3 Rules of Risk Management Every Investor Must Know

If you invest in index funds and your portfolio returns 25% and then the financial advisor says give me your money and you ask them what are your returns? They say our returns are 25%. The question is, what is the risk premium? What are you doing there? What's the extra stuff you're doing? Bonds are not risk free. In the last 60 years, 151 sovereign countries have defaulted on their bonds. If you're a doctor or healthcare professional and you're worried about investing and you get confused about investing and since you worry that it's risky and you worry that lose money, but you know that you should be investing and you don't understand concept, when you hear things like ISA stock and shares isa, it gets you confused. Then you want to watch this video. This video is a live recording of a live Q and A session with almost 100 doctors and healthcare professionals with burning questions around investing, Lifetime isa investment that doctors could do even above 40 years of age, as well as how to avoid the dreaded 60% tax trap and much more. So if you're interested in those topics and you like to hear the answers we discussed and the questions that we addressed, then you want to dive into this video. And if you are new here, I'm Dr. Andy Green, founder of MoneyWiseDoctor.com I'm an ex salary GP, an entrepreneur and investor and a MoneyWiseDoctor.com we help doctors and healthcare professionals make smarter financial decisions. Dive in. The key risk aspect of bonds is the issuer. I've had a lot of financial advisors or people, financial educators on YouTube. I guess I'm one of them now who say bonds are risk free. That is a fallacy that is born out of lack of study or lack of knowledge of the financial markets or economic history. Bonds are not risk free. In the last 60 years, 151 sovereign countries have defaulted on their bonds. What default means is that they said we can't pay you or we wouldn't pay you is usually we can't pay you. In case you think those countries are only Venezuela because I keep calling Venezuela, I hope I don't end up one day in Venezuela. And the government security thing, they want to have a chat with me. But Venezuela obviously on the list, but there's Argentina, Mexico, Russia, there's obviously Ghana. A few other countries have in the past said, you know what, this year we can't pay you or we have to pay you later or one sort of issue or the other. Or maybe they have to borrow some money from World bank or imf. So bonds are not totally risk free. They are dependent on the issuer who is the debt holder. Are they good for it? Can they pay you back? If the NHS is owing you money, they are owing your pension. For instance, you feel like the NHS is likely to give you your pension. Compared to when a random person says, oh, give me your money and I'm going to invest it for you and then I'll give you, in 20 years, 30 years, I'll be giving you your pension. So the bond itself is dependent on who is the holder. Why is that important? 2019, I got a call, obviously people need, I do invest and I do a few other things. But I got a call from a fast talking, sweet talking agent. Well, they usually say they are investment advisor who wanted to send me, sell me bonds from Austria, you know Austria, the European country Austria. And he was very excited about it and he said, oh, these bonds can give you 7.7 returns. 7.7% returns. At that point I think UK guilt was doing about 1.5 or 2% or whatever. And I thought to myself then, I think I was probably just 32, I can't remember the exact year, but at, oh, sorry, 2019, so five years ago I thought to myself, basically as at that point I was getting a better return in the stock market. That didn't mean that if you're getting a better return in the market, remember you're taking more risk by investing in the stock market. But I thought to myself, Australian government, I know nothing about them. That's one level of risk. Second level of risk. Who is this guy? Am I sure what I'm dealing with here, that I'm going to get my money back? Okay, the third thing there was, okay, let's just say that this guy is legitimate and the Austrian government is actually good for it. If anything goes wrong, what's the process? How am I going to get my money back? You understand, because some people, they invest in, a company goes bankrupt, they know that bankruptcy courts will sort them out. So these are different elements of risk, okay? So I said a very hard no, I'm not interested. I think that year we returned 52% in our stock market portfolio. But again, remember, when you invest in the stock market, you're obviously taking more risk than somebody who is offering you bonds, okay? So the issue here is that when it comes to debt, the issuer matters more than the actual return you're going to get. That's why we take you back again to rule one. Can someone tell me what rule One is don't lose money. Good, thank you. So one, don't lose money. This is the game here. Don't lose money. So when it comes to bonds, there are different issuers that can issue bonds. The sovereign bonds are usually the safer ones basically because they are backed by the country. So if the UK government is owing you money, a US government, basically the government is backed by the government, military mind and treasury and whatever they have that they should be able to pay you back. The worst case scenario, they just print some more money. And obviously when they bring money, inflation goes up, but they can pay you back. But they are also corporate bonds. Sometimes companies issue bonds. For instance, I think was it microsolutions or one of those companies, they issued bonds because they wanted to sell, they wanted to borrow money from the public so they can issue bonds. What they are doing is that they are actually saying the public give us some money and we'll pay you back. Maybe they wanted to invest in, I think that company Michael Saylor was investing in crypto or something like that. Sometimes, let's say Apple, Apple as a company, they might want to do a project, but they don't want to sell shares because when they sell shares they are also losing part of the value of the company. They might decide, no, instead of selling shares, we're just going to borrow the money instead. So they might actually float some bonds and the public can subscribe to those bonds and Apple can decide to, you know, Apple can then say, oh, this is the interest, we're going to pay you back. Obviously the US government is floating bonds, Apple is floating bonds. The interest will not be the same because US government has more ability to pay back. Apple is a great company, a trillion dollar company, but the U.S. government is the U.S. government. Now this is very crucial topic. Have you secured your family's financial future? Many times. You're busy as doctors and healthcare professionals, that's fine. But if we overlook our life insurance and income protection until it's too late, you're taking a bit of a risk here. I mean, nobody can predict the future. You need to protect what matters most. Think about life insurance and income protection. This is really quite important to protect your most valuable assets. Now if you're not sure about what you need or how to go about it, check the link in the description. I have a free guide that can help you step by step. Let's get back to the episode. Okay, do we understand now? If that makes sense, just give me a thumbs up. All right? Now since we understand that it's not only government that can issue bonds. We know companies can issue bonds. So it also depends if a company like Apple is issuing bonds and a brand new unknown company is issuing bonds. Obviously you want to go with Apple. So there's different bonds, there's grid, there are this investment grade bonds. These are like bonds that are considered to be high quality. They have ratings. There are all these credit ratings, like feature ratings and the rest of them, which obviously in 2008 we found out that those ratings may not mean much, but there's investment grade bonds. But there's also different rates of bonds. There's A, B, C, there's now junk bonds. Junk bonds are like bonds that people might not even want to touch it in the first place. Like at this company even going to survive. But the company is willing to pay 20, 30, 40. So some people will be willing to take the risk. Why is important is to understand that if you are taking more risk, you should be getting more reward. This is just the basis of risk in investment. If you're taking more risk, should be getting more rewards. So if someone comes to you to say, can you give me some money? Let's say you've got like 10,000. Or let's say I'm looking for. Yeah, let's say you've got 10,000 and you wanted to invest 10,000. Yeah, I was looking for you, Dr. Sam Pat. Let's say you wanted to take that hundred thousand, you want to put it in bonds. He decided I've got this chap, he does property, he invests in property. I see him, he's developing stuff and he says, give me your hundred thousand rather than buy bonds and I will give you 5% in in a year's time. And at the same time, UK government is giving 4.4%. Dr. Sampat, what will you say to him or her? Now the question is for everyone. Oh yeah, yeah. I need to know about the property investor. I need to do a bit of due diligence on them before really I lend my money. Yeah. Okay. Who else wants to comment on that? Dr. Sampa wants to know you tell them to make it more attractive. It's got to be. You guys are also polite and very diligent. Okay, I've got two words for that person. I'll tell them to get lost. Get lost. Why? Because the UK government is offering me 4.4% and you're offering 5%. So basically I'm taking more risks. And obviously she here says make it more attractive. Malika says she will do her Due diligence, which is very good. Obviously every you need to do due diligence for an investment. But in this case I'm going to say no, no, no. There's something called risk premium. So if I'm taking more risk, I want my risk premium, you need to be paying me a bit more above the risk. Okay, why I mentioned this is this if you invest in index funds last year and your portfolio returned 25%. So, and then the financial advisor says, give me your money. And you ask them why your returns. They say, our returns are 25%. The question is, what is the risk premium? What are you doing there? What's the extra stuff you're doing? Or worse, they might tell you, we return 10%. You're like, what's going on? It might be that you're investing in an alternative type of investment so that the market crashes, will still be doing well. But basically you're asking, what's the risk premium? If somebody says, if you want to invest in bonds, if the bonds is giving 4.4%, that's their baseline. So anything else that is more risky, you need to get a risk premium on it. So if you're going to invest in individual stocks, you need to know that you're doing much better than the average returns in the market. If you're not, if you cannot guarantee that you don't have an edge, it might be worth just actually investing in the average returns in the market. Well, I hope you found that helpful and more importantly, I hope it helped you to see investing in a new light. This is just a small section of what we cover in the flow master class. If you like me to drop more of these clips, just let me in the comments. Comment, invest and share this video as well with friends who may need to hear this. And if you are ready to stop winging it and guessing, guesswork is not good for investing. If you want to learn how to become a confident investor to learn how to invest properly, check out our investing readiness scorecard with the links in the description. It will help you determine whether you are really ready to start investing or on what you need to do before you even start thinking about investing to reduce the chances of you losing money. And until then, see you soon. Bye bye.