WEBVTT 00:00:00.709 --> 00:00:04.910 Yes, the answer is yes. Of course, there's risk 00:00:04.910 --> 00:00:07.889 in managing our pensions, but risk is nuanced. 00:00:08.050 --> 00:00:11.089 And there's an argument to say that if we all 00:00:11.089 --> 00:00:13.529 increased our understanding of risk by a small 00:00:13.529 --> 00:00:16.969 amount, we could improve our retirement chances 00:00:16.969 --> 00:00:20.589 by a large amount. So in this video, I'm gonna 00:00:20.589 --> 00:00:23.670 talk about some simple aspects of risks that 00:00:23.670 --> 00:00:25.870 most of you will know, but some of you may not 00:00:25.870 --> 00:00:29.339 have heard. Now, In the world of risk management, 00:00:29.559 --> 00:00:32.759 which was my profession before I retired recently, 00:00:33.460 --> 00:00:38.380 we often talked about upside risk. Now, roughly 00:00:38.380 --> 00:00:40.820 in English, if we translate this, it becomes 00:00:40.820 --> 00:00:44.380 the chances that things will be better than we 00:00:44.380 --> 00:00:48.020 expected. So what we're talking about really 00:00:48.020 --> 00:00:51.380 is opportunity. And I've always think that risk 00:00:51.380 --> 00:00:55.380 and opportunity are two sides of the same coin 00:00:55.380 --> 00:00:58.950 really. And if you consider one way or the other, 00:00:59.210 --> 00:01:02.570 you can actually run into some problems. Now, 00:01:02.710 --> 00:01:06.909 as human beings, we are programmed to fear more 00:01:06.909 --> 00:01:10.269 about losing than we are motivated about gaining 00:01:10.269 --> 00:01:13.930 things. So this has been proved in many different 00:01:13.930 --> 00:01:16.489 social experiments. And it's the reason that 00:01:16.489 --> 00:01:18.849 if you actually asked a novice to look after 00:01:18.849 --> 00:01:21.670 a portfolio of pension investments, they'd start 00:01:21.670 --> 00:01:25.109 to lose it pretty quickly really. And I think 00:01:25.450 --> 00:01:27.709 This is one of the reasons for this is that our 00:01:27.709 --> 00:01:30.569 instinct when an investment starts to drop in 00:01:30.569 --> 00:01:33.010 value is that what we'll do is we'll cash it 00:01:33.010 --> 00:01:36.250 in before we lose even more. But then again, 00:01:36.510 --> 00:01:39.310 our instinct when investments go up in value 00:01:39.310 --> 00:01:42.870 is to actually cash the gains in before they 00:01:42.870 --> 00:01:46.709 drop again. Now both these things can actually 00:01:46.709 --> 00:01:52.269 be damaging to pension portfolios. Now as chimpanzees 00:01:52.269 --> 00:01:56.230 don't really understand in investing, then if 00:01:56.230 --> 00:02:00.209 you give the same portfolio to a novice human 00:02:00.209 --> 00:02:03.689 investor and a chimp where the chimp can only 00:02:03.689 --> 00:02:06.870 make random investments, then the chimp will 00:02:06.870 --> 00:02:10.569 pretty much always do better. Now, of course, 00:02:11.009 --> 00:02:14.479 professional investors go through. advanced training 00:02:14.479 --> 00:02:17.860 in risk management relating to investments. And 00:02:17.860 --> 00:02:21.180 in general, they are trained to ignore these 00:02:21.180 --> 00:02:25.319 kind of natural instincts that cause this kind 00:02:25.319 --> 00:02:27.520 of risk aversion and the losses that come from 00:02:27.520 --> 00:02:31.180 it. But the problem with getting a professional 00:02:31.180 --> 00:02:33.740 to manage your portfolio is that they insist 00:02:33.740 --> 00:02:39.020 on being paid. Now, as they will only be slightly 00:02:39.020 --> 00:02:42.460 better than you in their investments, then by 00:02:42.460 --> 00:02:45.419 the time you've paid them, you'd have been better 00:02:45.419 --> 00:02:49.979 off, frankly, sticking with the chimp. So what 00:02:49.979 --> 00:02:53.120 can we do as most of us generally don't have 00:02:53.120 --> 00:02:57.400 ready access to a chimp? So the term to remember 00:02:57.400 --> 00:03:04.300 is index and chill. So let's break that down. 00:03:04.990 --> 00:03:10.210 An index in investment terms refers to shares 00:03:10.210 --> 00:03:13.590 of a large group of companies all kind of bundled 00:03:13.590 --> 00:03:16.870 together. So that if some of them companies do 00:03:16.870 --> 00:03:19.530 well and others perform really badly or go out 00:03:19.530 --> 00:03:22.270 of business, then on average you're not going 00:03:22.270 --> 00:03:25.629 to lose your shirt. The risk is spread amongst 00:03:25.629 --> 00:03:29.490 the companies. So we've started to diversify 00:03:29.490 --> 00:03:34.050 our investments. So index and chill, spread your 00:03:34.050 --> 00:03:37.590 risk with an index fund and then chill out. Now, 00:03:37.889 --> 00:03:40.409 don't keep chopping and changing it is the advice. 00:03:40.889 --> 00:03:43.310 Even better, don't even look at it at all. One 00:03:43.310 --> 00:03:46.449 of my subscribers on here said that what he does 00:03:46.449 --> 00:03:49.610 is he checks his pension portfolio once a year 00:03:49.610 --> 00:03:52.310 on New Year's Day and the rest of the time he 00:03:52.310 --> 00:03:54.530 doesn't worry about it. I think that's generally 00:03:54.530 --> 00:04:00.250 some good advice. In investing, Time is a very 00:04:00.250 --> 00:04:03.090 good leveler. You won't have missed the news 00:04:03.090 --> 00:04:06.849 recently about Trump's tariffs causing wide swings 00:04:06.849 --> 00:04:11.250 in the markets and you can think of markets and 00:04:11.250 --> 00:04:15.409 indexes or indices interchangeably for the purpose 00:04:15.409 --> 00:04:19.689 of what we're discussing here. So if you looked 00:04:19.689 --> 00:04:22.389 at the stock index week by week over the last 00:04:22.389 --> 00:04:26.129 few months, even the indexes that we're talking 00:04:26.129 --> 00:04:29.870 about here would have gone up and down. 5 % or 00:04:29.870 --> 00:04:35.589 more each week. Now, given the advice of my subscriber 00:04:35.589 --> 00:04:38.769 or checking it once a year, then the volatility 00:04:38.769 --> 00:04:41.769 of them shares that he will see will decrease 00:04:41.769 --> 00:04:45.709 significantly over a year. Even better, how about 00:04:45.709 --> 00:04:48.810 looking at the performance of indices over a 00:04:48.810 --> 00:04:52.170 20 year period and things will smooth out even 00:04:52.170 --> 00:04:56.420 more. Now 20 years is my favorite time frame 00:04:56.420 --> 00:04:59.560 for looking at stock indices, and this is how 00:04:59.560 --> 00:05:02.699 I try and use them. Now I have a pension pot 00:05:02.699 --> 00:05:05.560 containing all the money I've ever paid into 00:05:05.560 --> 00:05:08.879 my pensions over my lifetime, but I don't look 00:05:08.879 --> 00:05:12.920 at it as a single pot. What I do is I break it 00:05:12.920 --> 00:05:16.459 down into three buckets. Now the first bucket 00:05:16.459 --> 00:05:21.550 is the money I need in the next 10 years. I don't 00:05:21.550 --> 00:05:24.009 invest this generally in stock indices because 00:05:24.009 --> 00:05:26.569 I know these can go up and down quite a bit. 00:05:26.730 --> 00:05:29.910 So what I do, I invest this first bucket of cash 00:05:29.910 --> 00:05:33.629 in things that are much less risky. I'll show 00:05:33.629 --> 00:05:36.670 you in a minute what I mean by this. Now the 00:05:36.670 --> 00:05:39.250 next bucket I have is the money that I expect 00:05:39.250 --> 00:05:43.689 to spend between 10 and 20 years time. Now this 00:05:43.689 --> 00:05:47.300 bucket is a bit of a mix of very safe investments 00:05:47.300 --> 00:05:49.920 and some of the index investments that we're 00:05:49.920 --> 00:05:53.500 talking about now. So the final bucket of money 00:05:53.500 --> 00:05:57.459 is the money I will spend in 20 years time. At 00:05:57.459 --> 00:06:00.959 the moment I'm 56, so this is the money I will 00:06:00.959 --> 00:06:05.779 spend from 76 onwards. And I'm confident that 00:06:05.779 --> 00:06:09.209 the indexes that I've invested in will perform 00:06:09.209 --> 00:06:11.569 well over that 20 year period. Now it's important 00:06:11.569 --> 00:06:13.550 to remember that I'm not a financial advisor 00:06:13.550 --> 00:06:15.490 and this is not meant to be financial advice. 00:06:16.089 --> 00:06:19.509 It's just information about what I've done with 00:06:19.509 --> 00:06:22.370 my investments and what I'm happy to do in terms 00:06:22.370 --> 00:06:25.370 of risk. So let's take a look at the numbers 00:06:25.370 --> 00:06:28.430 around this third bucket and to do this I'm going 00:06:28.430 --> 00:06:31.829 to look at the average return of these investments 00:06:31.829 --> 00:06:35.350 over their previous 20 years. Now the index I've 00:06:35.350 --> 00:06:38.420 chosen to have a look at. is a group of over 00:06:38.420 --> 00:06:42.100 5 ,000 companies all in one big bucket from all 00:06:42.100 --> 00:06:44.399 over the world. And I can buy single investments 00:06:44.399 --> 00:06:47.740 that splits my money over all these companies. 00:06:48.360 --> 00:06:51.980 So if I'd have invested in this index which is 00:06:51.980 --> 00:06:55.540 the All World Index 20 years ago, I would have 00:06:55.540 --> 00:07:01.740 had on average a return of 8 .8 % per year. Now 00:07:01.740 --> 00:07:05.939 we all know that the that large world events 00:07:05.939 --> 00:07:09.319 impact markets. And if we consider four of the 00:07:09.319 --> 00:07:12.040 biggest events over the past 100 years, namely 00:07:12.040 --> 00:07:15.860 the Great Depression in the late 20s, World War 00:07:15.860 --> 00:07:21.079 II, 39 to 45, the global financial crisis of 00:07:21.079 --> 00:07:24.540 2008, and the global pandemic, of course, of 00:07:24.540 --> 00:07:29.259 2020, then two of these cataclysmic events have 00:07:29.259 --> 00:07:32.360 actually happened in the last 20 years, and the 00:07:32.360 --> 00:07:37.829 World Index. I still returned nearly 9 % average 00:07:37.829 --> 00:07:41.430 year on year during that 20 year period. So for 00:07:41.430 --> 00:07:44.149 the money that I don't plan to use the next 20 00:07:44.149 --> 00:07:47.170 years or more, then I personally like the world 00:07:47.170 --> 00:07:50.670 index. Now other people have a different risk 00:07:50.670 --> 00:07:54.290 appetite than me and they may choose a more volatile 00:07:54.290 --> 00:07:58.769 index for this kind of pot. One of these is a 00:07:58.769 --> 00:08:02.290 large American index called the S &P 500. And 00:08:02.290 --> 00:08:04.790 the argument goes that America is different, 00:08:05.350 --> 00:08:07.910 that America is an exceptional. Now this what 00:08:07.910 --> 00:08:12.009 we call American exceptionalism is largely based 00:08:12.009 --> 00:08:15.850 on the fact that America holds the world currency 00:08:15.850 --> 00:08:19.529 reserves and this gives it more power leading 00:08:19.529 --> 00:08:22.029 to better performance of the companies that are 00:08:22.029 --> 00:08:26.480 based there. So let's have a look at the S &P 00:08:26.480 --> 00:08:29.899 500 now that's performed over the last 20 years. 00:08:33.179 --> 00:08:36.940 So the average annual return of the S &P 500 00:08:36.940 --> 00:08:41.080 over the last 20 years has been 10 .9%, which 00:08:41.080 --> 00:08:44.399 is fantastic. Now, whether you believe America 00:08:44.399 --> 00:08:47.740 can keep that up for the next 20 years may indicate 00:08:47.740 --> 00:08:51.200 if you believe in American exceptionalism or 00:08:51.200 --> 00:08:55.269 not. Now let's consider some other options. How 00:08:55.269 --> 00:09:00.429 about the FTSE 100, a group of 100 of the largest 00:09:00.429 --> 00:09:04.370 companies listed on the UK stock market. Now 00:09:04.370 --> 00:09:08.629 that includes companies such as Unilever and 00:09:08.629 --> 00:09:13.210 Shell and HSBC. Well, these have done less well. 00:09:13.490 --> 00:09:19.330 The average return of 20 years has been 5 .5 00:09:19.330 --> 00:09:23.750 % and it's still not bad. How about we go for 00:09:23.750 --> 00:09:26.370 something with even lower risk, much less low 00:09:26.370 --> 00:09:30.330 risk? So if you have a self -invested personal 00:09:30.330 --> 00:09:34.149 pension, then you could choose an investment 00:09:34.149 --> 00:09:38.830 that actually doesn't track companies, but tracks 00:09:38.830 --> 00:09:43.090 the rate at which banks lend money to each other 00:09:43.090 --> 00:09:47.250 overnight. This is an investment called a sterling 00:09:47.250 --> 00:09:53.529 overnight tracker or a Sonya tracker. I use this 00:09:53.529 --> 00:09:55.710 for bucket one of my investments. That's the 00:09:55.710 --> 00:09:58.809 money I'll be spending in the next 10 years. 00:09:58.970 --> 00:10:04.230 And this pays a very steady 0 .1 % each week. 00:10:04.250 --> 00:10:07.789 It's actually linked to interest rates. This, 00:10:08.169 --> 00:10:12.919 as we know, doesn't... vary a huge amount. I 00:10:12.919 --> 00:10:15.460 guess we yearly return at the moment of about 00:10:15.460 --> 00:10:19.240 5%. We can't, of course, put our pension into 00:10:19.240 --> 00:10:22.799 a bank account or stick under our mattress, but 00:10:22.799 --> 00:10:25.200 let's imagine we could. Let's assume the bank 00:10:25.200 --> 00:10:30.220 pays us 3 % and then there's the option to keep 00:10:30.220 --> 00:10:32.899 money under your mattress. Now, this last option 00:10:32.899 --> 00:10:37.019 for me is the highest risk option, not because 00:10:37.019 --> 00:10:40.570 of burglars, but because of another pesky thief 00:10:40.570 --> 00:10:45.950 inflation. So yearly average inflation over the 00:10:45.950 --> 00:10:51.309 past 20 years has been 2 .8%. Now, the returns 00:10:51.309 --> 00:10:54.789 I've been discussing so far have been nominal 00:10:54.789 --> 00:10:59.009 returns and these don't take account of inflation. 00:10:59.649 --> 00:11:03.330 But inflation's real, it happens to us all. So 00:11:03.330 --> 00:11:06.889 we should consider it particularly. when we're 00:11:06.889 --> 00:11:10.230 looking at investment returns over longer periods. 00:11:10.750 --> 00:11:14.590 So if we take off inflation, our new returns 00:11:14.590 --> 00:11:19.269 look like this. Now let's imagine I invested 00:11:19.269 --> 00:11:23.169 100 ,000 pounds 20 years ago. How would I have 00:11:23.169 --> 00:11:27.090 done? Well, the mattress option, I'd have lost 00:11:27.090 --> 00:11:32.529 43 ,400 pounds from the value of my 100 ,000 00:11:32.529 --> 00:11:37.440 pound investments. That's 43%. Now you can see 00:11:37.440 --> 00:11:41.820 why I say this is the riskiest option. Now the 00:11:41.820 --> 00:11:45.200 bank option is not so bad. It will give us a 00:11:45.200 --> 00:11:48.820 4 ,000 profits over the 20 years. The sterling 00:11:48.820 --> 00:11:51.860 overnight track is much better. That would have 00:11:51.860 --> 00:11:58.039 given me 55 ,300 over the period. And even though 00:11:58.039 --> 00:12:00.360 the FTSE hasn't done brilliantly over the last 00:12:00.360 --> 00:12:03.000 20 years, it would still have given me a return 00:12:03.000 --> 00:12:08.399 of 71 ,600 pound. Now my choice has been the 00:12:08.399 --> 00:12:13.559 World Index which has returned £232 ,000 while 00:12:13.559 --> 00:12:17.659 the US has returned a whopping £322 ,000.