by narrowing down all the possible scenarios on an issue to two, often opposing, views (good or bad, true or false).

Professor Adam Grant in his book Think Again suggests there may be an antidote for both: Complexification, the act of adding degrees of complexity rather than keeping it simple. According to Grant:

"A dose of complexity can disrupt overconfidence cycles and spur rethinking cycles. It gives us more humility about our knowledge and more doubts about our opinions and makes us curious enough to discover information we were lacking."

Jim's ism, "missing the upside is the same as participating in the downside," may sound counterintuitive to most investors, who tend to only think of risk to the downside. Therein lies the opportunity to incorporate complexification and create a curiosity gap that leaves people interested in learning more from you.

Bottom Line:  Look for opportunities to lift your conversations higher this summer by adding a bit of complexity with an intriguing ism.