It's session number 16 , and this week we’re going to be talking about Risk, a small word, with big implications for your finances.
Last week I passed a major milestone, at least in my mind. I had 1000 downloads of this podcast in a single week. That is awesome to me. Particularly amazing is that only five weeks ago I was at just over half that. Turns out, going weekly makes a huge difference – who knew? (Everyone, actually – Pat Flynn, Cliff Ravenscraft, and Rob & Rob – all of whom extol the virtues of going weekly!). Thanks to all who are listening.
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This week’s reviews
Andy in Leeds (who I have since spoken to on the phone) says:
“Pete does a great job of making sense of the confusing world of finance. So many practical suggestions on how we can secure our financial futures. I’m recommending this to all my friends and family. Keep up the great work, Pete”
And Nael1 says:
“Thank you so much. I started listening to you on the recommendation of Rob & Rob and have been able to take your clear steps to managing my money. The budgeting podcast was especially helpful. I always used to plan on past spending, not future spending. Wow what a mind shift. Has massively helped with debt control I am still thinking and working on my future planning but believe I now have some useful tools. Thank you for building my financial toolbox”
Thank you Andy and Nael1 for the kind words, I’m delighted the podcast is being helpful to so many people. If you do like what you hear then the best way you can return the favour is to leave me a review on iTunes, which helps people hear about the show and keeps me near the top of the rankings. Go to meaningfulmoney.tv/iTunes to do that – thanks!
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Before we get into the meat of the session…
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Risk is a four letter word that no-one likes to think about. But like our discussion on inflation last week, risk in its various forms affects just about every area of our financial planning. As ever, you need to know the different forms that risk can take in the financial arena, how they work, and then what you can do to organise your finances in such a way as to take account of those risks and make the best of them. Risk can even work in your favour…
I thought this would be a good subject to hear from someone other than myself, so I asked my good friend and colleague Richard Allum to join me for a discussion via Skype which we recorded for your listening pleasure, so without further ado, let’s head into the interview…
Richard Allum is MD of The Paraplanners and a leading figure in the financial planning world. He's also a great friend of mine and the person I bounce ideas off first (other than my wife of course!)
Q. Richard, this podcast isn’t aimed just at people in the financial services industry but at the general public, so I imagine that many people are thinking: what exactly is a paraplanner?!
R: Good question. Paraplanners work alongside financial advisers, often doing a lot of the technical work, research and analysis. We are often as qualified as the advisers and we act as a second pair of eyes in order to make sure that any client gets the best possible outcome.
We’re going to talk about the different kinds of risks which people need to be aware of when they are embarking on their financial planning process. As ever, we’ll arm you with the information first, and then look at what practical steps are needed to take these into account
Everything you need to KNOW
1 – It’s not just about investment risk; other risks are available
Q. When most people think about risk to their finances, they think about the risk of losing money, say on the stock market. But there are more different kinds of risks than that right?
- Mortality risk – When are you going to die?
- Morbidity risk – What happens if you are disabled, or too ill to work?
- Inflation risk – how will rising prices reduce the buying power of your money?
- Investment risk – can you lose money if markets move down?
- Inertia risk – the risk of not doing anything
Ok, so let’s look at some of the lesser known risks first
2 – Mortality and morbidity risk
Q – Can you explain these in more detail?
Q – What kind of circumstances in someone’s financial planning would these become relevant?
- When you die has an impact. What if you live too long and your money runs out? Or you don't live long enough to get full enjoyment of your money?
- If you are ill, you may not be able to earn a living; this affects everything about your financial plans, assuming you're not a lottery winner, as your income is the thing that pays for your plans to come to fruition
- Family history can play a part here. Are/were your parents/grandparents long-lived? Is there a history of serious illness in your family?
3 – Inflation risk
Talked about inflation in detail last time, so no need to go over this in much more detail now, but…
Q – I guess you’ve seen examples where inflation has been a big factor in someone’s financial planning. Difference between being OK and struggling financially?
- At-retirement planning is so important to take account of inflation
- Real cost of living can be very different to the headline rates
- Any money you have saved or invested needs to be making more than inflation, otherwise you're going backwards.
- Money kept in the bank at the moment is “losing money safely”
Here's a link to the BBC “Calculate your inflation rate” page
4 – Investment risk
Q – This is the one that everyone thinks they understand, but how does investment risk really work?
- Money which is invested can go up and down
- You may lose money altogether in certain investments
- Your money may not be available when you need it
Everything you need to DO
1 – What to do to mitigate or allow for mortality/morbidity risk
- Live a healthy lifestyle – look after yourself!
- Insurance – Life, Critical illness and Income Protection Insurance – more detail here
- Awareness when choosing retirement income options – should you provide for your spouse if you die first?
- Not thinking too long term when tying up money
- Have an emergency fund – See this video, and then this one
2 – What to do to allow for/mitigate inflation risk
- Need to be aware of it when planning investment portfolios, and aim for average return which is higher, subject to your tolerance for loss
- Know your personal inflation rate. Use the BBC calculator
- Factor it into assumptions for long term planning
- Take extra care at retirement – mentioned in session 15
3 – What to do to allow for/mitigate investment risk
- Diversify, spread the money around
- Different assets, and different geographical areas – negative correlation. Listen to Podcast session 10
- Invest in the context of what you need, not what you want to achieve.
- Get the experts to do it? They will ask difficult questions that you might avoid yourself.
- Beware of human nature that wants to jump on the bandwagon when investments are going well, and then panic when things are going down. This means you'll buy high and sell low – guaranteed poverty awaits! Instead do the opposite.
4 – How to make sure your adviser is aware of these risks
- Your adviser should be aware of these risks and take them into account when planning for you.
- He/she should be doing all the things above.
- If an adviser is in a hurry to recommend a product or investment ‘solution' before spending time explaining these risks and finding out your tolerance for them.
OK, so we’ve covered the four major types of risk relating to financial planning, and we’ve looked at ways to account for those risks and work around them where possible.
Thanks to Richard Allum for his help on this one. You can find out more about what a Paraplanner is at TheParaplanner.com
Today (24th June 2013) I pre-launched Advisertech, a new membership site aimed at teaching financial advisers how to do what I do, that is, use online content marketing to share great information and win clients and friends in the process. At the moment there is just an information page with a video and a signup form to be kept informed in the run up to launch, planned for September.
That's it for this session of the MM podcast, I hope that was helpful. Please leave any comments or questions below and I'll do my best to answer them.
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I hope you enjoyed this session
Next time we'll be talking about borrowing money. If you have any questions about this, go to meaningfulmoney.tv/feedback and leave a voicemail
Thanks for listening – I'll talk to you next time