81. Embracing Risk: Developing a Winning Mindset for Financial Success (pension mini series 3)

On this episode of Women & Money Cafe, host Julie Flynn dives into the world of investment risk and how to determine personal risk for investments. Julie shares insights on how higher investment risk often leads to higher returns and how investing in multi asset funds or purpose-built portfolios can help reduce the risk of losing all your money. She also reveals how financial scams and unexpected global events impact investments and offers practical advice on how to create a balanced investment portfolio based on your time horizon. Along with that, she shares a scoring system based on level of experience, competence, and time frame and emphasizes why the biggest determining factor of how much money one makes or loses in investments is their own behavior. So join Julie Flynn on Women & Money Cafe as she demystifies investment risk and offers valuable insights and advice on understanding, measuring, and dealing with risk.

 [00:00:05] "Women of Money Cafe: Decoding Investment Risks"
[00:00:57] "Understanding Risk: Key Factors for Investing"
[00:02:26] "Understanding Investment Risks: Don't Fear Losses"
[00:03:48] "Your Workplace Pension: Safe from Financial Turmoil"
[00:05:23] "The Real Risk in Investment? It's You."
[00:06:52] "Scoring Your Investment Knowledge: A Simple Guide"
[00:08:00] "Scoring Your Investment Experience: 2 to 8"
[00:10:38] "Choosing Investment Labels: A Guide for Timelines"
[00:11:24] "Maximize Your Investment Returns With Portfolio Diversification"
[00:12:08] "Black Swan Events: Don't Panic, Stick With Diversification"

Find out which banks share a licence for FSCS purposes here

Learn more about the Financial Services Compensation Scheme (FSCS) here

Really serious about it, check out FinaMetrica

YOUR HOST
Julie Flynn is an experienced independent financial adviser and ICF coach. Justice and equality drive Julie. Which is why she’s spent years studying and researching how stress affects our financial decision making.

Julie is best known for her work with women who have lost their partner and coaching financial services business who want to implement fair and transparent charges.
Ebb & Flow Financial Coaching | Bree Wealth & Tax | Instagram

Transcript

0:05

Welcome to the Women and Money Cafe. I'm your host, Julie Flynn, independent financial advisor and financial coach. And this is the weekly Money podcast for women by women, exploring the practical and emotional side of money. Hey. Welcome to the Women of Money Cafe Podcast. So we talk about investments, risks, and funds on the podcast all the time, but we've never told you how to figure out what your risk is and what risk you should be taking and why take any risk in the first place. So while we're doing a series on pensions, we thought it would be the ideal time to take a proper look at risk. Now, everything I share with you today is not just for your pension, okay? You can apply this to any investment such as your Isa. So you may want to revisit episode 45 on how to start your first Isa armed with this knowledge. Okay? In this episode, I'm going to share with you how I explain risk. And we're going to be covering three key areas for you. So firstly, what is risk? And then secondly, how do we measure it? And then finally, what do we do with this knowledge? Know that we've got it. Bear in mind, okay, caveat here. This is an information podcast and not a personal financial advice. I'll be giving you a really simplified approach and there will be anomalies and things that are particular to you, in which case, go get some proper financial advice. Okay? So let's talk about what risk is with the type of investments that you hear us talk about when we're on the podcast and when we're talking about our clients. When we use the word rest, we talk about how the investment will behave, how exciting it will be or not. So if you think about it, I want you to picture a wavy line that slowly claims. Wavy line, slowly claims. And then another line with lots of spikes up and down. Now, the wavy line is lower risk than the spiky line because when we talk about risk, we mean how dramatic the ups and downs are. You'll also hear us use the word volatility, and it's the same thing. The more volatile I. E. Spiky, the higher the investment risk is. I think the most natural question to have if you've never invested before, is, will I lose all my money? Which is perfectly reasonable question to be asking. But with the type of investments you hear us regularly talk about these multi asset funds or a purpose built portfolio that we put together for clients, then no, losing all of your money is not a real risk because with this approach, your money is invested in literally hundreds of different companies. For a total loss situation, we would need every company in every country in the world to fail simultaneously, which is basically Armageddon. And quite frankly, if we're in that situation, you've got much bigger concerns than checking how your pension fund is doing. I've heard one advisor say that the best investment then is a shotgun and some water, but let's hope it never comes to that. But see, if you're investing in just one kind of thing, or you've got a portfolio where there is no intention or discipline behind it, then there is a real risk of substantial losses that can't be recovered. Okay, another reasonable question to ask is what if the company goes bust? Let's look at this in terms of pensions. Firstly, if you're saving into your workplace pension, can you lose your money if your company, if the company you work for gets into financial difficulty? No, you can't, because the pension money is ring fence. So if your employer gets into difficulty or even the company managing the pension is struggling, they cannot access your money. Now if you go and have a quick Google of Robert Maxwell, you'll see that he was the owner of the Mirror newspaper Group who did steal all the money from the pension fund. So this was back in the 1990s. Since then, lessons have been learned and legislation has been put in place to protect you. So your money is ringfest, and that's to protect you from fraud. Then there's the Financial Services Compensation Scheme, which offers protection should the financial institution, your work, get into difficulty. So for banks, if a bank fails, you're protected up to 85,000 pound per banking license. That's worth noting. Some banks share a license, so in that case, the 85,000 would be across the institutions. The Money Saving expert website has got a handy guide on this. I'm going to put a link to it in the show notes so you can go and check which banks share a license. Then again, your Israel, if the investment company fails, you're protected up to 85,000 pound. Your pension, it's up to 100%. If you've got a self invested personal pension, it's up to 85,000 pound per firm. So that's us covered off the protection you have against total loss. So where's the risk then? Okay, so what I tell my clients, and this is true for you, all right, the biggest determining factor of how much money you make or lose is you. So a lot of our conversations around this topic is about identifying how you're going to behave in certain scenarios. When you see your investment drop, are you going to panic? Are you going to want to sell it or are you going to want to move it to another investment that's doing better that day? Now I use the word when intentionally when your investment drops, because I can guarantee you at some point you will see a drop in value. The investment that only ever goes up has not been invented yet, and even if it had, I'm not sure I would trust it. So it's how we react when things go financially wrong. That's the real risk. And the great news is you're in charge of that bet. So think about your investment as a journey, okay? Can you cope with it being a bumpy journey without pushing the panic button? Or do you need a gentler start to get some experience under your belt? If you see the money drop, are you going to sell or can you keep your nerve? These are the key questions to be asking yourself. Okay, so got some general concepts there around risk. Then I know with regards, like, how do we turn that into a score? So I'm going to share with you something that I've heard Pete Matthews do with Pete's permission, by the way. And if you're a Pete junkie, go back and have a listen to episode 75 where simplify your money with Pete. So to get your attitude to rest, we're going to score ourselves on three areas. The first one is understanding. The second one is experience, and then the third one is time frame. So an understanding. Okay, on a scale of one to four, score yourself on how much you feel you know about invest, how investments work, so interest rates, inflation, the stock market, that kind of thing. So if all of those words mean nothing to you and you haven't got a clue, score yourself as a one if you're like. I recognize some of those words you just used. I've got a little bit of knowledge. Score yourself as a two if you're like. I've got a handle on most of this. You're a three. And if you're like, I know this stuff inside out. Score yourself as a four. All right, let's score ourselves on experience then, because experience is different to understanding. A lot of clients, when they come to work with me, they have some understanding how investments work, and they are smart people, but they don't have any experience. And this is critical because lived experience is a very different thing to imagining how you're going to react when your investments fall the first time. Okay? So if you have zero experience, I want you to score yourself as a one. If you've got a little bit of experience, score yourself as a two. If you've got a good amount of experience and you've been through some highs and lows, you're a three. If you got years of experience and you've seen it all, score yourself as a four. Okay? So taking those two scores, add them together, and your number should be somewhere between two and eight. So if you've scored a two or a three, you are a cautious investor. If you're a four or a five, you're balanced. If you're six or a seven, you're a growth investor. If you're an eight, you're an adventurous investor. Okay, so now you've got an idea of what your risk appetite is, and you've got a label to give your investment style. So the third factor we're looking at is time frame. What this lets us do is fine tune the risk in context of what we're investing for. What I mean by this is the longer you're going to be invested can influence how much risk you take. So one way to look at that is if, let's take me as an example. My pension money. Now, I'm probably not going to be touching my pension fund for 20 years. So do I care if it goes down today, this year? No, I probably don't care next year either because we know that within the time frame that I'm working to, my pension will be worth more in 20 years time than it is today. But if this is money you're planning on using the next few years, that's different. You know that we're always saying that money you have plans for in the next few years has to stay in cash. And it's for this reason. So let's say you're saving for a house deposit. You got 10,000 pounds saved. You do not want that invested and exposed to the ups and downs of the market. That's crazy stuff. All right? So score enough sales for a time frame. If you've got plans for the money in the next year or two, score yourself as a one. If the money is for three to five years, score yourself as a two. Six to ten years is a 311, plus years is a four. Now everyone with the one to two year time frame, you've got to stay in cash. Okay? But let's say you came out as a balanced investor and so for a time frame of six to ten years, absolutely go with a balanced investment. But if you're saving for eleven plus years, you could consider just moving up a label to growth as you've got a longer time horizon. Conversely, if the money's for three to five years, you may want to drop down a label to cautious. All right, so what do these labels mean that I've thrown out? Cautious, balance, growth, adventurous. You might hear moderate in there somewhere as well with other people. In its simplest form, right. The easiest way to increase or decrease risk in a portfolio is how much stocks and shares you've got in it. So if you want to up the risk, you put more stocks and shares in it. If you want to reduce the risk, you reduce the amount of stocks and shares you've got. And I'm going to show you a rough rule of thumb that's going to help you when you're looking at funds as well. So cautious investment generally has no more than 40% stocks and shares in it. Balanced portfolio a maximum of 60%. A growth portfolio a maximum of 80%. An adventurous, you can have 100% stocks and shares. Now these are generalizations and at different times, different things will impact the investment. So as I record this, it's May 2023 and last year the so called safe part of the portfolio, bonds, took a bit of a beaten all right? We had a series of interest rate hikes and we had double digit inflation. All of these things hurt bonds, so the safe bet doesn't look like it was doing too good. Then we get what we call these so called black swan events, which is like, nobody saw that coming. And when that happens, it can make it look like diversification didn't work. Because what can happen is you can see everything drop all at once. But if you've gone with a multi asset fund, that was the right risk for you, stick with it, all right? It will work out in the end. And if that feels too hard to do and you're tempted to do something that you just you're reacting to it, reach out to a financial advisor. Okay? We've got decades of experience of raiding out tough market conditions, and we can help you avoid some really expensive mistakes. So I hope this has been useful for you. And as always, if you've got any questions, come and find me on Instagram. She'll be Flynn moneywoman. Or you can drop us a message and we'll get back to you and we can. And like I said, if you have found it useful, you know I'm going to ask. Please, please, pretty please, go and leave us a review. But until next time, take care of yourself. Thanks for listening to the women of Money Cafe. If you've enjoyed it, please leave us a review. It really does help. And also, please note, the podcast is for education and information only and doesn't constitute personal financial advice. Please reach out to one of us or any of the other fantastic financial advisors in the UK for that kind of help. You heart.