Yes, the answer is yes. Of course, there's risk
in managing our pensions, but risk is nuanced.
And there's an argument to say that if we all
increased our understanding of risk by a small
amount, we could improve our retirement chances
by a large amount. So in this video, I'm gonna
talk about some simple aspects of risks that
most of you will know, but some of you may not
have heard. Now, In the world of risk management,
which was my profession before I retired recently,
we often talked about upside risk. Now, roughly
in English, if we translate this, it becomes
the chances that things will be better than we
expected. So what we're talking about really
is opportunity. And I've always think that risk
and opportunity are two sides of the same coin
really. And if you consider one way or the other,
you can actually run into some problems. Now,
as human beings, we are programmed to fear more
about losing than we are motivated about gaining
things. So this has been proved in many different
social experiments. And it's the reason that
if you actually asked a novice to look after
a portfolio of pension investments, they'd start
to lose it pretty quickly really. And I think
This is one of the reasons for this is that our
instinct when an investment starts to drop in
value is that what we'll do is we'll cash it
in before we lose even more. But then again,
our instinct when investments go up in value
is to actually cash the gains in before they
drop again. Now both these things can actually
be damaging to pension portfolios. Now as chimpanzees
don't really understand in investing, then if
you give the same portfolio to a novice human
investor and a chimp where the chimp can only
make random investments, then the chimp will
pretty much always do better. Now, of course,
professional investors go through. advanced training
in risk management relating to investments. And
in general, they are trained to ignore these
kind of natural instincts that cause this kind
of risk aversion and the losses that come from
it. But the problem with getting a professional
to manage your portfolio is that they insist
on being paid. Now, as they will only be slightly
better than you in their investments, then by
the time you've paid them, you'd have been better
off, frankly, sticking with the chimp. So what
can we do as most of us generally don't have
ready access to a chimp? So the term to remember
is index and chill. So let's break that down.
An index in investment terms refers to shares
of a large group of companies all kind of bundled
together. So that if some of them companies do
well and others perform really badly or go out
of business, then on average you're not going
to lose your shirt. The risk is spread amongst
the companies. So we've started to diversify
our investments. So index and chill, spread your
risk with an index fund and then chill out. Now,
don't keep chopping and changing it is the advice.
Even better, don't even look at it at all. One
of my subscribers on here said that what he does
is he checks his pension portfolio once a year
on New Year's Day and the rest of the time he
doesn't worry about it. I think that's generally
some good advice. In investing, Time is a very
good leveler. You won't have missed the news
recently about Trump's tariffs causing wide swings
in the markets and you can think of markets and
indexes or indices interchangeably for the purpose
of what we're discussing here. So if you looked
at the stock index week by week over the last
few months, even the indexes that we're talking
about here would have gone up and down. 5 % or
more each week. Now, given the advice of my subscriber
or checking it once a year, then the volatility
of them shares that he will see will decrease
significantly over a year. Even better, how about
looking at the performance of indices over a
20 year period and things will smooth out even
more. Now 20 years is my favorite time frame
for looking at stock indices, and this is how
I try and use them. Now I have a pension pot
containing all the money I've ever paid into
my pensions over my lifetime, but I don't look
at it as a single pot. What I do is I break it
down into three buckets. Now the first bucket
is the money I need in the next 10 years. I don't
invest this generally in stock indices because
I know these can go up and down quite a bit.
So what I do, I invest this first bucket of cash
in things that are much less risky. I'll show
you in a minute what I mean by this. Now the
next bucket I have is the money that I expect
to spend between 10 and 20 years time. Now this
bucket is a bit of a mix of very safe investments
and some of the index investments that we're
talking about now. So the final bucket of money
is the money I will spend in 20 years time. At
the moment I'm 56, so this is the money I will
spend from 76 onwards. And I'm confident that
the indexes that I've invested in will perform
well over that 20 year period. Now it's important
to remember that I'm not a financial advisor
and this is not meant to be financial advice.
It's just information about what I've done with
my investments and what I'm happy to do in terms
of risk. So let's take a look at the numbers
around this third bucket and to do this I'm going
to look at the average return of these investments
over their previous 20 years. Now the index I've
chosen to have a look at. is a group of over
5 ,000 companies all in one big bucket from all
over the world. And I can buy single investments
that splits my money over all these companies.
So if I'd have invested in this index which is
the All World Index 20 years ago, I would have
had on average a return of 8 .8 % per year. Now
we all know that the that large world events
impact markets. And if we consider four of the
biggest events over the past 100 years, namely
the Great Depression in the late 20s, World War
II, 39 to 45, the global financial crisis of
2008, and the global pandemic, of course, of
2020, then two of these cataclysmic events have
actually happened in the last 20 years, and the
World Index. I still returned nearly 9 % average
year on year during that 20 year period. So for
the money that I don't plan to use the next 20
years or more, then I personally like the world
index. Now other people have a different risk
appetite than me and they may choose a more volatile
index for this kind of pot. One of these is a
large American index called the S &P 500. And
the argument goes that America is different,
that America is an exceptional. Now this what
we call American exceptionalism is largely based
on the fact that America holds the world currency
reserves and this gives it more power leading
to better performance of the companies that are
based there. So let's have a look at the S &P
500 now that's performed over the last 20 years.
So the average annual return of the S &P 500
over the last 20 years has been 10 .9%, which
is fantastic. Now, whether you believe America
can keep that up for the next 20 years may indicate
if you believe in American exceptionalism or
not. Now let's consider some other options. How
about the FTSE 100, a group of 100 of the largest
companies listed on the UK stock market. Now
that includes companies such as Unilever and
Shell and HSBC. Well, these have done less well.
The average return of 20 years has been 5 .5
% and it's still not bad. How about we go for
something with even lower risk, much less low
risk? So if you have a self -invested personal
pension, then you could choose an investment
that actually doesn't track companies, but tracks
the rate at which banks lend money to each other
overnight. This is an investment called a sterling
overnight tracker or a Sonya tracker. I use this
for bucket one of my investments. That's the
money I'll be spending in the next 10 years.
And this pays a very steady 0 .1 % each week.
It's actually linked to interest rates. This,
as we know, doesn't... vary a huge amount. I
guess we yearly return at the moment of about
5%. We can't, of course, put our pension into
a bank account or stick under our mattress, but
let's imagine we could. Let's assume the bank
pays us 3 % and then there's the option to keep
money under your mattress. Now, this last option
for me is the highest risk option, not because
of burglars, but because of another pesky thief
inflation. So yearly average inflation over the
past 20 years has been 2 .8%. Now, the returns
I've been discussing so far have been nominal
returns and these don't take account of inflation.
But inflation's real, it happens to us all. So
we should consider it particularly. when we're
looking at investment returns over longer periods.
So if we take off inflation, our new returns
look like this. Now let's imagine I invested
100 ,000 pounds 20 years ago. How would I have
done? Well, the mattress option, I'd have lost
43 ,400 pounds from the value of my 100 ,000
pound investments. That's 43%. Now you can see
why I say this is the riskiest option. Now the
bank option is not so bad. It will give us a
4 ,000 profits over the 20 years. The sterling
overnight track is much better. That would have
given me 55 ,300 over the period. And even though
the FTSE hasn't done brilliantly over the last
20 years, it would still have given me a return
of 71 ,600 pound. Now my choice has been the
World Index which has returned £232 ,000 while
the US has returned a whopping £322 ,000.