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Hey , welcome to the women and Money Cafe podcast .

So we talk about investments , risks and funds on the podcast all the time .

But we've never told you how to figure out what your risk is and what risk you should be taking and why take any risk in the first place ?

So while we're doing a series on pensions , we thought it would be the ideal time to take a proper look at risk .

Now , everything I share with you today is not just for your pension .

OK ?

You can apply this to any investment such as your ISA .

So you may want to revisit Episode 45 on how to start your first ISA .

And with this knowledge , OK , in this episode , I'm gonna share with you how I explain risk and we're gonna be covering three key areas for you .

So firstly , what is risk ?

And then secondly , how do we measure it ?

And then finally , what do we do with this knowledge now that we've got it ?

Bear in mind .

OK , caveat .

Here .

This is an information podcast and not a personal financial advice .

I'll be giving you a really simplified approach and there will be anomalies and things that are particular to you , in which case go get some proper financial advice .

OK , so let's talk about what risk is with the type of investments that you hear us talk about when we're on the podcast .

And when we're talking with our clients , we when we use the word rest , we talk about how the investment will behave , how exciting it will be or not .

And then So if you think about it , I want you to picture a wavy line that slowly claims wavy line slowly claims and then another line with lots of spikes up and down .

Now the wavy line is lower risk than the spiky lane , because when we're talking about risk , we mean how dramatic the ups and downs are .

You'll also hear us use the word volatility , and it's the same thing .

The more volatile IE spiky , the higher the investment risk is .

Yeah , I think the most natural question to have , if you've never invested before , is will I lose all my money , which is a perfectly reasonable question to be asking OK , but with the type of investments you hear us regularly talk about these multi asset funds or a purpose built portfolio that we put together the clients then , no .

Losing all of your money is not a real risk , because with this approach , your money is invested in literally hundreds of different companies .

The total loss situation .

We would need every company in every country in the world to fail simultaneously , which is basically Armageddon .

And quite frankly , if we're in that situation , you've got much bigger concerns than checking how your pension fund is doing .

I've heard one advisor say that the best investment , then , is a shotgun and some water , but let's hope it never comes to that .

But see , if you're investing in just one kind of thing or you've got a portfolio where there is no intention or discipline behind it , then there is a real risk of substantial losses that can't be recovered .

OK , another reasonable question to ask is , what if the company goes bust ?

Now , let's look at this in terms of pensions .

Firstly , if you're saving into your workplace pension , can you lose your money ?

If your company , if the company you work for , gets into financial difficulty ?

No , you can't because the money is the pension money is ring fenced .

So if your employer gets into difficulty or even the company managing the pension is struggling , they cannot access your money .

Now , if you go and have a quick Google of Robert Maxwell , you'll see that he was the owner of the Mirror newspaper group who did steal all the money from the pension fund .

So this is back in the 19 nineties .

Since then , lessons have been learned and legislation has been put in place to protect you so your money is invested , and that's to protect you from abroad .

Then there's the financial services compensation scheme , which offers protection should the financial institution you with get into difficulty .

So for banks , if a bank fails , you're protected up to £85,000 per banking licence .

So it's worth noting some banks share a licence , so in that case , the 85,000 would be across the institutions .

The money saving expert website's got a handy guide on this .

I'm gonna put a link to it in the show notes so you can go and go and check which banks share a licence .

Then again , your ISA .

If the investment company fails , you're protected up to £85,000 your pension .

It's up to 100% .

If you've got a self invested personal pension , it's up to £85,000 per firm .

So that's all covered off the protection you have against total loss .

So where is where's the risk then ?

OK , so what I tell my clients and this is true for you .

All right .

The biggest determinant factor of how much money you make or lose is you .

So a lot of our conversations around this topic is about identifying how you're going to be in certain scenarios when you see your investment drop .

Are you going to panic ?

Are you gonna want to sell it or are you gonna want to move it to another investment that's doing better that day ?

Now I use the word when intentionally , when your investment drops , because I can guarantee you at some point you will see a drop in value .

The investment that only ever goes up has not been invented yet .

And even if it had , I'm not sure I would trust it .

So it's how we react when things go financially wrong .

That's the real risk and the great news is you're in charge of that .

But so think about your investment as a journey , OK ?

Can you cope with it being a bumpy journey without pushing the panic button ?

Or do you need a gentler start to get some experience under your belt ?

If you see the money drop , are you gonna sell or can you keep your nerve ?

These are the key questions to be asking yourself .

OK , so got some general concepts there around wrist .

Then I know with regards like , how do we turn that into a score ?

So I'm gonna share with you something that I've heard Pete Matthews do , uh , with Pete's permission , by the way .

And if you're a Pete junkie , go back and have a listen to Episode 75 .

We simplify your money with Pete .

So to get your attitude to rest , we're gonna score ourselves on three areas .

The first one is understanding .

The second one is experience .

And then the third one is time frame .

So an understanding OK , on a scale of 1 to 4 , score yourself and how much you feel you know about invest , how investments work .

So interest rates , inflation .

The stock market that kind of thing .

So if all of those words mean nothing to you and you haven't got a clue , score yourself as a one if you like .

I recognise some of those words you just used .

I've got I've got a little bit of knowledge .

Call yourself as a two .

If you're like I've got a handle on most of this , you're a three .

And if you're like I know this stuff inside out , score yourself as a four , right ?

Let's go ourselves on experience then , because experience is different to understanding a lot of clients when they come to work with me , they have some understanding of how investments work , and they are smart people , but they don't have any experience .

And this is critical because lived experience is a very different thing to imagining how you're going to react when your investments for the first time .

OK , so if you have zero experience , I want you to score yourself as a one .

If you've got a little bit of experience , score yourself as a two .

If you've got a good amount of experience and you've been through some highs and lows , you're a three .

If you got years of experience and you've seen it all .

Score yourself as a four .

OK , so taking those two scores add them together and your number should be somewhere between two and eight .

So if you've scored a two or a three , you are a cautious investor .

If you're a four or a five , you're balanced .

If you're a six or a seven , you're a growth investor .

If you're an eight , you're an adventurous investor .

OK , so now you've got an idea of what your risk appetite is , and you've got a label to give your investment style .

But so the third factor we're looking at is time frame , and what this lets us do is fine .

Tune the risk in context of what we're investing for .

And what I mean by this is the longer you're going to be invested can influence how much risk you take .

So one way to look at that is if , uh , let's take me as an example , my pension money .

Now I'm probably not going to be touching my pension fund for 20 years , So do I care if it goes down today ?

This year ?

No , I probably don't care next year , either , because we know that within the time frame that I'm working to , my pension will be worth more in 20 years time than it is today .

But if this is money you're planning on using in the next few years , that's different .

You know that .

We're always saying that money you have plans for in the next few years has to stay in cash , and it's for this reason .

So let's say you're saving for a house deposit and you've got £10,000 saved saved .

You do not want that invested and exposed to the ups and downs of the market .

That's crazy stuff , All right , so score ourselves for a time frame , right ?

If you've got plans for the money in the next year or two , score yourself as a one .

If the money is for 3 to 5 years , score yourself as a 26 to 10 years is a 3 11 plus years is a four now , everyone with a 1 to 2 year time frame .

You've got to stay in cash , OK , but let's say you came out as a balanced investor .

And so , for a time frame of 6 to 10 years , absolutely go with a balanced investment .

But if you're saving for 11 plus years , you could consider just moving up a label to growth as you've got a longer time horizon .

Conversely , if the money is for 3 to 5 years , you might want to drop down a label to cautious .

All right , so what do these labels mean ?

That I've thrown out cautious , balanced growth ?

Adventurous .

You might hear a moderate in there somewhere as well with other people in its simplest form , right ?

The easiest way to increase or decrease risk in a portfolio is how much stocks and shares you've got in it .

So if you want to up the risk , you put more stocks and shares in it .

You want to reduce the risk , you reduce the amount of stocks and shares you've got .

And I'm gonna show you a rough rule of thumb that's gonna help you when you're looking at funds as well .

So cautious Investment generally has no more than 40% stocks and shares in IT balance portfolio .

A maximum of 60% a growth portfolio , a maximum of 80% and adventurous , you can have 100% stocks and shares .

Now these are generalisations and at different times , different things will impact the investment .

So as I recall this , it's May 2023 .

And last year the so called safe part of the portfolio of Bonds took a bit of a Ben .

All right , we had a series of interest rate hikes and we had double digit inflation .

All of these things hurt bonds .

So the safe bet doesn't doesn't look like it was doing too good .

Then we get what we call the so called Black Swan events , which is like nobody saw that coming .

And when that happens , it can make it look like diversification didn't work because what can happen is you can see everything drop all at once .

But if you've gone with a multi asset fund , that was the right risk for you .

Stick with it .

All right .

It will work out in the end .

And if that feels too hard to do and you're tempted to do something that you just you're reacting to , reach out to a financial advisor .

OK , we've got decades of experience of raiding out tough market conditions , and we can help you avoid some really expensive mistakes .

So I hope this has been useful for you .

And as always , if you've got any questions , come and find me on Instagram Julie Flynn , Money woman .

Or you can drop us a message and we'll get back to you when we can .

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Please , Please , please , Pretty Please go and leave us a review , but until next time , take care of yourself .