Understanding Investments: Assets - BOD017

22:11Pete:That's why people do it. So cash is not an investment. It's not an asset. I've written the word commodities. No, you haven't. I wrote that down. Okay, good, because I was like, I don't remember writing it. So we've done the big four, right? Shares, bonds, property, and cash. The big four? You went like this. No, originally. You've done the big four and then started counting. Shares, bonds, property, and cash. Those are the big four. Okay. Commodities. Is that like a car? commodities is stuff that humans consume um metals and we don't consume eat them don't look to me like a stupid that's what the word consume means no because we can consume you know iron and gold by making stuff out of it it doesn't mean you eat it it means we use it stuff that humans use then rather than consume right so metals you know we dig it out of the ground we refine it and we turn it into buildings or whatever cars yeah oil and gas Ah, right.

23:11Pete:So, you know, oil price is a big deal because lots of money rides on it. Yes, food, wheat, sugar. Those are called soft commodities. So how do you buy them? I presume it's not going to say anything to raid the flower aisle? No. Most ordinary investors like me and you wouldn't say, right, I want to buy 100 tons of wheat at, you know, 10 pounds a ton. in the hope that that wheat will be worth 15 pounds a ton in a year's time because it'll have gone off. All right? But if you are Warburton's and you need to buy a shit ton of flour because you've got like a billion bread rolls to bake, you might be thinking, I wonder what the wheat price will be next year.

23:59Pete:Is it going to be higher or lower than it is now? And it's an investment in its own right. But there are funds that buy commodities. Commodities don't make an income at all. it's all about their price okay so that's not for the the average person that's a no some quite a lot of people will be in funds that will have a bit of commodities in them yeah but most people don't need to worry okay an interesting next point okay are crypto and similar alternatives bitcoin all of those real investments no yeah I don't think I might come in under fire for this crypto I'm convinced is part of the future. I don't think it's panacea.

24:41Pete:I don't think it's like perfection. Everything in the future will be crypto. What was the word you used then? Panacea. It's another word. It means... You swore a thesaurus this morning. The answer to all questions. No, I just have a vocabulary. It was all right, but panacea. Panacea, yeah. It means sort of the sort of ideal answer to something or the ideal solution, really. Right? Right. So P-A-N-A-C-A-E-A. You have to start writing up words we learned today. Word of the week. So I'm convinced it's part of the future. Crypto is, to my mind, still very much a bet rather than investment. At the minute.

25:21Pete:Yeah. I mean, we don't have time. But the reason why crypto is attractive to so many people is because it's decentralized. There's nobody controlling it. It's written into the way the whole thing is made, that it can't be controlled by a central party. So the money system is controlled by governments and central banks, right? So you've got to assume they know what they're doing. Spoiler alert. Most of them haven't got a clue what they're doing, right? They're just basically reacting to whatever's happening in the world. Crypto is, and particularly like Bitcoin, which was the first, and still I think the best of them all, was created so that there'll only ever be a finite amount of it.

26:00Pete:It's not a limitless supply that's really important. And it's pretty much unhackable because every computer in the world checks every transaction all the time, broadly speaking. I know I'm oversimplifying, those who do know this stuff. And so it's a totally different way of thinking about money. I think it's too early for it to be a proper investment. Remember, the ideal investment is something that produces an income, goes up in value, or ideally both. Right now, it's still too much of a bet, I think, crypto. We've had a few people asking about it, so I think it would be good to do a proper episode on it.

26:33Just break me down what it is.

26:35Pete:It might be worth getting somebody on to talk about that. I've got people who I might be able to ask. Because while we, you know, there's a lot of hype about crypto. That's a problem with crypto bros on internet. And just like, oh, there's a lot of hype about it. We need to understand it. Is that the people in the Manosphere documentary? Have you watched that yet? Yes. Have you? Yes. Fascinating. and deeply disturbing. Disturbing, yeah. All right. So it's not a true investment yet. It's a bet, I think. How do these assets make you money? So I feel like actually we've kind of covered this. So how do shares make you money?

27:13Pete:The share price rises and falls, rises and many shares produce a dividend. And so you can either use that to spend that money. Company makes a profit. It pays a dividend now to you, the shareholder. or you've got cash back in your bank, you can either spend it or you can use it to buy more shares. Which does. That's compounding. And that's how it grows. Oh, yeah. Accelerates. It's a snowball. Gets bigger as it rolls. Yes, because the more you buy, the more you get back, the more you can buy, the more you can get back. Yeah, exactly. And it quickly gets out of control. It's why wealthy people get wealthier quicker.

27:46Pete:Easy to make money when you've got money. Yeah. Dead easy, yeah. What a dividend. We've definitely covered that. Tiny share of profit, yeah. Right. Okay. What are capital gains? That could have been wanky with the week, wouldn't it? Could have been wanky, but it's very wanky. Yeah. I feel like the finance bro is talking about capital gains. Yes. So capital gains, capital is your money. Yeah. But when it's invested in assets, all right? So if you own a lot of shares, you could say, I'm part of my capital. What? So when you sell your shares, you make a capital gain. You make a gain, really. So it's the growth on your investments.

28:23Pete:But only when you sell it. Oh, okay. Right? So if I've got£100 in shares, and the shares do really well and turn into£200 worth of shares. You've still not had any capital gains. No tax to pay. No capital gains there until I sell those shares and I've got£200 cash back in my hand. Then I've made a gain of£100. Yes. A capital gain. So the capital gain is the growth on sold investments. Correct. So we tend to use the word capital gains because it's capital gains tax. Yeah. Right? You and I would just call it a gain. We've made a profit. profit but then you have to pay tax on the money you've earned yes and that's called over certainly yeah yeah all right so that's what a gain is is but only when you sell and the flip side of that is um we're gonna talk about risk in a minute but the flip side of that is people say oh i've lost money on my shares so have you sold them yet and they're like no so you haven't lost anything no because not a penny they might grow back again they're worth a bit less than they were but you lost anything until you sell them.

29:20Pete:So you only lose or gain when you sell. That makes sense. Really important point. That makes sense. Okay. Alright. Risk with a capital R. Is it? Yes, because it is. Well, it's not just like... Anyway, it's a specific... It's a named thing, isn't it? It's a noun in this sense. It's entirely a noun. Yeah, exactly. I suppose it's generally too risky, isn't it? No, no. You know what I mean. I do. It is risk with a capital R. It's an important thing. So what does risk mean in terms of investing? My regulator makes a big deal about risk, rightly so. Because people don't understand investing and if they get into an investment they don't understand, they might be taking more risk than they're comfortable with.

29:56Okay, that makes sense.

29:58Pete:Answer me this. If you go to Vegas and you put your entire life savings on red as opposed to black, you've got a choice of red or black, right? What's the risk? Well, 50%. Don't give me a percentage. The risk is either that you'll make money or... You'll lose money. Everything. Oh, so it's a shit ton of risk because you're going to lose everything. You either make a load or you lose everything. You put 10 ,000 quid on a horse in the Grand National. It's either going to win or it's not. Exactly. So that's a binary risk, right? It's one thing or the other. Risk with investing is much more nuanced than that.

30:35Pete:It's much more complicated than that. Most people, when they think about risk when it comes to investing, is can I lose it all? Well, if you buy one thing, yes. Well, that's an important point. So if I put my entire pension, my entire ISA, and every pound that I've got into Marks & Spencers or Tesla, and that company fails, I lose everything. But if I put my pension and spread it across 1 ,000 companies, 10, 15, even 50 of them will fail. But that's a minute. It's a relatively small proportion. And so the total value might fall a bit, but it's not all going to fail. Yeah. if you are invested in a global passive tracking that we were talking about last time, a global investment fund, which is tracking markets, you're probably invested in 20 ,000 companies.

31:23Yeah, so you're not going to notice.

31:24Pete:You're not going to lose it all. So risk is not about total loss. My view on risk is a badly thought through portfolio or if you are advised to go into something that you're not comfortable with, it's the risk that your investments will make you do something stupid. right i hang on i think i've got this so if you are someone who sees a dip in the market and freaks out you need a poor fund or whatever that isn't going to dip too much because then if the markets go mental and yours doesn't dip as much as it could do you're less likely to panic pull your money out if you're like nah i know it's going to go back up again then you can afford to have something that is more risky because you aren't likely to make that knee-jerk reaction.

32:13Pete:Exactly right. That's called your risk tolerance. Right. That comes down to understanding. It comes down to experience. So when we are... Stage of life? Potentially, but that's not necessarily a straight line. And actually when people get quite much older, their cognitive ability might decline and they tend to get more risk averse. Yeah, that's what I was leaning towards. Oh, was it? Okay. So more risk when you're younger? Because you can afford it. Yeah, potentially. Okay, yes, then. I'll say yes to that. Kind of leaning towards the pension thing that we talked about last week. Yeah, we talked about last week.

32:47Pete:So, yeah, when we are talking about risk with clients at my company, my planning company, Jackson's, your company too. That's your company. I just worked for it. Yeah, you just worked for me. That's okay. So when we do that, we're not asking them, on a scale of one to ten, how do you feel about investment risk? Because everybody says five, right? Yeah. Somewhere between four and seven. Yeah, it's a middle ground. But what we're saying to them is, how often do you check the markets? How often do you log into portfolio? Have you invested before? Have you ever chosen your investments before or only ever been advised?

33:19Pete:Have you ever bailed out when you've heard bad news on the markets? Yeah. There's no shame if the answer to any of those is yes, which is we just need to not. No, we're not trying to trap people. You know, we're trying to understand how they tick. Yeah. And so often we can fill gaps by educating and teaching clients. But our job is to know them well enough and to sort of get a sense of how they might react so that they can stay the course. Because the biggest risk of all is human behavior. If you sell out when the market is down, you are realizing those losses. Yeah. Whereas if you can just hold your nerve, and it's bloody unpleasant sometimes, But if you can hold your nerve, markets, investments will look after you over the long term.

34:02Pete:They just always have, and there's no reason to think that they won't always will. Won't always will. Anyway, no reason to think that that won't continue. So to my mind, risk when it comes to investing, people think it's about risk of loss. It's not. People think it's about volatility, up and downiness. It's not. It's about can you cope with however it behaves? Markets will do their thing. You've got no choice or control over that. So it's whether you can stick it or not. The best portfolio is the one you can stick with. Yeah. So there's no point going for a super risky one if it's just going to mean you're staying up at night, can't sleep.

34:38Pete:No point. Life is literally not... It's way too short for that. No, exactly. Even if it makes you more money, if it causes you more stress, it's not worth it. But also, you shouldn't just go for the safer fun for the sake of it if you are okay to go a little bit. Oh, definitely not. You need to go as high risk as you can cope with. As high risk as you can cope with. Because you'll make more money that way. Yeah, but not lose sleep. So it's finding that kind of sweet spot. I think we've kind of covered the other points in there, to be honest. Well, yeah. Actually, we've mentioned the next one because we're just that good.

35:11Pete:Yeah, yeah. Because the next… Very cohesive. What, diversification? The next thing we're going to talk about is diversification. But we talked about that in the sense of… Yeah, it's worth mentioning. Yeah, we talked about it in the example of putting everything in one company shares. and we also talked about it a little bit when we talked about how shares and bonds for example work differently you can take that, you can have shares, bonds, property gold lots of people have all those things in their portfolio and they all kind of balance each other out to a point so do I need different types of investments?

35:42Pete:no you don't need but most people do is that to help them sleep at night or is there kind of some reasoning behind that? one of the best personal finance books ever written is called The Simple Path to Wealth by an American guy called JL Collins. I've interviewed him twice for the Meaningful Money podcast. Does he want to call a bank of death? Sweetest guy. I'll ask him. Sweetest guy and has made a ton of money out of this book. I mean, honestly, everybody should read it. It's brilliant. We'll put a link in the show notes to it. He wrote that book because he was trying to get his 20-something-year-old daughter interested in finance and she was having none of it.

36:18Pete:So he's not a finance guy, but he'd made a lot of money investing simply. and he basically wrote this book for her and it became this classic, right? Changed countless people's lives. He talks about investing in shares. He only invests in shares, right? And he said, investing in shares will leave some investors, quote, bleeding by the side of the road as if they've been beaten up, right? Because stock markets can halve. Well, if you spent 30 years It's building up your pension fund and it's like half a million quid. Lovely. And suddenly it's 250. That's terrifying by any measure. Most people can't cope with that.

36:57Pete:And so diversification dilutes that volatility. And if you get it right, it increases the chance of you staying the course. Because shares might go down, but bonds and a property and all the others might not at the same time. Classic example of diversification is umbrella shares and ice cream company shares. So if you have a really hot summer, your shares in your ice cream company will do really well, but your umbrella shares will do badly. If it's wet and rainy, your umbrella shares will do well. Now, of course, that's a little bit too binary, but you get a point. If you hold both, no matter what the weather's doing, you'll probably make some money.

37:34Yeah, smart. Because they don't actually totally offset. If he only invests in shares, how does he negate that?

37:39Pete:He doesn't want to negate it. He's tolerant for that. Yeah. but if you want if you're not and most people are not then you would dilute either with cash or with bonds oh okay alright that's the on the answer alright let's close this iPad okay have I got it how do shares make you money two ways shares make you money by going up in value yes because the company does well because the company does well and in the form of dividends which is when the company makes profit and they decide to pay out or sum it out to their shareholders very good What's a bond in this context? Okay. A bond is a loan from me.

38:21The investor. The investor to a company. Yes. And they will promise to pay me interest on that.

38:28Pete:Yes. And at the end of the set timeframe, they will pay me whatever it was that I bought. Exactly right. The bond for. Dead easy when it's like that, but when they get traded in the stock market, that's when it gets complicated. Yeah. What's a commodity? Generally things that are consumed. so used or used so things like well food we talked about then we also why can't I think of any other examples metals oh yeah metals to buy to make things and oil and that kind of thing yeah I don't know whether you picked this up or not what's the best kind of portfolio what's the best kind of portfolio there's a bit of a throwaway line no longer it's the one that you can oh tolerate the one you can stick to yeah because yeah that makes sense so it's the one that you're not going to freak out by yeah it's the one that you can hold your nerve and stay the course yeah investments will look after you if you let them but they'll give you a really uncomfortable ride at times yeah so as long as you can cope with that then they'll look after you and it's finding how much of that you can cope with yeah finding that switch bud yeah and that's obviously it's a big part of my job as a financial advisor financial planner it's harder when you're DIYing when you're learning this stuff yourself so sometimes you've just got to dip your toe in the water but you know to do that for like six weeks or six months you've really got to do that for ten years you've got to learn about investing because markets move sometimes very quickly and sometimes very slowly from the beginning of 2007 to March 2009 that's a long time, that was two and a bit years, they went down by 35-40 % How long did it take to get the back up?

40:10Pete:pretty quick about another year and a half something like that that's a hell of a drop though Covid it dropped 30 % in what three four weeks I was going to say Covid as an example because I remember you mentioning it yeah but it was back after about six months of that alright so sometimes those ups and downs are very stark sometimes they're a lot more insidious but I remember in March 2009 when the market had already dropped by 40 % all the newspapers or many of the newspapers as we're saying, still another 50 % to go. So in other words, half again. Half of what was left. I mean, that's terrifying.

40:46Pete:As it happens, that was the bottom. Imagine if you'd have sold out then and waited for it to get better and it got better straight away. Yeah, thinking it was going to go down another. Yeah. I had some clients who entirely by luck invested at the lowest point in the market. They made a ton of money over the next couple of years. That's the issue. Just luck. That's the thing, so much of investing, you can only know exactly when the best time is after it's gone. Yeah. Because we're not mind readers. We don't know what happens in the future. So you've just got to keep investing. None of us could predict that COVID was going to happen.

41:14God, that sound, you know, look back at it now and it sounds flipping apocalyptic. It does, yeah. It's dystopian.

41:18Pete:And yeah, we're all still here, many of us. So it's, yeah, you've got to just keep investing. And one thing that I guess the last thing to say on risk is that if you are investing regularly, like monthly, then, you know, some months market's going to be down. Well, you buy more shares then because they're cheaper for your 100 quid a month that you're investing. If they go up, you're buying fewer shares because they're a bit more expensive. But even though the market wobbles, it will smooth itself out. That's called pound cost averaging or dollar cost averaging. God, there's so much wankiness in this industry.

41:52Pete:DCA, PCA, yeah. Is it more acronyms? Acronyms, yeah. But people come across this stuff online, so it's important that we mention them. That's why we're here. Exactly, because when I write these scripts, so I'm like I open up my you know laptop and start googling comedy ask questions and start and then that leads me down a rabbit hole but it leads me down like a rabbit warrant where there's like all these other tunnels coming from it we're really trying to sort of keep it tight so assets today next week we'll talk about Rappus the different accounts what makes them different then platforms which ties it all together so and how to kind of think about choosing them yeah I mean what we haven't really talked about too much today is funds but a fund is just a kind of thing that groups lots of assets together.

42:36We've mentioned that a little bit before. Yes, we have.

42:38Pete:So good, good work and I think you've got it. And I think I've got it. That is good. Yeah, that was good. Felt like we got back into the swing of filming very quickly. Yeah, it does actually. Well, I do like talking about this stuff. Well, yeah, and you and I kind of get on. I like talking about it with you actually. It's good because you have a grasp but there's a lot you don't know and that's probably true of a lot of the audience. Well, yeah, exactly. you know people hear the word premium bonds and they kind of know what it is but they don't really have a safe secure place to ask yeah we do here yeah exactly that's why we're here that's why i drag you here and if you've got any questions send them to us hello at bankofdad.show we'll do our best to answer them or comments in the if you can just pop your teeth in kate put podcast questions subject title but it's really not the end of the world if you don't because i check every single one anyway.

43:28Pete:Yeah, or you can just leave a comment under the video. Yeah, exactly. I'm checking them all, all the time. Yeah. So, yeah, I'm replying to as many as I can. If I can't reply to them, I may dad reply to them. So, we will do our best. We will. Thank you so, so much for watching. If you're listening, if you want to drop us a little rating on Spotify or Apple Podcasts or whatever it is you're listening to, that would be much appreciated. If you're on YouTube, if you could drop us a like, subscribe to the channel, click that notification bell to be told when we're posting it does us so much good really really helps us out it does um like we said next week we are talking about the rappers yeah look forward to that or i will anyway yeah indeed um but yeah thank you so much for watching and supporting us and as always we will see you next time

44:24Thank you.