Risk Pt 1 - The Risks We Know - BOD025

0:00Or just chucking themselves off a cliff. Well, yeah, exactly.

0:02Pete:I can't be bothered. To be honest, if zombies are running around, I'm either lying down so they can bite me or I'm hurling myself somewhere. It's easy to understate something which is ubiquitous. It's everywhere. God, you've thrown out all the words today. I don't do it on purpose, I promise. No, I know you don't, but it is the way you talk. But it's good. Give me alone. Go away. Hi, and welcome to the Bank of Dad podcast. I'm Kate, and this is my dad, Pete. Hello. And we're here to teach you the money lessons we were never taught at school. There's no judgement, no jargon, just real talk about how to handle your money.

0:32Pete:I wonder if I could do that. Go on. No, no, no. Unless she's out of my mouth, I'm like, she's going to say, go on. No, no. Good job. What are we talking about today? Today we are talking about risk. I'm not asking you about the house because it's about an hour and 20 minutes since I asked you last time. Nothing's happened since I bought myself. I've had an email from your solicitor since. Have you? What do they say? ID check. Just asking for ID check. because we are helping with deposits. So that's just adding a complication. £25 plus fat for every ID check. Yes. Easy step down. What are we talking about this week?

1:10Risk, as we talked about.

1:12Pete:No, you answered the question too. Yeah. Okay. Risk. We're talking about risk. So this has come from me, hasn't it? Let's face it. It has, yes. Because risk doesn't sound like a deeply attractive thing to talk about for 30 minutes or 40 minutes. Yeah, but the fourth episode we ever did was debt. yeah which is also not chirpy is it but risk i think as we we said in the sort of what we learned episode what we covered really in the first 19 20 episodes is pretty much everything most people need to know so we now need to go deeper and just build on that sort of fairly high level foundation of everything that we've talked about and i think risk is i mean it's part of the human condition it's part of how we live think and operate but it's an essential part of building wealth so we need to understand risk it's very uh multifaceted shall we say lots of kind of elements to it that we need to talk about just because i think people have a simplistic view of it right so we need to go a little bit deeper than that without boring people with us so this is a two-part series yes just as we talk about boring people with us um the first being today's which is kind of the risks that maybe we know about.

2:20Pete:Yeah, the kind of more obvious ones. More obvious ones. And then next week will be the risks that we don't know. The hidden ones. The more hidden, insidious ones. Yeah, exactly. Don't say, we don't keep you on tenterhooks. No, exactly. I think we've got like 10 or 11 different risks, haven't we? I think that we're going to cover. And even then, honestly, I could do a series on each one. For your sake, I made sure we didn't. We're not going to because it's not that necessary. Or interesting. No, probably not. But do you know what happens first? It's time for Wanky Word of the Week.

3:00What a tune.

3:02Pete:What is it? Volatility. Volatility. That's a pleasing word to say. Yeah. So volatility is, well, when it comes to investing, which is like the first of our risks that we're going to talk about volatility is... Uppy-downiness. Up and downiness, yeah, upy-downiness. How sort of big of a roller coaster it is. Technically, it's variation around a mean. So it's to what extent does an investment or a portfolio rise and fall? And what impacts might that have? So, yeah, how volatile is something? how unpredictable markets are by definition, unpredictable, and investments as a result. But to what extent?

3:53Pete:Up and downiness. How upy and downy they go. Yeah, but volatility does not equal risk. It's just part of it. Quite important. I think a lot of people think it is risk. No. Well, the risk is, you know, my portfolio is going to go down. Anyway, let's get into that in just a second. All right, so the first risk, nice and easy, starting us off, investment risk. risk. Yeah, it's a finance podcast, right? This is what people think about it. Well, yeah, I feel like we should, yeah, yeah. And this is what they think risk is. Yes. So what does investment risk look like in real life? How long you got? 20 seconds max for this question.

4:25Pete:What does investment risk actually look like? It's up and down in us. Having just said volatility is not risk. You know, really, most people, when they think about investment risk, they think about the risk of total loss. Can I lose it all? Unlikely. well yes depends well you've got a couple of follow-up questions which will highlight that but um that very very rarely happens and only happens where you are taking very very risky bets risk is degrees right you've got zero risk and you've got full-on risk all of my funds into my cousin's startup yes which has massive chance of failing risky and if you do you will lose everything so it's almost a toss of a coin or a black or red type of question isn't it most investment risk just certainly investments done right as we would sort of uh suggest you might consider investing uh that's impossible so our clients at jackson's they hold somewhere around about uh depending on their portfolio something somewhere around 24 000 individual stocks and so in order for them to lose all their money, the entire world would have to go bust.

5:40Pete:Every company and every government. At which point, if that happens, our investments are the least of our concerns. We're in zombie apocalypse territory, really. You know, we need to be buying guns and gold. Or just shucking themselves off a cliff. Exactly, I can't be bothered. To be honest, if zombies are running around, I'm either lying down so they can bite me or I'm hurling myself somewhere. You know when it's like all of these main characters in movies, I've got such a strong survival drive. I just don't think I've got that gene. No, I'm just like, oh, just get it over you. It is my neck.

6:12Like, you know, yeah, exactly. You know when the big tsunami comes and they try to run? I'm like...

6:17Pete:Yeah, I'd be like the father and daughter at the end of Deep Impact where they just see the tidal wave coming and they just hold hands. Yeah, or like the old couple lying on the bed in Titanic. Yeah, waiting for it to happen. It's just going to happen. We might as well just... Anyway, apparently we have no survival drive. No, clearly not. Now I know where I get it from. Okay, so if investing is risky, as people say, why bother? Because risk is linked to reward, comprehensively proven over centuries. So, for instance, if you put money into your cousin's star and it ends up being the next Tesla.

6:56Yeah, it's going to be pretty good, that.

6:57Pete:Very high risk, like unicorn territory reward, right? It's going to be like, I'm not alive, this is made. I spoke to somebody once who knew the founders, the people who came up with the second biggest crypto coin called Ethereum. And they were penniless when they set it up. And they crashed on her floor for a fortnight at one point. And they gave her what was then essentially about 400 quid worth of Ethereum. By the time I met her, it was worth millions. All right. So, you know, you've got that at one end or the other. Yeah. That one in the extreme, but you can kind of scale that down. So we've talked in our assets thing about shares being the growth engine.

7:40Pete:So shares in companies being what really will grow your money. Either you can buy shares in a single company. And if that company goes bust, you lose it all. Or you can buy shares in 5 ,000 different companies. And, you know, even if 10 of them go bust, you're not even going to feel it because you've still got 4 ,990 others. So, you know, there is degrees of risk. and so you must accept some risk because if you accept zero risk, you'll never make any money at all. In fact, you will lose it over time. Can you reduce investment risk without giving up all of the potential rewards? Yeah, again, that scale is there.

8:17Pete:So if shares are the growth engine, which I believe that they are, talked about businesses and bricks, remember shares and property? The two main assets that will consistently and have been consistently proven to make you money over time. So you can dilute a shareholding with some other stuff, stuff that behaves differently. And so if shares are doing really well, we normally kind of offset and dilute them with bonds, different kind of investment. We talked about that in the asset class, the assets episode. And, you know, if you hold, like, say, 50-50, equities and bonds, versus holding 80-20, 80 % equities and 20 % bonds nearly knocked you out with a microphone there they're connected to the same table well the 80-20 thing will behave broadly the same but just more so so you'll make more money and when it goes down it'll go down lower so you get some you give up some of the potential rewards but not all of them it's not binary it's not like you've got to be all in or not at all there's shades of grey really important so when markets fall should that make people nervous?

9:26young people specifically.

9:27Pete:No, it should make them excited. But that sounds perverse. Yeah, controversial. But it's because it's going to go back up. And it's because then they're on sale. So shares, particularly investments generally are driven by sentiment. They're driven by other things as well. But sentiment, how people feel about those investments is the main driver. So if people are feeling a bit concerned about them, more people sell, the price goes down. Well, if you believe generally that given long enough, those things will come back, if the price is down, they're on sale. Especially for our audience. If you're 30 and you're buying it, or 24 or whatever, you've got loads of time for it to...

10:06Pete:To bounce back up, that's right. The answer is to keep buying no matter what, and that's the beauty of what we call pound cost averaging. You put money in every month, you benefit when it goes down, you benefit when it goes up. It averages out. Yeah, true. You're not constantly watching the market trying to time it. That's a fool's errand. Mugs game. Mugs game. Yeah, a mugs game. You're a mug if you try that. Have you not come across that expression? Not that. People would, my age, would call people a mug, but they wouldn't say a mug's game. That must be where it comes from. Mug is a gullible fool.

10:36Pete:Yeah. Yeah, so a mug's, it's like that's a mug's game. In other words, it's totally not worth the effort. All right, next risk. Okay, so is that helpful for investments? I think so, yeah. Yeah, you know, it's... We've talked a lot about investments. We have. I don't think we need to spend too much time on that. Fair enough. Next then. Yeah, sure. I didn't mean for that to come across, but yeah we've talked a lot about it so let's start about this one concentration risk we have talked about this before we just might not have called it this yeah it's almost a subset innit so concentration risk so putting all your eggs in one basket or not my favourite question is this one what's wrong with putting all my money in one place if I really really believe in it it's like to what degree do I dial up the sarcasm go on dial it up For this one question you get to do it.

11:24Pete:Oh, if you believe in it, then that's fine. Because, of course, you are an investing genius. Yes. And, you know, clearly you are able to spot. You can meet the future. Yeah, able to spot the next Tesla, Amazon, Microsoft, NVIDIA, all that. You know, come on. Your belief is utterly irrelevant. The history is littered with, you know, very well-meaning, completely obsessed idiots who lost everything. And so what you believe matters not a job. Yeah. And that person down the pub who's got a really great feeling about this doesn't... He doesn't know either. That's right. Nobody knows. No, that's the point.

11:59Pete:Yeah. There's a famous story of Queen Elizabeth. So after the great financial crisis of 2008 and 2009, easily the worst crisis since the stock market crash and Great Depression of 1929 to 1935, right? So, I mean, literally, once in three generations financial crisis. Queen Elizabeth was meeting with a load of sort of finance people central bank and she basically just said to them how come none of you predicted it? they had nothing to say these are the brightest financial minds on the planet and not one of them saw it coming and so you know your mate in the pub no matter how strong his belief it's not got a clue it's a classic example of where we need to talk to ourselves rather than listen to ourselves your inner voice saying I really believe in this needs to be silenced Yes, shh, shh.

12:50Whenever you are saying it, ignore it. So, okay, but why is the diversification so important then?

12:58Pete:Because of, you know, what we said about if you hold lots of different things, there's two things. Firstly, if one or two or just a few of them completely fail, the whole is not affected. Much. Much, not materially, right? If you own 5 ,000 companies and 10, even if 50 went bust, you'd lose 1%. Yeah. Right? And so it's really not going to move the needle. So it spreads risk, I think, is the main thing. But it also reduces volatility in the meantime. Because if you buy stuff which behaves differently, that is the example of ice creams and umbrellas. Yes. Yeah, right? So you might have shares in two companies.

13:41Pete:One's an ice cream company and one's an umbrella company. But that means regardless of the weather, you're still going to do okay. Yeah. Yeah. And so it both reduces risk of total loss because 5 ,000 companies are not going to go bust, but it also smooths the journey along the way. So diversification is essential in life and in investing. So could you say that putting all of your money in one share or one crypto or one whatever is considered gambling? Yeah. I mean, at most, it's one step removed from gambling. Crypto is not yet established enough to be an investment in the true sense. Right. My not so humble opinion.

14:12Pete:Plenty of people would disagree with me on that. I think it's getting there don't get me wrong particularly Bitcoin but still I do wonder you know how that will all end up but yes it's alright for me to say you know shares are the growth engine of the world but if you bet on one company it is a red or black it'll either win or not it's not down to chance like red or black no but it's got the same odds essentially it's binary outcome yeah yeah one or the other it's either going to do great or it's going to fail probably yeah not probably it's going to fail it's going to be that binary yeah it's probably going to be that binary so what is concentration risk can that apply to anything else or is it just investing

14:59Pete:well yeah one example is at my financial planning practice Jackson's we have had a bit of a spate of attracting high earning sort of mid career people, so people in their 30s and 40s, 40s primarily, but they're working for like Google and Amazon Visa, earning like 400 grand a year, working 80 hour weeks, right? But a chunk of their earnings are in the shares of their company. So they get not only a salary, they get given Google shares, whatever. So, I mean, Google is Google, right? Alphabet BetStrictly, the parent company or Visa. These are like massive. It's very unlikely these companies are going to go bust.

15:45But if they did, you'd lose both your income and your investments. Right. So that's concentration. Yes. Right?

15:53Pete:That happens at smaller scales as well. Yeah. You know, smaller companies will issue shares. If you are working for a startup, it might be, you know, we'll pay you a salary, but also you get in on the ground floor. And if things go really well, you might earn a fortune or you might lose both your income and your investments. so yes you can concentrate in other areas I'm sure there are other examples but that's the one that obviously springs to mind to me yeah okay right that takes us on to risk number three debt risk yeah so when does debt become dangerous? so it's been a while since you talked about debt it is I think debt becomes dangerous firstly if you obviously if you take on too much of it if you're repayments are sort of too high a proportion of your take home pay if you don't have an emergency fund so if anything goes wrong at work you lose your job or whatever suddenly like well okay I can't make my next debt payment clearly that's dangerous yeah I mean that's a terrible situation I have a succinct answer okay sorry that came across so much bitchier other than your ridiculously wordy verbose one Pete verbose anyway carry on when it starts to control you yes yes when it starts to as opposed to you controlling it yeah that is insidious all right it can you know sometimes people give it a different name like leverage it's a bit of a wanky word there but it kind of works well the thing is because it is leverage over you it's being held over you yeah in this case so for instance you can't afford to buy your house outright i cannot and so you are using somebody else's money to buy that asset you own the asset though you owe the debt but you own the asset yeah you get all the benefit of the increase forget the fact that it's section 106 right yeah so you know i still get benefit of it yes you do i just don't get so i own my house i do still have a small mortgage yeah but um all the increase in the value of the house is mine but i used somebody else's money to kind of get access to that so leverage does that you can borrow money for example to invest more that's a highly dangerous i was gonna say that does not sound like a good idea it's not a good idea um that's plenty of people say like i just love debt you know they start companies they take on other people's money mostly that's not debt that's investment and you know they're basically spanking other people's money on a dream which may or may not work i just think debt can be insidious it can be kind of uh wolf in sheep's clothing sometimes.

18:29Pete:But you're right, control both over you and your control over it. That's a good barometer of whether it's dangerous or not. So why do you think so many people don't... Why do you think so many people underestimate debt risk? Because debt is a part of most people's lives. It is. More so than it's ever been historically. It's easier to get into debt than ever. Do you think that's because of the UK's obsession with owning their own house? I think it's or the ease which is to get like credit cards yeah that more so that's unsecured debt a mortgage is secured on the home if you don't pay your mortgage they take the house off you yeah yeah whereas unsecured debt which starts with your kind of gateway drug like Klarna and you know buy now pay later type things PayPal yeah it's funny PayPal never used to be that yeah but you know these are things where it's just it's so easy it's a couple of clicks these days so yeah yeah we'll do that which is like my credit card do you remember i asked you to look over my shoulder because i figured it'd be this lengthy process 30 seconds i had it it was in my digital wallet and then the next day i'd arrive physically and that's amazing what the hell now i've got three grand that isn't mine that i can spend well right dangerous potentially yeah if you don't have the right attitude and teaching an example obviously from from uh in some cases so it's i think it's too easy and because it's too easy and it's such a sort of um it's part of all of our lives it's kind of sting has been drawn a little bit and it's we just assume it's natural i've had plenty of people say to me over the years well actually everybody always has a car payment no you don't have to just don't have to have the newest car no you don't have to you can if you want but you don't have to yeah that's money you can't you know save for the future or whatever so it's just everywhere that's why i think it's easy to understate something which is ubiquitous it's everywhere.

20:20God, you found out all the words today.

20:22Pete:I don't do it on purpose, I promise. No, I know you don't. It is the way you talk, but it's good. Leave me alone. Go away. You say I'm not so sick, did I use posh words? Ubiquitous is a great word. It is. It's one of those ones that you say in a sentence and you're like, yeah, I know what ubiquitous means. Yeah, yeah, I'm not quite that up myself. No, you're not, but it's just one of those words. I mean, you know how I was raised, right? You know my dad, your granddad, is a languages genius, so every single tea time my entire childhood was like, well, the Latin root of the word ubiquitous is ubiquitana or something.

20:56Pete:It's like, who is it, dad? And it means this, and it comes from Plato or something. Yeah, he does just have this. I mean, I say that, he does that now. The thing is, but now he'll also reel it off in the Latin origin, the Cornish origin, potentially like the German origin for Schitts and Giggs, and then maybe a surprise fourth. Yes, I know. He is a genius. And so when language and grammar and vocabulary is such an important part, because it was foisted upon you as a child, it kind of never goes away. No, it does happen then with me, though. I often read a book and I'm like, Dad, what's that word mean?

21:25What's that word mean?

21:26Pete:Yeah, well, exactly. The cycle's continuing. Right. What warning signs should young people look out for when it comes to debt risk? High interest rates.

21:42Pete:making sure that it's not too big a part of your monthly outflows. Yeah. You know, don't go into debt to buy stuff that you don't need and that is essentially worthless immediately after. This is why Klarna is nonsense. It's why store cards are a waste of time. It's like, well, take out a store card and you'll get 10 % off this purchase today. They still do that, actually. That's a good point. You were looking at me a bit blankly. Just the word store card was stirring me off a bit. That's interesting. So, I mean, it used to be... Well, that's you go to, like, Oak Furniture Land and buy a dresser.

22:15Pete:Yes. Or, like, is Burton still a thing? It's closed in Penzance, but it's a sort of men's clothes shop. Jeez, so old. Right? But, you know, you would go into, or even, like, Argos, that's still a thing. Yeah, it is. Right? You'd go and they'd say, well, actually, you know, we'll give you 10 % off this purchase today if you take out an Argos credit card. Well, no. so it's a store card linked to a particular it's a credit card linked to a particular retailer I say the only equivalent you'd get now would be to like have an account with someone yeah I guess so like next a next account and then you might get 10 % off every time you spend over 250 or something like do you know what I mean yeah yeah but it's not a credit card like that no but it is a form of debt you don't have to pay it all off straight away in many cases so you can pay it off over a period so I'm going to have it all now I don't think that's yeah next that's definitely the case really?

23:04yeah

23:05Pete:Yeah, yeah. So, I mean, it's good that you think not, because it means you'll definitely pay it off. But it's stuff like that. It's like, oh, actually, I don't have to pay it all off now. I'll pay it off over a couple of months. Yeah, but the issue is you can forget about it. That's the biggest issue of all. Yeah, exactly. And it certainly would be my issue. Yeah, it's like, oh, rats, now I've got 75 quid this month that I wasn't expecting, because I forgot that I delayed it from last month. Yeah, it doesn't actually feel... It feels great in the moment. You're like, oh, I've got£100 worth of stuff, but I've only spent 25 quid, and then the 75 quid comes back at you, and you're like, ah, this didn't feel so great anymore.