Roger Edwards is head of marketing development at Scottish Life
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But in between is a huge market of people who want stockmarket access but with protection against the downside. Some might argue that an individual could get the downside protection from a well-diversified portfolio and, provided this was the individual’s view, that approach would be fine. Many people view any type of investment, however diversified, as a gamble. And while they understand that a stockmarket investment is likely to give them greater returns than cash, the risk of the “gamble” will put them off. How much would an individual be prepared to pay to participate in the upside while being protected against the risks of the downside? Let’s imagine someone contemplating a 10 bet on a horse with odds at 10-1. Obviously a straight bet at these odds would return 110 if the horse won and zero if the horse lost. Now these odds might be perfectly acceptable for an individual standing to lose only 10 but what would happen if the sum at stake were a lot higher – for example, 10,000 or 100,000? The risk involved may suddenly appear less attractive. But what if the bookie offered the individual lower odds, say, 8-1, in return for agreeing to return the original bet if the horse lost. So the option is either to win 110 but at the risk of losing the original 10 or to win 90 but with no risk of losing the 10. With higher sums at stake, this might well become a more attractive alternative. When it comes to investment products that offer protection against the downside, there is always a corresponding reduction in the participation of the upside. Most structured products are pretty much “one size fits all” when it comes to the downside protection. But as individuals have different outlooks, it is important to have products that offer solutions flexible enough to meet these different needs. Watching individuals’ different attitudes to risk is fascinating. Look at the TV game show Deal or No Deal. Imagine that the latest contestant has two boxes remaining – one containing the booby prize of 1p and the other containing the top prize of 250,000. The banker offers the contestant a deal of 90,000. So the choice is to say: “No deal” and possibly discover the box you hold contains the 1p or to say, “Deal” and be 90,000 better off but find you were actually holding the 250,000 box after all. How many people would take the risk of ending up with 1p when they have the chance to walk away with 90,000? Of course, some would argue they came with nothing and therefore would take the gamble. But if you were in that situation, what would you do? What about being offered a slightly lower deal? Say you could take 55,000 but still be allowed to walk away with the top prize if that happened to be in your box. How much of a reduction in the value of the deal would you be prepared to take in order to retain possible access to the top prize? If you had dealt at 90,000 and the final box had the penny in it, you might feel good about the result. Accepting a lower deal and finding the penny rather than the 250,000 would probably be less of a thrill. The reality is that different individuals would react in different ways to these scenarios. So, flexibility must be the key and when it comes to investment products that offer stockmarket access and some protection against the downside, it is essential to bear in mind the wide range of client outlooks and select a solution that is individual to each client.