The Optimal Order for Investing in the UK

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0:17Alasdair Walker:Alasdair Walker is a financial planner, but he's also one of the people behind the popular UK personal finance flowchart and a former moderator of the Reddit community. So I'm not exaggerating when I say he's helped millions of people make better money decisions. So welcome to the podcast, Alistair. Just in case people don't realise, I am not Damien. I'm stepping in for Damien. My name is Tobin, you bet, just in case you know. T is here, as always, though. Reliable. Reliable, exactly. First thing I was going to ask you, so Alistair, you are most famous for, if you want to use that word, for creating the UK Personal Finance flowchart and also running the Reddit for UK Personal Finance.

0:54Do you want to tell us a bit about how that even came about? Yeah, sure. And thanks for having me, both of you, by the way. Yeah, it's interesting because it's what I would describe as, for a long time, a one-way secret. Because Reddit is a very anonymous online site, or certainly always was historically. It's changed a little bit more recently. So everyone uses pseudonyms. there's this whole joke about like discovering that someone you're sat next to uses reddit and like oh like we're members of a secret club or whatever um so for a long time it was it was very very one way um but the experience of starting up a uh what was a very small very niche bit of reddit on a niche website as it was in 2011 i think when i first started looking at it um I didn't found UK Personal Finance.

1:50I think it had about a thousand members when I joined. It was run by someone who just registered UK everything. Got it, okay. When Reddit had started. So they had like UK Personal Finance, they had like UK Law, they had all these different UK subreddits. And they were just fed up of trying to run this thing. So they said, oh, I basically went on there as a young, freshly qualified financial planner and answered every single question on there. I spent 20 minutes, half an hour, a couple of times a day just answering questions. That's all I did. And he was like, you seem keen. Do you want to run this thing?

2:22So I said, yeah, yeah, sure, okay. And then it grew just exponentially. I stepped away from the subreddit sort of formally, if you like, I stopped running it 2021 in the middle of COVID. I might explain a bit later why, but it became very frustrating. But I think there were just over a million subscribers at that point. So, you know, from a thousand to a million in probably a decade was a really interesting experience to be part of. Yeah. I run the Discord server still, which is attached, and that's got about 5 ,000 kind of people who were there and all at the same time, you know, who are logged on.

3:03And that's kind of regular, sort of, you know, very quick conversation, question and answer. And again, you know, that is super focused. There's not like an off-topic section for people. It's just come and ask questions and people are trying to help you. And that's kind of the brand it was known for. The flowchart, the UK personal finance flowchart, I always say if you search on Google for UK flowchart, it's our flowchart that comes up, which I think is great. That was probably the thing that gave us something to hang it on. The danger is it makes everything look binary. Like, oh, don't do this, but it's too far down on the flowchart before you've thought about this thing.

3:40That's always a risk. but at the same time it gives people this opportunity to go okay well kind of i'm about here yeah this is where i need to be uh okay what's next well here we go so so it it flows really nicely um always has could always be improved um and it's changed a lot over the over the years as well um but i mean the proof's in the pudding really the the site that hosts it we get around 50 ,000 unique visitors a month. So it's over half a million a year who are coming on and most of that traffic's the flow chart. So people are really engaging with it as well. And again, the other sort of long-running joke in the subreddit was, anyone asks a question, the answer is, have you seen the flow chart?

4:21It's a great flow chart, honestly.

4:23Alasdair Walker:When you started, there were 1 ,000 members. Then it went up to like over a million members. And then now I think it's around 600 ,000 members. How do you think the community changed over time? Yeah, the metrics are interesting. I think that 600 ,000 now is actually people actively using it. One of the things about a space like UK Personal Finance was lots of people created alt accounts to ask questions. So we reckoned of that million, I don't know, like 250 ,000 at least were just not active. So I think the numbers are probably more accurate to who's actually using it now. I found as someone who'd developed this very small community that had grown and grown it got to a critical mass say around the COVID kind of period where the absolute fire hose of questions became like as someone I'm relatively I like things to be quite neat I like to you know to finish things that I start and all that sort of stuff and to and to have a mod cue you know which is what happens behind the scenes of this stuff, to just have a never-ending series of people reporting stuff or people asking questions that weren't being answered or whatever.

5:31It was just overwhelming. So it became this much bigger thing. The people that now run the subreddit, actually, who have, you know, I had a team that helped as well and then they're running it now. They've automated a lot of it. They're all much smarter than me. They're all in tech. And so there's now bots that do like two-thirds of the work that we were doing manually, which I think makes it bearable for them. But I'd still be there going, oh, I'm not doing enough. What led you to create this kind of flowchart then to, I guess it sounds like from your perspective, it's like to be efficient really because you found yourself answering the same questions over and over again from everyone who wants to know what they should do at what stage.

6:09Yeah, and the UK Personal Finance flowchart is designed to be basically a one-stop guide for finding where you are on it, if you like. It's a series of steps. There's nine steps working out where on that you are and going, okay, well, what am I missing here? What am I doing well? What's next? So I'll give you just a bit of a sort of run through of what the flowchart looks like. So it's at ukpersonal.finance slash flowchart or on Reddit. You can find it there. And it literally has, we have little checkered flags for start here. and step one is budget pay bills necessary expenses and expensive debts and within that that's probably the most important and deepest bit and hopefully if we've helped five people with that link that's been worth its weight in gold right hopefully we've helped a lot more so step one is the real the kind of meat meat of it and uh important particularly from a financial education point of view what debts are going to cause you to be evicted and that sort of thing step two is building a small emergency fund and this diverts from probably most other sort of guidance about this and it was a lot of back and forth again when we were working this through but but the guidance from us is build one to three months and again that could be one month and that'll be enough or it could be three months that'll be enough it's a range rather than a three months being the goal and then join your workplace pension scheme if you're an employee we didn't want to be advising people to join the workplace pension scheme while still in expensive debt I think that can be really dangerous because you're sort of saving but then you're also paying huge costs from debt we wanted just a very little bit of buffer but then absolutely you ought to enrol as soon as you can and then looking at other debts so if you've got step four step four is just assess other debts once you're out of the problem debt sort of world and then build that bigger emergency fund The range is three months to 12 months, depending on where you are in your life, how secure your income is.

8:16But yeah, so step five, build an emergency fund. Step six is define goals, which we talked about. That can be challenging. Step seven, saving for short-term goals. It's all in cash. Step eight is long-term goals. And that's where you get into a bit where it's impossible to clarify everything on long-term goals in the flowchart. That's the bit we've had most battles internally over. But I think what we've got is good, and then it expands now into different areas, what you should look at, all those sorts of things. Because it's trying to be so general, there's a lot of edge cases it misses, which is, I guess, where the subreddit and Discord and things pick questions up.

8:54But I think as a general point, as a general starting point, and with the website behind it, it should give someone who goes from no clue whatsoever. that was the the the uh design if you like the vision someone who never thought about the personal finances in their life could get that and go oh right i'll start here and then five years later

9:16Alasdair Walker:sort of their future i can give can i give you one thing i liked about one thing i didn't like yeah go for it so i love that it's like it gives you steps step by step like you said from the beginning and then at one stage it's like if you don't have enough money for an emergency fund for like three months emergency fund or you have debts click on this link to debt bureau advice and they can help with your debt if you do have enough money do this it was great and so it gives you different resources which you can use for your individual situation to get move along the chart but there was one point when it said you should have three to 12 months emergency fund i've barely got three months emergency fund who 12 months emergency especially if you're like self-employed that's like a big 12 months of salary emergency fund it's crazy so is that a practical thing i mean if i don't have 12 months emergency fund i can still invest right because that's a lot of money for a self-employed person or anyone really it's it's it's really it's really good challenge uh and it's a discussion we've had over and over again um the problem if and we had this discussion recently the problem is if you say three to twelve people assume twelve is the target right and it's that classic another human nature thing of going well like if there's a big number at the end that's the number i've got to get to if you've got three months emergency fund you've got three to 12 months of emergency fund.

10:28Do you see what I mean? Right. So we haven't worked out a better way to word it within the constraints of like a tiny little box, but we need to resolve that because the point about three to 12 is it depends on your life situation, on the security of your earnings, on your general appetite for risk, on how accessible all that other investment money is. Like if you could just pull out the markets, fine. If you could accept the risk that the markets were down 25%, but you'd still be able to pull it out and deal with an emergency, also fine. So a lot of that nuance is lost in the little square. But yeah, to be able to say, we sort of said, well, could you say three plus?

11:11But the issue then is if people see three plus, they'll go three and they'll go, right, I'm done with that. And for some people, that's not appropriate. They need more. So someone with really secure income, let's say you work for civil service and you're not about to be thrown out because the government's changed. But you've got a really secure job. Maybe three months is totally appropriate. What we actually see is often those people tend to want to save more and the people that need more tend to want to save less. It's just an interesting observation. Classically, with self-employed people, you actually need more because your earnings are less reliable generally.

11:46And that's the paradox, right? Because you've got loads of it. You could always invest in your business or whatever else. But having that cash, like any insurance, you only know the value of it when you need it.

11:58Alasdair Walker:Yeah. And if you need it and don't have it, you know the risk of not having it. Yeah. I think it's interesting. The flowchart almost replaces the lack of financial education in the whole country because at no point in your life does anyone say, oh, you know, okay, I've saved, I've paid my debts off, what do I do now? Yeah. Absolutely no one learns that unless you're very lucky to have parents who knew anything about it yeah i mean i'll take that i'll take that yeah so if it's like your teacher and and it's important like you said it's just a place to start and um it's going to lose a lot of nuance but as some place to start it's a good order because i think i've made lots of videos before about you know how to start investing and a good chunk of the video doesn't talk about investing it talks about getting in a place to invest yeah because as we know when times get bad and if you end up selling your investments then you just waste all that time or whatever you lose all that compounding and things like that the uh the real the real moments where i thought actually this is this is breaking through were finding out that a big money coaching company was basically using it in their money coaching service so that's quite nice to know even though it's probably strictly against the licensing terms um and also hearing multiple financial planners and financial advisors use it to triage clients oh right okay someone i i met was saying that they built a spreadsheet that they sent to the client they work through it and it basically tells them where in the flowchart they are and whether financial advice is appropriate for them or not.

13:15I thought that's really interesting. I bet if we asked chat GPT now where we are on the flowchart, I bet he would reference this one. Definitely. That'd be quite funny. This ad's brought to you by Hiscox, so I'm not hosting the episode because unfortunately I can't. And this all really started with something that I was really excited about. This year, I made myself a promise to go on more holidays as I tend to just overwork. So last month, I went to Bali with some mates. On the flight I was buzzing, 10 days in the sun, but then life happened. On day three I had a crash with a car. I'll save you the details but my arms were flapping around in a way that you really don't want them to.

13:53Fast forward to today and I've had two sets of surgeries on my broken arms. Looking after myself has been a bit of a nightmare and I can't really work that much. Turns out you kind of need your arms. It's the best reminder I've ever had of why the right business insurance is important. So I'm really happy that this episode is sponsored by Hiscox. They can protect you and your business for things like personal accident, which covers you in case an accident means you're unable to work. Plus it can help cover medical expenses and physiotherapy to help with recovery. They also do professional indemnity, employer's liability, public liability, business contents.

14:25They can cover your business for a lot of things that can go wrong. I couldn't make it to the last podcast recording, but it could have been even worse. If you're running a small business, then don't leave it until it's too late. Check out Hiscox and get properly covered. They're flexible and they're reasonable. There's a QR code on screen for you if you want to check that out or there's a link in the description. Protection is subject to already holding a relevant Hiscox policy and to policy eligibility terms and conditions. Where do you think is the place that maybe people trip up or they fall over?

14:55Where would you kind of advise people to how to look at it? Yeah, so there are a couple of things. There's probably two parts to answer. The first is who isn't it for? And the big challenge that a really engaged online community like UK Personal Finance faces is when people go, well, I've done this this way. Now my parents or auntie or grandparents need some help. They know I know about finance, so they're going to ask me. And I'm going to tell them to do it exactly the same way I'm doing it. That's a massive risk. Because it's absolutely suitable for anybody where the stakes, I guess, are fairly low.

15:35In the sense that you're starting your journey, you're building, you're investing. When you're starting to make these big irreversible decisions, you really don't want to be relying on the anonymous advice from people on the internet. So I think there's this aspect of how high the stakes are. Got it. So yeah, it's really aimed at people, the Reddit audience basically, right? like the 20s to 30s who are trying to build their wealth or trying to get out of a hole. The biggest challenge that it faces, and we've, again, gone round and round on how we could change this, it's really tough, is about kind of goal setting.

16:12Because the very typical thing is people will come and ask a question and they'll be like, I've been through the flow chart. I've completed it all. I've completed it, mate. And so I'm allocating 50 % to savings and 50 % to investments. what should i do and it's like well what's the goal for any of that like what are you actually wanting to achieve with it we do have like a goal setting bit but it's really personal and it's really hard to get across on a website like how do you work out what your long-term objectives are what your short-term objectives are there's a bit of guidance about it but that's really tough so a lot of people come in and they're just like well i've got money what do i do with it and the answer to that is always what do you want to do with it right like that determines what your next steps are so it assumes that people have got a decent idea of what they want to do and sometimes people do like oh i'm really clear i want to retire at this age well that's easy but if someone's like oh i don't know how do you deal with those people or where do you kind of guide people because i think probably a lot of people are in that position where oh i know i want to build wealth i know i should invest but they're not really sure or they might say oh i want to retire early but how do you help guide those people who might have no idea it's really tough it is really tough um i think in the absence of better information, I'm very much a fan of everything in moderation.

17:27So actually that example, someone's going, well, 50 % savings, 50 % to investing. For lots of people, that's great. Brilliant. If that's how you're deploying your spare cash. And also the other bit is, we're coming back to that permission to spend that we were talking about earlier on, is people who get so fixated on all of that spare cash has got to go into saving the investments. They forget to actually spend any money on themselves. Another area that I think the flow chart falls down on is people who are really at the start of their careers. So you get someone, I'm 18, I'm earning, you know, 2 ,000 pounds a month at a retail job and I'm saving 50 % of my earnings.

18:03It's like, that's brilliant, that's great. But actually, could you use that cash differently to upskill or upeducate or change your prospects for work? In terms of lifetime bang for buck, that's massive compared to, you know, compound interest on your on your thousand pound of month yeah i think you've almost created a case for you to create a lifetime flow chart rather than just a personal financial flow chart that goes through have you got this skill do you earn this amount have you invested in yourself have you got a bit of money invest in other things do you want children yes no are you going to get buried not sure well and exactly right and all of those things and the other thing is the best laid plans change.

18:49Yeah, of course. I always say to clients when I'm building them financial models, there's a quote attributed to some statistician in the 70s in the US that says all models are wrong, but some are useful. Yeah. Like the one thing I know is the financial model I'm building today will be wrong tomorrow. Sure. But it's still got to be useful. And so there's a false certainty in all of this kind of flow chart led planning that says everything's going to pan out exactly how I expect, you know, and then you have a major accident, you can't work for six months. Well, where does that fall in? Yeah. Coming back to the emergency fund question, well, hopefully that helps.

19:19But then that goes down to zero and you go, okay, now I'm back here on the flowchart. It's like being in Monopoly and going to jail. Well, now I've got to start back up here and rebuild that emergency fund.

19:29Alasdair Walker:Funnily enough, on your three to 12 months, you're actually right because I didn't get paid for six months in the job. They finally paid me and I spent loads of investments. But if I had my 12 months, I would have been fine. But yeah, I ended up, I had like two and a half months, spent that, started selling investments. And after six months, I finally got paid. But by then, I lost all that saving, all that growth. So yeah, it's a pretty good photo. I feel like I might be persuading you. Yeah, I think you're doing all right. Not too bad. Not too bad. It's funny. When you're modeling for clients about what they should do, it must be, it's very difficult because obviously we don't know the future, right?

20:02So we can only base it on what's gone in the past. How do you deal with the people who, because you end up with saying, oh, best case scenario, you could have two million pounds, you're not spending enough. Worst case scenario, you can end up with zero. Medium case scenario is£100 ,000 left. How do you talk people through that risk? I guess is everyone different in how they view that? Yeah, it's an eternal problem. So I am the self-professed financial planning geek. I think about this way too much. The Certified Financial Planner Qualification, which is a global qualification, it's the only qualification that actually says somebody can do financial planning, talks about all your assumptions being reasoned and reasonable, but that's as far as the guidance goes.

20:46So it's got to be both those things. Well, that's a good start. We use two numbers that I think resonate with two different types of people. So we present them both. One is the percentage success rate of the plan. So that uses a behind-the-scenes maths thing called Monte Carlo modeling. I feel a red button might be about to be pressed. We've discussed it on the podcast many times.

21:06Alasdair Walker:I still don't know what it is. So what I imagine is, Monte Carlo is full of casinos, right? Yeah. This is basically what you're doing. You're going in and rolling the dice a thousand times on that plan, and you're going, well, for this model, this happened with this dice roll. For this model, this happened with this dice roll. You do that a thousand times, and then you get, well, this percentage of those worked. But the rolling the dice is based on how stock markets work. So it's like a reasonable estimate of what the future might happen. So if I say to somebody, the percentage of success rate of your financial plan is 85%, that's brilliant.

21:37that's great if I say it's 100 % that's probably too much it's too cautious they're going to end up with way more cash than they need so so we have this sort of tuning thing that appeals to my brain but it doesn't appeal to that many other people's so the other one we have is required rate of return and that tends to appeal to other to another set of people if I say your required rate of return for your retirement to do everything you want to do is minus two percent most people can go yeah generally investments return more than that so I'm fine yeah right so so so those are the the two numbers we use to try and bring that to life yeah that's interesting yeah so basically saying i've got x amount of money and in a thousand scenarios i come out on top most of the time but as with anything there's no guarantees yeah so and that's that's personal finance really when it comes down to it and trying to build things down to uh to to a flow chart have you had situations where you've had to like because as you know there's lots of subjective things in personal finances and financial plannings how do you how have you dealt with some of those issues where you might have people fighting in the moderation space about, oh, we should have this, we shouldn't have that, or people should be talking about that.

22:40Yeah, there is always healthy debate on that stuff. And in fact, the reason that I ended up stepping away from the subreddit was it was the sort of crypto boom at the start of COVID. As a professional financial planner, as somebody who looked at the sort of metrics of cryptocurrency and went, you know, there's nothing here. I got, there was, let's say, differences of opinion on the moderation team. about whether that should be a permitted topic or not. Okay. And there was just nonstop, or, you know, should I buy Ethereum? Should I buy Bitcoin? What should I do? I've bought this. Where should I, what wallet should I store it?

23:17And it's like that, that for me, that wasn't what it was about. Interesting. So there was a lot of other stuff going on in COVID as well, but I just got to a point where I was like, I'm walking away from this. I'm glad you said that

23:27Alasdair Walker:because the first time I heard about Reddit in a financial, obviously everyone knows about Reddit, but in a financial sphere was like GameStop, meme stocks yeah crypto and like the way they were the community was moving the whole game stop moving the market what did you learn in that time yeah it was it was an interesting time uh we caught some of the u.s side of things there's there's like a general americanization of the world with the internet uh you know so we get lots of people asking uh about like u.s specific um investment things a lot in the uk personal finance space um and we saw people saying oh how do i buy game stock shares or whatever.

24:03But I think it's just a repeating pattern that we see over time. The current thing being the SpaceX IPO probably will have something similar with OpenAI and people trying to get in on that. Big hype bubble, the market sustains itself for about three weeks and then falls away and people are surprised and every time people are surprised. so what we find is that if people try and try and be rational and sensible about it you know maybe we can stop some of the worst of the harms like maybe some people will be put off getting into that sort of situation explaining it isn't investing it's basically gambling you know that sort of thing but it is something that the human nature just seems to continually fool us into doing.

24:56I've got this kind of idea that human nature is that we think we know better than everybody else. And most of the time, that's a really great thing. It's what makes us human. It's what makes us successful when we are. But when it comes to investing, it just really doesn't work. Like anything that we're thinking, the rest of the market has already thought 10 times over. There's this idea that the stock markets are the best guessing mechanism we've ever come up with as a species. And trying to outguess that on an individual stock for an individual reason is just a recipe for disaster.

25:30Alasdair Walker:But I think that's what makes Reddit so dangerous or so powerful. It depends how you look at it because with the GameStop thing, like that community was moving the whole market and people were like, oh, same with Bitcoin. They're like, oh, we can beat the institution. We, the retailer, are now in control. And it was working. Like Robinhood was shutting down. They couldn't do withdrawals or you couldn't sell your stocks on there because it was just too much demand. So how does, did you ever see that side of Reddit? Like it's kind of an echo chamber, but in a good way and a bad way. Yeah, and there are people who got out at the right time from those things and who made money.

26:05And the problem is we have a habit of seeing a big story about a big win. And that's what we remember. I suspect if you looked at the GameStop statistics or cryptocurrency statistics, I suspect the return was focused on a very small number of people that made an awful lot of money. The loudest as well. But also the people who probably didn't fit that are sticking it to the big man mentality because they probably were the big men. That's right. And so I'm not sure I quite believe the folklore story about it. I think if you put it all together, an awful lot of people lost an awful lot of money. And one thing about Wall Street Bets, which is the place that all that happens, is that they're very, very upfront about things going horribly wrong as well.