As we reflect on the past year of 2023, it's apparent that the phenomenon of losses faced by equity funds was widespreadData gathered from Wind suggests that as of December 22, the average loss across the entire market's stock funds over the past year stood at 10.75%. Alarmingly, there were around 500 funds that recorded losses of at least 10%, with over 30 of these funds suffering losses exceeding 30%. Looking at the past three years, stock funds experienced an average loss of 11.61%. Furthermore, hybrid equity funds saw an average decline of 11.74% in the last year and 9.1% over the last three yearsThis dismal performance brings to light the tumultuous landscape of investment in the current economic environment.

Presently, while investors generally possess a degree of risk awareness, there are significant irrational behaviors evident in how they comprehend and navigate these risksStrategies such as ignoring their fund account balances or vowing to never invest in funds again are troubling yet common responses to perceived investment threatsThese tactics often overlook essential long-term market trends and the intrinsic value potential of assets, highlighting a behavioral phenomenon akin to the “Lobster Effect” in psychologyTo address this scenario, it is critical for investors to gradually nurture concepts of asset allocation, risk diversification, and the importance of long-term investmentSeeking the guidance of financial consultants or investment specialists may offer valuable insights.

Enhancing risk assessment capabilities remains a significant challenge.

A recent report published by YinHua Fund, based on more than 30,000 completed questionnaires from their Q3 2023 "Investor Behavior Survey," reveals that while investors broadly demonstrate risk awareness, some exhibit irrational tendencies regarding risk recognition and coping strategies

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When prompted about the best timeline for taking action against risks, the dominant response—chosen by 29% of participants—was to react to significant fluctuations in fund performanceYet, when it came to actively managing that risk, 6% opted not to check their fund accounts, while 11% decided to sell off investments entirely with no intention of returningAdditionally, 18% indicated they would maintain or increase their risk appetites and adjust their portfolios.

Furthermore, when asked about the factors leading to investment risks in funds, the majority cited issues such as poor market performance (10%), underwhelming performance in targeted industries (15%), adherence to fund strategies that lack adaptation (18%), and unexpected shifts in fund styles (16%). Interestingly, only 7% attributed risks to selecting unsuitable funds and merely 4% blamed poor choice in timing to engage with the marketThis report suggests that a notable proportion of investors still require improvement in their ability to assess risks.

"The losses observed in funds throughout 2023 are primarily a consequence of market conditions—not only did the fund investments suffer, but stock investments also proved challenging," commented Dai Jingxia, a senior analyst at Morningstar (China) Fund Research CenterShe emphasized the necessity for individual investors who are experiencing severe losses—significantly overshadowing market averages—to engage in a critical reflection of their investment behaviorsKey questions arise: Are they overly concentrated in specific funds or sectors? Are they pursuing investment strategies defined by buying high and selling low?

"Investors who encounter losses often experience diminished morale, leading to a reluctance to engage in rational thinking and an aversion to risk," added representatives from Hongde Fund, referring to the “Lobster Effect” psychology

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The concept indicates that when two lobsters confront each other and one is defeated, the losing lobster ceases to fight and often loses the motivation to battle againInvestors, too, can fall victim to such sentiments.

However, this approach neglects comprehensive considerations of market trends over the long haul and the growth potential of their assetsHistorical trends suggest that stock markets typically show a steady upward trajectory over extended periodsAlthough instances of short-term fluctuations and losses are inevitable, these movements are often regarded as part of the usual market mechanism," emphasized representatives from Hongde Fund.

Mitigating product mismatch risks is essential.

According to analysis by a financial technology platform, the sheer number of publicly offered fund products surpasses 10,000, with equity fund net values highly sensitive to market fluctuationsOrdinary investors, hindered by cognitive biases, often struggle to align their risk tolerance and investment timelines with the risk-return profiles of available products, which leads to inappropriate selectionsA fundamental error in risk selection is compounded by insufficient understanding and the emotional responses that lead to impulsive investment behaviors.

An example provided by the financial technology platform illustrates an important scenario: if an investor initially puts 100 renminbi into a fund, achieving a staggering 100% return in the first year—this would double their investment to 200 renminbi

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However, encouraged by this high return, they might decide to invest an additional 10,000 renminbi in the second yearYet, should the fund return -25% that year, it results in a loss of 2,550 renminbiIgnoring the previous year’s profit, the two-year total investment loss could reach 2,450 renminbiIt shows that while fund returns aren't inherently low, many investors miss out on profits due to inappropriate buying and selling practices—predominantly excessive trading without a plan and attempting to time the market's ups and downs.

Consequently, issues surrounding the discrepancy between funds making profits and the lack of profits for investors can be partially attributed to flawed investment perceptions and operational practicesWang Qunhang, the Vice President and Board Member of Baijia Fund, emphasized the importance of recognizing several key points: investing in funds does not automatically guarantee positive returns across all types of fundsMoreover, it does not imply that a holder will achieve favorable returns at all timesInvestors should work to understand the return structure of funds, especially equity products.

"Investors should focus on understanding the funds themselves rather than placing their trust solely in individuals," Wang assertedFor example, in an equity fund holding, 80% of the assets might be allocated to stocks where the net value declines due to unfavorable market conditions, meaning that investors should not place blame solely on fund managers for losses that are reflective of broader market performance.

Yingmi Fund expresses that, in this era of net value investments, society faces a reconstruction of financial management philosophies

Long-term investments in equity products tend to yield higher returns; however, much of the public’s money is often earmarked for retirement or future plans, resulting in a significant portion being parked in savings accountsWithout an investment mindset that equates long-term returns to ‘time plus volatility,’ it becomes challenging for investors to achieve success in the market, leading asset management institutions to struggle with obtaining stable long-term capital.

Nurturing a mindset around asset allocation is vital.

To amend misguided investment behaviors, Dai Jingxia advocates for investors to cultivate a philosophy centered around asset allocation, risk diversification, and long-term investmentSeeking assistance from financial advisors or investment experts can help guide this transitionThe strategy of broad asset allocation involves distributing investments across various asset categories (e.g., stocks, bonds, commodities, cash) to mitigate risks and enhance overall returnsCurrently, however, many investors overly fixate on short-term market trends, often leading to over-concentration in specific asset categories or hot products while neglecting the importance of long-range asset allocation.

The financial technology platform underscores the notion that improving profitability for investors cannot solely rest on enhancing individual investment skillsOrdinary investors require professional investment guidance and accompanying services. “Investment and financial management is a specialized field, and the lack of a robust investment knowledge framework among investors is a critical factor in the discrepancy between profitable funds and non-profitable investors,” they assert

Moreover, fund companies need to strengthen educational outreach to investors, assisting them in adopting appropriate investment philosophiesFor those less informed, professional advisory services should be offered.

This additionally suggests a need for transformation among relevant institutionsYingmi Fund highlights that fund companies, as asset management bodies, must serve as "tool providers," offering a wider range of broad-base asset allocation productsHowever, actual implementation of tailored asset allocation strategies still necessitates the involvement of advisory firms to deliver personalized solutions.

Specifically, Yingmi Fund breaks down investment returns into three components: α, β, and γ. The α return signifies the goals an asset manager must achieve, which necessitates improving their research and active management capabilitiesThe β return is determined by economic benefits and market conditions—fluctuating in the short term due to economic factors and market sentiment, yet reflecting long-term economic growth and corporate profitabilityThe γ return represents the advisory income portion, which is generated by guiding investors to correct their investment behavior, adjust their understanding of investments, and accompany them through volatility to secure their rightful α and β returns.

“The performance of asset management products can be independently achieved by asset managersHowever, for investor accounts to generate steady returns, collaboration during the investor-advisor interaction is crucialTherefore, reliance on merely achieving superior performance of asset management products does not fulfill investor needs

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