- April 21, 2024
- Posted by: legaleseblogger
- Category: Related News
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## How to Help Your Risk-Averse Partner Understand Investment Opportunities
Hello!
As the title indicates, my partner is extremely risk averse to a fault, leading him to let his savings remain idle for the past decade (much to my surprise!). Recently, he has begun expressing dissatisfaction with the sluggish returns on his investments, prompting me to intervene and help him grasp the potential gains he has missed out on and guide him towards more profitable investment options.
He is a rational individual who can be persuaded by sound evidence and logical arguments. While I can engage in discussions with him endlessly, he is more likely to heed advice from a credible source supported by statistics. I am looking for reputable resources, informative videos, or relevant facts that I can leverage to educate him effectively.
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****** just grabbed a
Show him the S&P500 performance graph or maybe not as it may be a bit too painful as a comparison to bonds.
Show him the _inflation_ _adjusted_ returns for bonds vs all world, so he can see he probably lost value vs investing gaining value.
Ask him what £100k would have brought him 10 years ago.
Then ask him what he could buy with it now.
The biggest risk to his money is the impact of inflation.
What I found works in these types of situations is to redefine what we mean by “risk”.
If risk is defined as the volatility of an investment (usual definition), then yes bonds are less “risky” than stocks.
But now … what if, instead, we define risk as: The risk of not having enough money in retirement and running out.
Now, with _this_ definition, bonds are incredibly **more** risky than stocks (probabilistically speaking).
Then do some simulation to prove your point (or find existing ones)
This reframing has really help me move these types of conversations forward in the past. I hope it helps 🙂
Has he had it in good bonds though? I’ve been getting 5.95% on mine lately, I know it’s about to drop but still, its safe.
Show him an all world tracker or S&P500 and then break it down. E.g
Option 1:
10 years ago today the S&P500 opened at $1,865
April 20, 2014 £/$ exchange was £1/$1.68
So £100k would be $168k
All of that invested in the S&P500 = 90 shares.
Today, April 21, 2024 90 shares of S&P500 = $447k / £361k
Option 2:
April 25, 2014 VWRL was £40.39
Investing £100k would’ve been = 2,475 shares
Today, April 21, 2024, VWRL is £98.62
His investment would be worth £244k now (+ the dividend received from VWRL)
I’d also find some data on how over a 20 year time horizon has provided a positive return.
And the worst would be to show what his £100k from 2014 is worth now in purchasing power with inflation.
Bonds are an investment and some are still down 20+ % from the pandemic. They can swing just as wildly as stocks, however less likely.
If he held through the pandemic he’s probably saw his account balance change wildly, if he got through that level headed and didn’t panic sell then tell him he likely has the mentality to invest in the stock market.
If might be easier to convince him to start putting a bit of his monthly savings into shares rather than starting off with his existing savings.
That way he can see how they develop alongside each other without exposing that money to more risk than he’s comfortable with yet.
I don’t envy your position.
Bonds have done badly as interest rates have risen. Stocks are extremely expensive right now.
The medium term future for bonds is looking quite good with rates expected to fall. The medium term future for equities is not looking good at these earnings multiples.
Be careful of being the one to blame if you forcefully push your point about suggesting they move from bonds to equities, and in the medium term it ends up quite bad. It could easily be a sell low buy high moment.
As a highly risk-aversive person I strongly suggest not to tinker with the savings of a person like me. It is not your money, and you cannot guarantee those better returns. Please, let him alone. I mean, if you cherish this relationship.
What kind of bonds? Gilts, inflation linked, corporate, premium, Bank bonds (which are basically a fixed term savings account)?
Your partner doesn’t need a more official source. The facts are the facts. A decent expectation is around 4% real from equities, whereas “bonds” depending on what you’re talking about often struggle to beat inflation over the long term.
The number of people here thinking past performance is an indicator of future performance is shocking 😲 just because this market went up xxxx amount doesn’t mean it will carry on like that,
The most risky thing you can do over the long term is keep cash. It is *guaranteed* to lose value. The least risky thing you can do over the long term is invest in equities, especially a world tracker. It is statistically most likely to outpace inflation. And i prefer statistical risk to guaranteed losses.
Ooof imagine the gains they could have had
Get a financial advisor
Different approach but I would focus too much on what he’s missed out on. There’s been some serious growth over the last decade and I wouldn’t want to intentionally make my partner feel like they have made a silly decision. A £100k in bonds is still a £100k and way more than most people probably sit on in the UK.
The way I would do this is show them a growth tracker for how this money may look in the future and how he can get involved going forward.
Then don’t. The same type of people who would cry if they lost 2% in stocks. You don’t want to deal with that, especially if it is your partner.
He didn’t use it for a house deposit? Or do you not own?
Maybe he has wanted to buy in that period but it just hasn’t worked out?
No one would suggest putting money in stocks for <5 years.
But everyone laughing thinking the S&P will do the same for the next 10 as it did for the previous 10. Maybe it will, maybe it won’t.
If he/you’ve bought, then yeah, pretty weird.
Hi /u/s3ast4r, based on your post the following pages from our wiki may be relevant:
* https://ukpersonal.finance/tax-traps-and-tax-efficiency/
____
^(These suggestions are based on keywords, if they missed the mark please report this comment.)
Curious to know what he’s gained in Bonds
One of the key things with the suggestions people are making of comparing it to how an index fund performed – make sure you make it clear these are tracking the index as a whole not just individual companies. Investing in an individual company could really pay off. Or it could tank and be worthless and you literally lose all your money. With an index fund that is globally diversified, even if it performs poorly you are unlikely to have literally nothing left. And the idea is you move away from entirely investing in index funds and move towards other safer things as you get older and are less able to cope with downturns.
Might be worth getting him to watch some of the videos on YouTube by James Shack.
The important thing is to help your partner identify his goals, what’s he saving/investing for?
Then with that in mind how do you get there.
An analogy I love is a ship sailing from point A to B and the route you take determines risk. Going directly is quickest but over the choppy ocean is risky (stocks)
Staying by the shore (bonds) is less risky but takes X times as long.
Two Cents who are run by American broadcaster PBS did an amazing video on this that I recommend to anyone getting started. It’s short and the visuals make it so easy to follow.
https://youtu.be/sHSaUqoKjkA?si=QxP4q3lOkk89_rBB
Damien talks money- on YouTube has literally changed my life, highly recommend for finance info
The moment I understood that opportunity cost is the same as risk-translating-to-loss, except guaranteed over time, is the moment it clicked as to why “time in the market beats timing the market” for general wealth investments.
He’ll get it, just needs it in a way he understands.
It’s also worth noting that ETFs are lower risk than shares (not housed in an ETF) as the risk is spread more and hopefully this appeals to his risk averse approach.
Buy him an ice cream and leave it out in the sun on a hot day. Tell him to imagine the ice cream is his £100k which has significantly melted due to inflation and continues to do so rapidly the longer he leaves that in a ‘safe’ bond.
You have to start with what your retirement goals are and work backwards.
1. Do you want to retire early?
2. Do you want to retire comfortably?
If you want either of those scenarios, or both, you cannot do it through a portfolio of bonds alone.
They need to establish their current risk appetite and start there. There’s a scale I think it’s 1 to 7 and it features on the KID – Key Investor Documentation- of various investments. If they’re 100% in bonds their risk appetite will be low so choose something appropriate – perhaps that has a focus on low volatility and preservation of capital. Robo investors will test for risk appetite so you could look at them too. A gradual transfer of assets towards riskier assets than bonds, keeping within their comfort levels, is my advice.
Get him to read JL Colins’ [Stick Series](https://jlcollinsnh.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/). Also get him the book by the same author The Simple Path to Wealth.
Savings grow, investments can grow quicker, but are also more risky. At least with savings your money is safe
Not arguing that investing wouldn’t be a better option but doesn’t this subreddit advise bonds as a saving option too?
When are bonds for?
At least chuck half of that into premium bonds, with 50k you will be getting 1 or 2 prizes a month and they are relatively risk free, and winnings are tax free.
What’s his return been, out of interest?
Explain to him that the biggest risk to his money is leaving it as money. Leaving your net worth in cash has a 100% certainty to lose value. Investing has a risk of losing value whilst offering the chance of gaining value. Risk to reward. Investing is less risky.
Take
Risk
And
Prosper
To be honest I’d be looking to invest in a tracker fund – S&P 500 for example. UK very unstable place to invest right now.
Do people here realise investment funds can go bankrupt? Many people learned that lesson in 08
That being said £85k per firm is protected so it’s pretty safe to invest that, when it gets into investing into multiple firms it’ gets more complex because a lot of them are all in the same umbrella groups