Understanding RISK

Meaningful money dot. Hi folks and welcome to another Meaningful Money Podcast. Session number six. and four and welcome back as always to my learned friend Mr Roger Weeks. Hiya Pete. Hello. You all right? Yeah, I think so. How is twenty twenty six shaping up for you so it's it's going m magnificently. Uh actually Magnificently. Magnificently. But far more settled and quieter than it was this time last year. That's fair.

Flood, weren't you? Yeah. Yeah, really good start to the year. Yeah, good. Good. I'm glad we've not had a repeat of that. What we're talking about today. So today is an episode that's going to be a deep dive about one of the touchest subjects And probably one of the misunderstood in financial planning, which is risk.

Yeah, this is gonna be good. Well I hope so. Anyway possibly uh setting ourselves up for a fall. But like if there's one subject that as you say, Roger's misunderstood, I think it's misrepresented as well by advisors and by the industry at large. It is this subject of risk. And actually it isn't just one subject, is it? No, it isn't. There's there's loads of little nuances that are all all interlinked. That's the thing about this. Yeah, that's right. Um and

Some of them stand alone and some of them don't. Yep. So um some are constant, some appear at d at different times in our lives. Yeah. Some just are transit, they pop in and go back out again. They do, yeah, yeah. But we kinda need to understand them and As we always do on standalone shows.

Some people might not have done listen to us do a standalone show for ages. But what we do is we're gonna give you everything you need to know first and we'll follow it up with everything you need to do. And specifically right towards the end, we wanna just give you something called a risk lens. A way of assessing risk. In a sort of qualitative way. Yeah and after the

uh uh at the after the main board of the show, we're gonna read a review that's been left by a uh a listener. We well we're saying actually'cause on the QA shows, people leave their reviews in the questions, don't they, which is quite nice. But on these sort of deep dive shows we should add a Review keep the reviews coming, folks. Meaningfulmoney.tv slash love

Love. Love. Okay. And we'll also tell you what we're going to cover next time. Yes, we will. Remember any notes or links that we talk about today, they will be at the show notes. It's the only link you need to remember as you're listening to this, so if you're out and about.

Just remember this meaningful money dot T V slash session six zero four. Session six zero four. Let's get started and talk about what we need to go know about risk. Well I I think we just need to reframe what risk is entirely.

That's a nice aggressive start. Most people have too limited a view as to what risk is. It's like oh w w what what is it? And and and we've got to fear it. It's it's something horrendous in the this in the background. Yeah, key point right at the start. Risk is not to be feared, it's to be embraced. But I think most people think that they sort of

Connect risk with the market, don't they? Yeah. Like their investments. Well, I'm gonna lose my money. Markets are gonna crash, it's all gonna go. Yeah, exactly. That's what many people think it is. But actually, risk is anything that increases the chances of you not getting the life that you want.

Yeah,'cause you th it could be a risk you're not even c thinking about. It's not necessarily market risk and we'll cover that in a minute for you. Yeah, I got a load of risk to talk. Um and there'll be something in there that will

risk the chance of you not getting where you want to be, but it's not the markets that's doing it. No, it usually isn't actually. So that's going to be really important to cover. Markets really are just one of many sources of risk and certainly not the biggest, not for most people. Um Good planning.

doesn't remove risk. Removing risk entirely is impossible. That's just the nature of being a human on planet Earth, isn't it? There's you know, you risk that you sort of turn your ankle over when you step off the curb or get hit by a bus or you know, that your horse comes in on the three thirty five at Kenton Park, right? So there's risks everywhere. Good planning doesn't remove it. What it does is it helps us choose which risks to accept.

Like you say as you say Pete, all the time and we're just saying, Okay, we're happy with that one, not happy with that one or we're partly happy with that one, what do we need to do? So yeah. It's just knowing what the risks are and then choosing to take an action based upon that. Really? Yes.

So if risks are the things that sort of increase the chances of us not getting the life we want, we've got six to cover here. So we're gonna start with the one that everybody wants to do. The most obvious one. Yeah. Markets and investment risks. They are real.

And I think it's probably people kind of focus on these because they're the most sort of visible. You know, you log into your investment, it's gone down. Uh the papers and the social media outlets kind of labour on this stuff and talk most about it. Um but it's kind of just the nature of the beast, isn't it? When it comes to grouping. You c you can see it quantitatively and it's like, Oh my goodness, me, it does it. So yeah, I mean

Markets go down. They do. They do. They go up and down. They w and do there's this line that you know markets can sometimes go down. No, they will go down. Yeah, yeah, frequently. And they sometimes go down a lot and for sometimes lots of years as well. Yeah, it's not always we've had a f a succession of sort of short term bounces, haven't we? You know, COVID was a pretty horrific fall, followed by a very spectacular rise. Yeah. Twenty twenty two

You know, twenty two was a grim year, but pretty much came back very quickly. Markets have done and exceeded their previous highs by some margin. And we call those ups and downs volatility. Really important to know that volatility does not equal risk. Volatility is the price of entry for investors. If you are gonna make money uh by investing, you have to accept the fact that it goes up and down. It feels dangerous. just b almost uh in principle

But volatility is necessary to make money. It's just fact. Yeah, because that that's that sets the market. Then th th then the market makers can use that volatility to give you what you want, ideally. Yeah. Um but and there's always this sequence of risks. You know, and it and so so is it more worrisome if it's going down or going up? Well, it depends on what you're doing at the time. If you're accumulating wealth.

It's not the end of the world because you've got lots of time. But if you if you're drawing money down out of it, then the sequence of the risk does make a difference then. Really does. If you're accumulating and markets go down, you're buying more units, it's a good thing. You kinda want volatility because you will average it out because your pound costs.

Averaging money in when you're spending, though, if you need a big withdrawal when markets are down, that can be really uh serious. So sequence risk is a sort of subset of market risk. Matters more when you're spending, but less so when you're saving. Yeah. And something we alluded to in in one of the QA's last week. Yeah. Uh is concentration risk. Yeah. Uh employer shares is a example. Yeah, yeah. You've got a lot of money in employer shares, then there's a risk in having that one company.

So while you're also employed by that one company. Yeah. That company goes under you lose your income and your investments. Yeah, yeah. Um, we see a lot of people with very property heavy portfolios. Yeah. Property's a great investment, there's no doubt about that. Historically it's not very tax efficient, it's not very liquid. There are reasons not to invest in property in my uh not so humble opinion.

But we if you're very property heavy, that's quite a big bet. Yeah. Uh in its own right, I think. And concentrate on on on your home country. Um I've I've come across in the past working for a another different company. Uh and it's one of the things we talk to about and say, Well that you you you ideally want a UK based fund because we live in the UK, you understand the UK, you know about the economy of the UK.

And there's there's all these risks around the outside you don't know about. It's like Sounds like it makes sense, doesn't it? Yeah it sort of does. It's not bad, but we wouldn't have to But as as a as an investment area, the UK's something like seven percent of the global

Or four percent. Of the global investment returns. So it's like, okay, we understand it, but you're missing out on so much other stuff. Mm-hmm. You know? Yeah, exactly. So this is sort of concentration risks. Um These things are broadly manageable.

It's just the price of entry, it's just something you've got to get used to. Yeah, and at the end of the day, when you when if you're gonna be investing money, you're gonna be investing money for the medium to longer term. Yeah, we're talking five years plus. Yes. Well volatility then is a little bit of a moot point, a bit more towards the shorter end is is not gonna be so good. No. Um but if you're investing for, you know, ten, fifteen, twenty years

A bit of volatility that which will always appear will disappear again in in Yeah. One of the best ways to min mitigate volatility is time, no doubt about that. It sort of flattens the longer you get. uh longer you invest over. So that's market investment risk. That's the first thing for people to be with. The one that everyone thinks about. Number two is inflation and purchasing power risk. This is the silent killer of wealth. And this is we spoke again last last week.

You know, inflation it sits in the background without you really noticing it too much. You hear about it on the news but it doesn't make much sense until you go to shopping and it's like, Ooh, I understand that now. Uh but it quietly erodes the spending of how of your money. And you know, from one year to the next, it's probably not the end of the world. You know, a three percent change, or was it three point two the last three percent change in my shopping habits is not gonna be too bad.

No. But actually you have ten years of three point two percent. Yeah. You've lost a third of the value of your money. Things are a lot more expensive very quickly. We tend not to feel inflation when we are building wealth and when we are earning because All things being equal, particularly in the private sector, wages hopefully should broadly keep up with inflation.

Everybody in the public sector shouts at their their sort of foam when we say this'cause public sector wages very often haven't kept pace with inflation. But generally speaking you don't feel it so much when you're working, but when you have a fixed income perhaps in retirement or you have a finite pot of money to draw off. Uh in uh inflation feels like a much bigger deal.

And we tend to, you know, in the context of sort of market volatility, people tend to say, Well, I'll keep my money in cash because it's safe. Yeah. Well, it's safe for market volatility, but it's vastly at risk. From inflation. Well, even back in the eighties, if I I can remember that far back.

Um back in the back in the eighties, you know, uh interest rates in the banks were like ten, eleven, twelve percent. It's like wow, I'm making hay while the sun shines and I was like, Well, yeah, inflation's fifteen. So still losing money. So there's never really been a period, there've been short cycles, but there's never been a a period when cash has outlived inflation.

Yes. You know, it's you're still losing it. I I know I know you can see it in the bank and they oh I've made three percent this year or four percent this year and it looks great, but actually in real terms you're not making any money at all. No, not real not uh any meaningful money. Ha. S lifestyle inflation, it's different kind of inflation. Something that we do have control of, really we don't We can't really control, you know, inflation at large. That's the Bank of England's job. Uh

Um jury's out as to how well they've done that, but I wouldn't want that job, so who knows. No. But lifestyle inflation, this is where we we call it lifestyle creep. Um, you know, where your spending rises and so often can rise ahead of your increase in earnings. You know. It just life gets a bit more expensive. You push the boat out a bit and you get used to a higher standard of living.

And before you know it you're still not saving anymore even though you're earning twice what you're earning. And it's like they should be so much better off. Yeah. And they never are. Because it's like If there is a step change in your earnings, it's probably a big step change in the way you spend your money. Um but as a percentage of you know you should be able to save

A bigger percentage of your safe. Yeah, we would hope so, yeah. Yeah, but it never seems to work that way. So inflation can speak to lifestyle as well. Um Obviously as financial planners, when we are planning for clients, we generally plan for them to live to a hundred. I mean if you live to a hundred you probably think ah that's a success. Yeah. You know, that's a good effort, right? But actually But it's very long retirement, it's gonna last a long time. Yeah.

Yeah. And inflation is a killer on that on those kind of timescales. Yeah, exactly. And and you know, we all want to live longer and healthier if we can. Um but you'll need more money in the future.

You know, um yeah, if you look at the the state pension, you know the the government affording the state pension these days. Yeah, that's um it was introduced at the at the end of the Second World War, in its in its present present sense it really. Um and at that point, you know retiring men, if I just latched onto them, they expect to retire at

sixty five, yeah. They might draw a pension for four or five years. Yeah, be dead by the seventy, yeah. Yeah. But now the chance of living to your very late eighties is really, really good. Well how can we afford that? Well, if you have to fund for your own retirement with savings and pensions Yeah, that's a big risk to your portfolio. I think this is

The thing about like market volatility put my teeth in, volatility, it's visible. It's right there. We look at our the value of our pots and they've gone down or it's all over the news. Inflation is insidious. It's uh they give you a headline number, but it will probably be very different from your real inflation number, your personal one. So you got sort of visible pain, but the damage that inflation could do is invisible, but it would really creep up on you. But it's so insidious.

And it's and it's even more insidious for retired people because they're on a fixed income generally. Um and and and and the the the trolley full of goods that the inflation is made up from, it's like Mobile phones and TVs and stuff like that. Well, when you retired, you're you're spending money on heating and lighting and food and stuff like that, which is the bit that really goes up. So

Um that's when you really feel it. Yep, for sure. So market risk, inflation risk, that's one and two. So number three is behavioral risk. And actually our view is that this is probably where the most damage is done. So the way is this where it sort of The theory, the stuff that we talk about very much in the abstract, although obviously we've we've lived it in our day job for for years and years.

This is where it re y the theory of sort of market returns and inflation, all that sort of stuff meets the actual practical reality of the fact that we are h emotion driven humans. Yeah, very much. And and you know, w the the number of clients we've spoken to that w y you know, I wanna get this money working as hard as possible So and and and I'll go I'll go all in. I'm it's all on red. I'll go for that because that yeah, I've I've seen the returns on those. They're fantastic.

And then you get a market downturn which they've not seen for a while or may never have seen. Yeah. And it's like, Oh, I can't live with this. I I'm coming back out again. It's like, Oh Yeah. And you've just done the damage. Yeah, exactly. Um you know, fear and greed. Th these are emotions, right? And they they drive outcomes far more than theory and spreadsheets, don't they? Yeah.

I th the the example that that w one of your clients who had run his own business for years and years and years, been been in control of everything, um, and then the business solved from what I understand and then wanted to invest some money.

And then suddenly lost control of it and then the markets turned to the wrong the wrong way. And it's like, Well, I don't want I don't want this'cause I'm not in control. Yeah, very different. So so then you've got the the the the fear and greed driving what you want to have back, but then you've got How am I gonna react when things don't go well and then suddenly that oh I'm gonna panic sell on this now? Yeah, yeah. You know, and and or or I'm I'm changing performance, so therefore I will

Take a bit more risk than I f I feel happy with'cause the markets are doing well at the minute. I'll I'll have a bit a bit more of that. Exactly. Continually fiddling and tinkering. These are the things that we think we're adding value, but almost always we detract. uh overconfidence bias so important. Markets have had a great run. This is this is easy. I'm a great investor. Yeah. I've just stuck it in a global index tracker. It's done fantastic over the last two years. Well

You know, there have been periods when that's dropped by a third or a half even. So we gotta And and you've even come across I hate to say it, advisors. Yeah, aren't we good? Yeah. Actually the market's down twelve percent this year, but uh what impact have I had upon that? Well, I just chose that fund. Yeah, but Yeah, w when the when the tide comes in lots of boats rise.

Yes, that's right. Yeah, yeah. You know, we we get overconfidence when things goes well, we sort of despair sometimes when things go bad, even though we've done nothing to impact either outcome. No. Not at not at all. And

And be confident when people are worried when it comes to m investing. So you know the the the the general rule is the markets are dropping, you need to be putting more money in. Not not taking your money out, think very much. Are you thinking of be greedy when others are fearful? Mm-hmm. Fearful when others are greedy, something in it. Yeah, exactly. Yeah. Well um he knows what he's talking about. Yeah, yeah. Greatest investor that's ever lived, arguably. Um

People do nothing, inertia risk. You know, the fact that they just sort of overthink and I'll just read one more book before I start to invest and you know, in the meantime the market's growing away and they're losing out. Well, yeah, and and when you you you look at the market you think, okay, w I'm I'm gonna buy a fund.

H how many are there I can choose from? So so the so you need to just whittle that down and get a get it get a few, but you know it's um but do it uh the number of people that have come to us and said, I'm thinking about doing this and we say, Look, do it. Just take some action now. Yes. Don't overthink this. Just step into the m into into the void and you'll be fine. Yeah, yeah. Exactly. I've even had sort of occasionally sort of um

get to know each other's sort of calls, end up not working with the client because we're basically saying, Look, you can do all this yourself, you know, you don't need to pay us to do it. Just crack on and then I'll have another call with the same person. And one I'm thinking of in particular. It was four years later and we're still sitting on cash and in the meantime the markets have risen by fifty percent. So doing nothing can be just as harmful as doing the quote wrong thing.

Look, you know, we tend to think in terms of stories as humans, you know, it's just the way we've evolved, we pass knowledge on through stories. Um but stories can be emotive and often they kind of oversimplify fairly complex things. So behavioural risk I think is where the most damage is done. Yeah, and we and we see it because

It's an emotional thing. It it resonates. Yeah, yeah. Yeah, it's it's your it's your life, it's your savings, your investments, your your everything you work for. It's impossible to be Cold and calculated. analytical and cold. You've got to be slightly worried they may be psychopathic. So market risk, inflation risk, behavioral risk. That's three of our six. Number four is planning risks when the structure itself goes wrong.

Yeah, I mean you you y you could have good investments, it's like having having a good business, but if it's not set up right Yeah. You can you can have something that's really, really profitable, but if you run it the wrong way, you try to run too quickly, you you you you're s r rely upon suppliers, you don't get the supplies and stuff like that. So even good investments will fail if the plan is weak. If you've not got it set up properly

It ain't gonna work. Yeah, and it's sort of starting with the end in mind. What are we investing for, isn't it? So yeah, you can build a great business, but if You know, if your money's locked up in it and you haven't planned for an exit, what good is that for you? You know, I always think on paper, mm, I'm worth quite a bit, but I can't spend any of it. It's all it's all tied up in companies at the minute. Um

Using I think w the wrong risk level for the wrong time horizon. We talk a lot about the cash flow of SOC is particularly when you are spending money down in retirement. You don't want to be

um spending money which is distressed because it's been in a high risk investment and it's currently sitting on a loss. So that's really, really important. Yeah. And one of the things we do uh when we come to uh cash flow modelling is having the what is scenario, having a having a safety net there to say okay if

things don't go quite right, do I need to have something to mitigate some of that risk just in case? Yeah, I'm always a bit worried when people kind of over plan and they say, Okay, right, we've planned this to the nearest one pound. We need to sort of plan it to within the nearest five hundred quid a month or something like that because it's there's gonna be variability. Um so we need to build in margin. I think that's a key thing about risk.

Uh tax drag, you know, sometimes people plan and focus just on the investments. But it's also the rappers that they're in. Order of withdrawal. Yeah. Sometimes the order that you pay tax had a case recently where We actually recommended that they incur they're about sixty two now, right? We always plan to a hundred. We recommended that they incur, get this, an extra five hundred and fifty thousand pounds worth of income tax in their lifetime because it saved them two million inherent tax.

Goodness me. And that was their priority. Yeah. Right. They had all the income they needed. They had a nine hundred pound pension fund, thousand pound pension fund, nine hundred grand, that they were never really going to draw on to spend on lifestyle stuff, but they wanted to Give to their kids. So we're saying, right, okay, we're gonna draw out of your pension plot, even though you don't need the money to spend, but you're gonna give it to your kids, gift out of income exemption.

You're gonna pay half a million quid of extra income tax, but you'll save two million in IHT. Yes, and you look at that in purely black and white, you say why why would you pay the tax? Yeah. And sometimes as we as we said in in the past podcast, it's worth paying the tax to get where you wanna be. Yeah. Choose your poison. Dis despite the fact it feels horrible. Yeah, it doesn't feel yeah, the climb was like, Really? I'm like, Well

You said your priority is estate planning and and you don't need this pension. So you either die with it and it's worth five million quid and you pay a ton of IST mm or you pay income tax at twenty percent as you go instead of four. Yeah. And you know, obviously. But Tax is uh a huge drag if you don't plan for it carefully. So that's that's a planning risk. Um We see I we see a lot of people come to us.

Planning for an average life. The average life expectancy is eighty five. So I'll I'll I'll get rid of all my money by the time I'm eighty five and a half. It's a bugger if you die if you live till ninety five though, isn't it? Well this is this general thing, isn't it? There there's I don't Yeah, for a couple of sixty I think it's uh better than even. Yeah. Yeah, but but but w once you're at eighty five

The chance of you getting one of you getting to like ninety five is huge still. Potentially, yeah, certainly must have been. So it's actually so you mustn't plan for well, I I'm probably just average, you know, I've got an average life and I I averages cover a multitude of sins. Yeah, and and even if you look at your parents

And and family around you is like, well they they they died young, so therefore I'm gonna die young. It don't that doesn't necessarily work that way. We probably eat a little bit healthier. I don't know about that really. No, I don't than our predecessors. No, probably not. Um and um one of the things is When it comes to the planning is using the wrong type of numbers.

safe withdrawal rate. So I'm gonna draw four percent a year or five percent a year. And people assume that might be four percent or five percent of the current value. Mm-hmm. And the way that th this is the the the safe in inverted commerce withdrawal rate is worked out is based upon when you retire, you draw, say, four percent of your fund at that point. Yeah. And you tweak it up by inflation from then on, no matter what the fund is worth in the future.

So somebody w might have had a really good run on the markets. The funds gone up twenty percent. Oh five percent of that new f fund value, thank you. But actually the year after it could drop by fifteen percent. So you know, using the right numbers for your circumstances, make sure it's right. Yeah, yeah. Planning risks. Yeah. This is why I have a job, really. Um

Life risks. These are the sort of non almost non financial, but obviously the impact of finances really you know, these are s often the the biggest risks. So we talk a lot about almost all the risks we tend to talk about result in income either stopping or reducing. So dying early, critical illness. Just, you know, mental health crisis, being unable to work for an extended period of time. They have massive impact on your finances. Yeah, they do. I bec because

And it's one of the things that comes out of the blue generally. Often, yeah. You know? And um and so health issues changing your priorities and capacity. So it's not necessarily the income, but actually it might change the way you live. You might have to move house, you might have to Alter what you've got. Yeah. The way you live your life.

Yeah, I mean health issues change all sorts of things. They change priorities, they they change your capacity to do things. Like you say, you might have to do work on the house if you, you know, suddenly become paralyzed, car accident become paralysed or whatever, move house. It changes everything financially as well as personally. I know I know, s it's silly, it's a lesser extent, but my mother in law, uh Beth, is um she's a celiac. Mm-hmm. And she was diagnosed later in life with that.

But it's like okay, she now pays like three pounds fifty for a little tiny loaf of bread because it's gluten free and stuff like that. And her and her cereal's that much more expensive. And I know it's just a little tiny thing, but it's an impact. It does have an impact through on a fixed income. Uh, you know, our personal lives don't always go as we expect. Relationships can break down.

That has financial impact. Oh yeah. I've had that. No thing it's too about that. That's a long time ago now. That's a long time ago. I've been I've been married a second time never. Over thirty years and it's gonna last forever and ever. But yeah, I mean you've Uh children and and and relationship breakdowns cause a hell of a lot of things. And then and then you know, the the children you have

Are they are they healthy? What happens if you do send them to private school or not? Um Yeah, do they God forbid, you know, end up with addiction issues or, you know, mental health issues? I've got tons of clients in that boat. One client very wealthy on paper, but with a family member with extensive and serious

mental health issues and it's all consuming. These are life risks. You can't very often you can't plan for them. Sometimes you can insure for them in some cases. So we've we've talked about that before. But these are Much bigger than markets. Mm. Much bigger, longer term, deeper impacts, I think. Markets generally. And and these these could be lifetime some of these you know, and uh and market is as we said earlier on, is transitory. It it it comes and goes.

But these things could affect your life forever. Yeah, they really can. And then finally the risk that nobody talks about, which is we kind of summarized it as building the wrong life. Focusing on the wrong things. Like for example Being so obsessed with optimizing for tax and investment returns and so all that sort of stuff that you forget why you're putting the money together in the first place. Yeah.

It it it's see it all the time. You're doing it for a reason. Yeah or hoarding money just in case. I'll I'll hold on to that just in c I mean I I remember speaking to a lady when it came to uh financial planning one at one point and she had like fifty thousand pounds in her current account. And it's like

You don't really need fifty thousand pounds in your current account, do you? You'd be doing Oh yeah, but you know w you never know when I get a big bill comes through the door. Okay, so what sort of bill might you get that comes through the door? When's the last time you spent five thousand pounds? Oh.

I've never spent five thousand pounds. Okay. You don't necessarily need fifty thousand pounds to you know tack it back to ten or fifteen if you want to. But you know some of this money could be working better for you. So don't don't don't hoard it just in case. No instead Use it, spend it with joy, you know. Just holding money for its own sake. When money becomes the end in itself, that's problematic.

Um obviously it's it's still fairly trendy to talk about the fire movement, financial independence retire early. Uh I I think it's laudable for the most part and I think it puts it helps people have some really good habits, but You know, if you work like a dog for twenty years, don't have any joy in life. save seventy percent of your income, you might get to sort of forty.

And you're financially independent, but you're knackered emotionally and physically. Yeah, and and you've and you've and you've lost the way of having joy from spending some money. So you get to the point with all the money think I can't remember how to do that now. No, exactly. Or any kind of you know, a life

just with financial freedom is only gonna be half a life anyway. You gotta have purpose and all that sort of stuff. And it it's it's one of these things where where we say that all my numbers are working fine. Yeah. But my life isn't. I've got loads and loads of money and I I I've I set myself up when I was sixty, but I'm really miserable at forty. What's the what's the use, you know?

So there's a bunch of risks there, so just to go through them market and investment risk, inflation and purchasing power risk, behavioral risk. Planning risks when the structure is wrong, life risks, you know, that can derail even the best laid plans, and then basically building the wrong life, aiming for uh and concentrating on the wrong things.

Crucially, and we'll say this repeatedly, risks can't be eliminated. It's impossible to eliminate all risks. Instead you should understand them and manage them where you can. Yeah. When you do build your life around it but Avoiding all risk guarantees a different kind of failure altogether. Well it does.

Under you know, you will be thrashed by inflation, so you actually can't avoid all risk, you know. What feels like a risk free life, keeping all my money in cash, you know, i under the mattress even, well actually you're at the risk of inflation risk. Really, the goal ought not to be safety. That's a massively flawed word in financial planning, I think. What we should be after is resilience and Choice, flexibility. Yeah.

Right. And we do that by managing risks. And and one thing we say then is that once you've know what the risks are, you can take decis decisions on those and then you can act. Intentionally. We love that word. We love it. Okay. So that's kind of what you need to know, right? Those are the risks we need to be thinking about.

And knowing that once we understand these things, here is how we deal with it. Let's talk about everything you need to do. What's number one, Rush? Well, you need to get clear what the money's for.

So improved. So you need to know what the end result is in order that then you can know w what risk to take to get to that point in view. So I think you need to write down what you need your money to do for you. Yeah. So Freedom, you know.

The ability to choose whether you work or not. Yeah. Uh FU money they call it. Right. The ability to walk away from a situation or a job that you're not and not happy with. Or security, knowing that you haven't got too many worries behind you because you've got that money for that reason. Yeah. choices I can

choose A or B because I've got financial flexibility as opposed to being forced into A because that's what my finances dictate. Yeah. Really important. Or you can be more generous with your money. Either for yourself to or for other people. I can be generous to myself Or my wife, my partner, or whatever. Or be generous to other people. Remember there's only three uses of money. You spend it now, you invest it so you can spend it later, or you give it away. Being generous, uh, really important.

Uh you know, experiences, travel, great meals out. Mm. West End shows. Go to see Rush in Toronto in August. Yeah, I heard. Did I mention that? No, you didn't mention it once or twice. Yeah, there'll be many more times before now and then. Yes. So um you know, these are just some examples. Freedom, security, choices and flexibility, being able to be generous. Experiences that really

Light you up, write down what you want your money to do for you. And maybe split them into sort of short, medium, and long-term goals, because that will impact. um, you know, the investment approach and things like that. Yeah, and because if you don't know what the money's gonna do for you. You can't judge whether the risk you need to take upon is worthwhile or not. Oh yeah, sure. So if you're absolutely lit up by the idea of moving house,

you know, you got I don't know, kids on the way or kids are here or whatever, and you think that, you know, this everything about our life would change if we could get into this property. Um, we're saving, we're we're building up the the the money we need to make that leap. And I can't risk that at all because it's so important to me. You keep your deposit money in the bank. You don't risk it. It's gonna be shortish term, we don't worry about inflation risk. But what you don't do

is try and double it by going to Vegas. Mm-hmm. Right? That would be a nonsense. Because this goal is so important to you, you can judge whether a risk is important to you, uh in uh is acceptable to you enough. This pot of money exists to do what? That will uh inform the risk you're happy to take. Yeah. My my pen my pension is to provide for me in thirty years' time.

Yes. So I'm so I'm happy to take some risk on it. The mark you know, whatever happens to the markets is not gonna be a worry for me because somebody is down the line. Yeah, absolutely. It'll all compound up for me. Super important. So what is the money for? That will inform the risk you're hot you're prepared to take.

And when we're talking about investment, I think particularly but even wider risks, we need to think we need to match the risks not to how we feel, not about our emotional response, but particularly to timescale. Yeah. So if we're talking about short term money, like in the house example just then, you want to reduce or eliminate the risk of volatility. You don't want to find the perfect house and realize that the fifty thousand quid you've got

in the bank towards it, invested towards it is now forty and that means you can't have the house that you found. That would be just awful. So short term money, you want to reduce the volatility risk. Yeah. But long term money like it like my exam just now with you with your pension. Yeah. It's like, well actually market risk is something I'm happy to cope with.

Yeah. In return for the bigger growth I'm likely to get going forward. Yeah. So important. And please, please, please, we've said it countless times. Don't read the news. Don't listen to the news and certainly don't react to it. The news outlets ha they don't care about your priorities. They don't care about what's important to you. They're certainly not going to align with your unique timeline. So stop reacting.

To the timeline. Yeah. Think about every pot. Is this short term? Is it longer term? Mm-hmm. Soon? Whatever. Just and and invest and think about it accordingly. Match the risk. to the time, not emotion. That's number two. And the number three is build shock absorbers in before chasing returns. Yeah. So you're if you've got some resilience, it optimizes what you can do. Yeah. You know, so it's like maintain an emergency fund that actually lets you sleep.

Yeah, which peop people come to us and say, I got a three month emergency fund. Mm-hmm. Well, if you're happy with that, that's fine. But in my head, oh, I'd need a bit bi bit longer than that because

A an illness could come along and knock you off perch for like twelve twelve months. Yeah, potentially. You know, so you need to take that worry off you and enables you to free you up to do other things with other b other bits of money. If you engineer resilience into your finances As opposed to trying to optimise investment returns or even tax angles.

If you build in resilience, you can cope with pr pretty much anything. So emergency fund is the obvious one. One that actually lets you sleep. So it's going to be slightly unique to you. Some people might be happier with a smaller one. But what you want to do is to make sure that you are able to avoid being forced to sell investments when they're distressed at w at the wrong time.

Y no amount of tax planning can kind of make up for the fact that I've got to sell this investment while it's sitting on a twenty percent loss'cause that's never gonna recover. No. And and if you're allocating all your money for that plan for the future and not uh given some flexibility within your budget. yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n yw'n

You can flex quickly without having to access other money you've got this earmark for a plan in the future. We love flexibility. And often the answers to the Q and A is people are like, Should I do this or this? And the answer is maybe meet someone in the middle'cause then you get bit best of both. often it's about compromise, it's about maintaining flexibility. So so important. Ask the question if something went wrong

tomorrow. What is it that breaks first? Is it I can't pay the mortgage because I've lost my income? Uh is it, you know, um I'm gonna if I I'm forced to sell investments while while the markets are down. that's gonna have an impact on my retirement. I may have to work another five years longer to make up for this impact now. And building resilience against those negative impacts. So important. Build shock absorbers.

before you try and chase returns. That comes later. Um number four. Uh diversify like you mean it. I love that line the way you wrote that, yes. Yeah, yeah. So um diversification is is Humility in portfolio form, right? It's It's accepting the fact that you're never going to be able to chase the winners or accurately identify the winners in your investment. So by spreading the risk, it's just like I'm never going to find the needle in the haystack, so I'll just buy the haystack.

Yeah, darn right. Because because if somebody had the answer to that They'd be millionaires, wouldn't they? So all these all these fund managers who are so good at doing their jobs, yeah, they wouldn't need to work because they've done it already. Yeah. You know what I mean? So so we so so you say, Okay, I'm never you know, me as a la lay person won't have a clue. I'll just buy the market.

And I'll spread the risk around various things, you know. I'm not I'm not gonna have it all in banking. Yes. And I'm not gonna have it all in America. Exactly. So spread your risk. It's just It it's like risk management one on one. It's like what your granny would have said, Don't have all your eggs in one basket, Rodg. Do you know what I mean? It's like spread your money, spread it spread the risks across different kinds of assets.

uh different geographies. You know, it's a s it's a small world now. You can invest all around the world very easily. Uh different sectors, you know, because some will do well at some times, some will do well at other times. Different kinds of tax wrappers because that affects uh access in later life.

Um just spread your bets and diversify. Um and just be wary, particularly when concentration is a little bit more insidious and hidden. We've mentioned company shares and we and and markets. Yeah, we say okay. I'll I'll have the um

I'll have a a a a a worldwide market fund, including the US US and stuff of that. But I don't know all with that fund manager. I'll do another one with this fund manager. Yeah. But actually you're still buying the same risk. You know, so it's um just a d just a different wrapper on it. So um

You know, is i you gotta say to yourself, if one of these things fails, does everything fail? Yeah. So having having bits and bobs all round the place, yeah, one of them could go up, go belly up and it's not gonna affect it too drastically, you know? No, exactly. Diversify like you mean it. Um Uh number five, design your plan for your behavior. Not sort of I don't say not brilliance, not that everything will go well all the time because it won't. So you need to kind of

Yeah, we would say the best plan is the one that you can stick to. Yeah. The best investment portfolio is the one you can live with. So Put as much as you can, uh essentially design for behavior. That's that's the message here. So if you're building wealth,

automate your saving and investing. Just take it out of your head. Yeah. Pay pay yourself first, as we always say. Exactly. Get the money put aside for you so it's done. And one of the things I laid to that the I want to do for two thousand twenty six is trying to convince people to reduce the number of decisions they make. Yeah. But remember why you made them to begin with.

Yeah. Big big because the number of people that say, Well, I've I've no, I it took me six months to investigate. I'm I'm I'm doing that fund'cause it's'cause it's historically done well, yeah, despite the fact you can't rely upon that, but actually it's r returned this. I'm happy with the risk attached to it, so I'll do that.

Then the markets do something funny, you think, Oh, I'm not quite sure whether you did the right thing. You just took six months to decide upon that. It's the market that's gone against you. So do remember why you made the decision you did when you did it. Exactly right. We talk a lot about automation, simplification, making life easy on yourself. But if you forget why you made those automation decisions then you may second guess them, which is uh can be just as dangerous. Um

accept that the future you is gonna panic occasionally. It just does. I mean I've been there and you know I do this for a living and sometimes you think, oh my God, actually is it different this time? Yeah. Chances are it's not. Right? Might be, but probably not. Um and you can sort of adjust for that. You can kind of build resilience in like things like guardrails, like you know, spending guardrails, um, as opposed to building a plan

that is only successful if you hit certain numbers. You kinda wanna build in breadth. Yeah, th there's never gonna be a perfect forecast. They're all they're all just guesswork. And the further out you're doing this, the more guesswork it is. You know, so like you say with the guardrail, so

If I assume I'm gonna get a five percent return and therefore that I'd be able to draw that much income, well if the market falls next year, what the hell do I do? Yeah. Okay, well I I latch onto my cash and do deal with that or whatever. So let the portfolio recover. Exactly.

Yeah. So what decisions can you remove rather than make your plan dependent on them being correct decisions? Because we can only know whether those decisions are correct in hindsight anyway. So how much decisions can we move? How much can we uh automate? One thing we always say, you know, you can't build a house on sand. You've got to build correct foundations. So, you know, some risks you can't

kind of take control of yourself, you've got to insure them. Yeah. Right. So the the main ones obviously that we talk about are life and critical illness cover, um, income protection, you being unable to work for whatever period of time and the impact that would have on your finances.

Um even like what happens when you die, you you know, you can protect for that by making a will. Yeah. Or doing a power of attorney. What happens when you can't control it yourself anymore? So I mean th th this this whole thing about protection is like it's it's money wasted. Yeah. This isn't pe pessimism. We're just saying to you, and it's not and it's not wasted money, it's responsibility. Yes. If I if this plan to d g to get from A to B

To be successful, I need to make sure it's everything's in place. Well, w if something comes along, you need to ensure. So it's not money wasted. Yeah, you've got to insure your car. Yeah. Yeah, just in case something happens. But you know, this is something that said, Okay, if this plan is important, I need to pay the money for it and and it's

Literally the premium worth paying to give you the comfort that you know you're gonna get there. Exactly. Take that off, it's done, you know you're protected if that eventuality happens. Ask what would devastate my family financially if it happened? You know, what event would would just Pull the rug out from under my finances and then protect it. Best people we know to do that are life search. So if you go to meaningfulmoney.tv/slash life search.

Um there's a number on there you can ring or you can click through and you will deal with their senior team. Uh I had Life Search recently completely revamp my shareholder protection and key person protection in in Jackson's'cause Uh we own uh the company me and Mike fifty fifty now, so we had to up my life insurance and all that stuff.

They just like uh we could have done it at Jackson's, but they are the absolute experts. They just do a brilliant job. So meaningful money dot TV slash life search. It's an affiliate arrangement, full disclosure. So if you go through them They kick back some of the commission to meaningful money helps us keep the lights on because Rog is very expensive to uh to have on the podcast. Um review don't react.

This risk management thing is an ongoing thing for you. You're not gonna just make a lump a decision now and then forget it. A number of people have done that and it th the the wheels come off. So um but the important thing is th it's not event driven.

Not external event driven. No external external event driven. So you review plans when your life changes or when you come to rev uh a review date. Yes. Not by what's happening with the news or what's happening with the markets. Yes, for sure. You know? Yeah. That's really, really important. Don't let stuff you can't control Yeah, particularly when it comes to markets, I suppose.

Yeah. Make you freak out and re sort of reassess everything. And pull your p and pull and pull forward your decision process. That's what we do. Talk about with with clients. Look, it's important that we review and update your plan regularly. there's broadly speaking, sort of three things that might impact, but really it's only one. We always say

markets and economy. We're probably not going to make any changes off the back of that'cause we factor them in. Yeah. Uh legislative changes, so changes to pensions or ICEs or how all that sort of stuff works. That might mean we need to update something that we've done for you in the past. But by far the biggest trigger of changes in people's financial plans is life changes. Relationship changes, health changes, job changes. These are the things that tend to trigger

a c almost like a blank sheet of paper. Let's review everything. Yeah. So don't react. review. If you're going to rebalance your portfolio, do it carefully, calmly and intentionally. And of course as you're going through life, we talk about timescales to certain events. Well

You know, if you're reviewing in a year of time a year's time, you are a year closer to your retirement, a year closer to buying, you know, upsizing your house or changing your job or whatever. And so you need to perhaps rethink your time horizons, your investments, based on time, not markets. Put your reviews in the diary, ignore all the noise in between times. Yeah, and and when you do no

More importantly is as well, uh w when you're doing a review it comes pops out the diary on the first of January. Mhm. Hopefully not,'cause you might be hungover by then. Don't do a review when you're hungover. No, no. Or when you're hungry. Um Um but when that pops out, don't go, Oh, what the what are the markets doing? Perhaps I'll leave it another week. You know. If it's in your diary for that date, do it on the date. Yes.

Unless you're physically not able to do it for whatever reason. Yeah, quite really important. And the last thing well I'll just sort of summarise these for you in a minute, but the last thing is use your money intentionally, spend it both now and in the future. Yeah, you know, it's a brilliant book oft quoted by Bronny Ware, The Five Regrets of the Dying. Right. The last thing you want, we get one life, it's not a rehearsal. The last thing you want is to look back and

regret. So we are all about balancing savings for the future and living well today. Yeah. Really important. Tomorrow is not promised to us. No, spend on what matters the most to you. Yes. Enjoy that. Even if the spent Uh change that word spent or to gift. Yeah. To whatever whatever whatever matter most. Because there's joy in doing that for yourself, which gives your life more richness than just having money. Yeah. So important. Don't confuse prudence with postponing life.

Don't put life on hold. just to optimise a financial decision. Geez, what is the point? Honestly. Uh I mean I I get quite sort of evangelical with this with clients sometimes. It's like what why would you put that off? It's like, oh maybe we'll do that next year. It's like for God's sake, doing that you might not be here next year. So

You know, it is a balance, but for the most part you must prioritize today. But spend intentionally. We love that word because it covers all sorts of things. Ask yourself, what would I regret not doing if I'm healthy? But I'm c too cautious for too long. If I hold my money for too long, I better just wait and see. Why not just do it and see?

E ev even even if that's taking the investment decision decision. Yeah. Yeah, why hold on to that? If you've decided to do it, just do it. Yes, absolutely. So eight things you need to do. Get clear what the money is for. Two match risk to time, not emotion. Three, build in shock absorbers before you chase returns. Number four, diversify like you mean it. It's a great way to reduce risk.

Number five, design your plans for behavior, not brilliance. In other words, don't make your plans rely on you making great decisions all the time. Plan for your behavior. It will be imperfect. Number six, protect the foundational stuff. Check out life insurance, income protection, stuff like that. Make sure your wills and powers of attorney in place. Number seven, review things.

Mm, dispassionately, carefully and intentionally. Don't react and make changes in the heat of the moment. And finally, spend your money intentionally, both now and later on. This is just uh these things I think will be you know. Yeah, we've barely talked about the markets, and yeah, that's what people focus on. Yeah, so we want to give you just

Five quick questions. This is the we're gonna call it the meaningful money risk lens, right? It's just a little sort of mechanism that people, any financial decision you make, you can kind of run them through this lens, all right? So super quick. Number one. Uh what could go wrong? Ask yourself what could go wrong. What could go wrong? Well they will. Your income could stop.

Yeah. Yeah, exactly. Or the wrong time. Your life might change in some way. So firstly ask yourself what could go wrong. Next ask yourself How b how bad would that be? Yeah. Is it just a bit of an inconvenience'cause it's happened? Yeah, or is it life changing, plan altering stuff?

Right. Ask yourself, what could go wrong? And then how bad would it be if it happened? And then how likely is it to happen? So important. Yeah. Long term care leaps to mind here. The number of people who want to plan for long term care, even though they're sixty years old. Yeah. And they probably will never need it.

And and planning for it might impact their spending now. I have no time for that. I say we're not doing that. Or or or or people not taking out critical illness insurance. Yes. Because it's so expensive.

Yeah. Well, the reason it's expensive is it's more likely to happen. That's why the insurance the the insurance companies are in business for that. They uh appreciate that. So if it's more likely to happen, you're probably more likely to become critically ill than you are to die if you're i you're early in life.

It's worth paying for. Is this risk possible? Is it probable? Or is it even like almost inevitable? So market volatility is just is inevitable. Inflation is an inevitability of life. How likely is it? How can we plan? Fourthly. Uh this this is this is a huge one in making your decisions is can I live with it emotionally? You know, once I've d done this, can I keep to that plan? You know, uh a number of people go, Oh, you're you ought to be a hundred percent equities now.

That would be in the ideal world, but could I live with the volatility of that? Could I c would would I be able to cope with something a little bit less volatile? Yeah. But give me still a decent return to get me where I want to be. Exactly. If the thing kicks off Am I gonna panic? Am I gonna freeze in fear or am I gonna just sort of try and tinker?

Does this thing I'm thinking about doing, does it align with how I actually behave? That's your hundred percent equity thing. Oh yeah, everybody, all these influencers they tell me I should be hundred percent equity. But actually if you're a bit delicate and you've never really experienced a market crash before, that could be catastrophic. And and you and you don't need to take any more risk than you need to take. Right. Can I leave it emotionally? And then finally, what's the risk?

of not doing this thing. So, you know, if you're panicking about investment returns. Mm mm. And you hold money in cash, so you're gonna lose out on growth? Yeah. That's a numerical one. Well we we yeah, we we had that question, was it last week saying like we've got three hundred thousand pounds in cash because we don't take too much risk on the stock market.

Yeah. But actually you might be missing out on your life going forward because you're not taking or not allowing for that risk to come into the into the process. So you might miss experiences by not having the money available. Yeah, yeah, exactly. Or, you know, you've been too cautious with it and so you can't spend on great experiences in later life because of decisions you've made earlier.

What about future regret? Oh, man alive. I think deathbed regret must be an awful thing when you can't do anything about it. So think about you almost kind of need to pre-think that. So, this is your meaningful money risk lens. Ask when any financial decision you're going to make, run it through these five questions. What could go wrong?

How b bad would it be? I can't say that kinda how bad would it be? How likely is it that it could go wrong? Could I live with it if it happened emotionally? And what is the risk of not doing this thing that I'm thinking about doing? And and then once you've done that, you can then say, Okay, I've I've taken allowance for all these different risks. And as a result of that, I need to do this with some of my money.

And that was some more of my money. Yeah. And I'm willing to do that because I've allowed for these risks. Yeah. You know it's We're gonna put a summary of this as a sort of downloadable PDF on the website. So go to meaningfulmoney.tv, just scroll up. Slash session six zero four. Meaning for money dot TV slash session six zero four. This will be a downloadable thing on the website. So you can you know stick it to your fridge or whatever.

And just remind yourself of it as kind of a summary of the show and the things that we've talked about. But really just to remind you, good financial planning is not about avoiding risk. No, it it's about Appreciating what the risk is

understanding it and embracing it. Yes. Yeah, we we we take risks every day of the week. Am I am I gonna quickly jump across the road before that car car comes along? Or or am I gonna walk down the road to the Zebra crossing or whatever? Yeah. Little little things that you do every single day. It's about choosing the right risks at the right time for the right reasons. Just remember that.

Good financial planning is about not about avoiding risk. It's about choosing the right risks at the right time for the right reasons. Risk is inevitable, it's just about harnessing it. All of this is in the service of a meaningful life. That's the point. And it's individual to you. So what somebody else will accept as risk, even if it's your partner, it will be different to yours.

Putting up with what you're happy with and not running with the crowd because they think you should be doing something different. Yep. You know, it's your risk. It is. I feel like we covered some good ground there. That's really good. I enjoyed it. We're both like kind of leaning forward. We're right into that. Great work. Right, let's uh cut things off with a review. There's a review from Ray Spud.

There's gonna be a play on words on here, I'm sure. Uh that's headed up professional, educational and entertaining. The best finance related podcast I've found, full of helpful practical information, well produced and well pitched for the average listener. Entertaining without being patronizing. Only wish I'd found it ten years ago. Highly recommended. Thank you, Ray. Well done, Ray. Thank you.

Uh what was that? Well produced, Kate. That's good to hear, isn't it? Yeah. But thanks you for that, Ray Spud. Uh look if you like what you're hearing on the podcast Please leave us a rating or review. You can do that wherever you're listening to this show. You can Hit the like button on YouTube if you're watching it.

But if you wanna leave us a review, do that. Meaningfulmoney.tv slash love gives you a few places you can jump off to do that. And that's it. So next time we're gonna be doing another QA. Q and A I think next time. Yeah. Yeah. So we're hoping to blend these, aren't we? Yeah, because the Give you a bit of bit of difference in in each week when we can listen to them. So that's it from the variety. It's a good thing. It's a spice of life, Rod. So I've heard.

So they tell me. And that's why you need risk. You take a variety of risks. So that's it for the session of Meaningful Podcast. We hope it was helpful. Yeah. Any questions or comments, please go to meaningful money dot TV slash session six oh four. Yeah, and we'll have that downloadable uh sort of summary there for you. So definitely go get that. Hope you enjoyed it folks. Thank you so much for listening. Thank you once again, Mr. Roger Weeks. I enjoyed that one.

But not all the others. We'll talk to you next time.