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Why you must take more risk for longer than you think · The Money Puzzle

0:10
Speaker 1: Hello, and welcome to the Australians Money Puzzle podcast.
0:13
Speaker 2: I'm James Kirby. Welcome aboard everybody.
0:15
Speaker 1: I want to take you on a slightly different path today,
0:19
Speaker 1: and that is I actually want to have a discussion,
0:21
Speaker 1: free wheeling discussion, you might say, with someone who's thinking
0:25
Speaker 1: on investment issues.
0:27
Speaker 2: Is very important.
0:28
Speaker 1: Firstly because she is important, right she's the chief investment
0:31
Speaker 1: officer a DMP with one hundred and eighteen billion dollars
0:35
Speaker 1: under management there. But more importantly she has a message
0:40
Speaker 1: I think which is crucial to everybody, absolutely every single
0:44
Speaker 1: listener on the show. Just to put this into perspective,
0:48
Speaker 1: it's going to talk about the changing nature of investment
0:53
Speaker 1: principles and the sort of lines have inquired that we've
0:56
Speaker 1: been believing if you like for a long time, I'll
0:59
Speaker 1: give you an exam, but that I probably know this
1:01
Speaker 1: rule of one hundred, which is basically where you say
1:05
Speaker 1: how do I invest in? You subtract your age from
1:07
Speaker 1: one hundred. Right, So for instance, if you're fifty, you
1:10
Speaker 1: have fifty percent in fixed in investments and you have
1:13
Speaker 1: fifty percent in growth investments, and as you get older
1:16
Speaker 1: you have more and more fixed investments. Makes a lot
1:19
Speaker 1: of sense. The thing is, those rules were invented when
1:22
Speaker 1: people used to retire at sixty five and live for
1:25
Speaker 1: about three years. That's really changed more commonly, perhaps if
1:29
Speaker 1: you're in a big fund, you sit there one day
1:33
Speaker 1: and you tick off the boxes. What are you a
1:35
Speaker 1: conservative or balanced or growth? And then something happens and
1:39
Speaker 1: you change your mind. I'm thinking of last year when
1:41
Speaker 1: there was that big sell off last year in April,
1:44
Speaker 1: and I couldn't believe the people, the nature of the
1:48
Speaker 1: people who came up to me and said, should I
1:50
Speaker 1: go to cash? I couldn't believe that people would even
1:52
Speaker 1: think of that of doing that. More commonly people would say, look,
1:55
Speaker 1: I'm whatever, I'm fifty five or I'm fifty seven. I
2:00
Speaker 1: mean a balance fund, should I go conservative? So ann
2:05
Speaker 1: Anna Shelley is the chief investment officer at AMP, and
2:08
Speaker 1: she has some things to say about that.
2:10
Speaker 2: How are you, Anna, And thank you very much for
2:11
Speaker 2: coming on the show.
2:13
Speaker 3: Oh I'm very well, Thank you, James, and glad to
2:15
Speaker 3: be here. Thank you for having me.
2:17
Speaker 1: Look, why don't we just actually talk about how this
2:20
Speaker 1: came to pass Once upon a time, and I mean,
2:23
Speaker 1: I think the famous the US financial advisor sort of
2:26
Speaker 1: guru of advisors who invented this rule.
2:28
Speaker 2: Of one hundred. It's common all around the world.
2:30
Speaker 1: I remember it's common all around the world, and that
2:34
Speaker 1: I've worked around the world and it has It was
2:37
Speaker 1: common in everywhere I worked. This broad notion that you
2:41
Speaker 1: should you know, your age should reflect how you invest.
2:45
Speaker 1: And basically you have your age in income. So if
2:50
Speaker 1: you're if you're forty four, you have forty four percent income,
2:54
Speaker 1: you know you have sixty six percent growth.
2:55
Speaker 2: It made a lot of sense.
2:58
Speaker 1: How did that come about and what made you start
3:02
Speaker 1: to question it?
3:05
Speaker 3: Yeah, well, I think you know, firstly, the markets love
3:08
Speaker 3: a rule of thumb. Everybody loves the way of making
3:10
Speaker 3: things easier for investment, and it was a pretty good meature.
3:14
Speaker 3: I mean, as you say, people did used to retire younger,
3:17
Speaker 3: you know, maybe around sixty, sometimes even younger than that
3:20
Speaker 3: in hard labor industries, and then they tended not to
3:25
Speaker 3: have a very big life expectancy after that. So I
3:28
Speaker 3: think when you know, when Australian super annuation verse came
3:32
Speaker 3: into being and then grew so substantially with the increase
3:36
Speaker 3: in contributions into superannuation in Australia, we started seeing funds,
3:42
Speaker 3: you know, investing in that sixty percent growth asset sixty
3:45
Speaker 3: forty style. Gradually moved though up to seventy thirty, which
3:50
Speaker 3: became more common, and then in recent years you've seen
3:53
Speaker 3: quite a shift actually, as many funds have either adopted
3:58
Speaker 3: a life cycle or a life stage strategy, which is
4:02
Speaker 3: where for members who don't make a choice, or don't
4:05
Speaker 3: want to make a choice, or don't feel like they
4:08
Speaker 3: have the information or knowledge themselves to make a choice,
4:12
Speaker 3: they end up in a default strategy that uses their
4:15
Speaker 3: age to start with really high growth assets almost one
4:18
Speaker 3: hundred percent when they're young, and then gradually decline them
4:22
Speaker 3: down to lower growth assets. And it used to be
4:27
Speaker 3: that the lower growth assets at around retirement age was
4:30
Speaker 3: about the fifty percent mark. But what we've seen in
4:33
Speaker 3: recent years is that most superannuation funds that have this
4:38
Speaker 3: style of investing, and AMP is one of them, have
4:42
Speaker 3: lifted that glide path. They've lifted the growth asset waiting
4:46
Speaker 3: across the spectrum across all ages, but also that they've
4:50
Speaker 3: let that decline happen at a later stage in life.
4:54
Speaker 3: So instead of having people decline potentially whilst they were
4:57
Speaker 3: still in their forties. That pushed that so that young people,
5:01
Speaker 3: really young people were all the way up to fifty
5:05
Speaker 3: years of age, sometimes all the way through to sixty
5:08
Speaker 3: sixty five years of age. And that's what.
5:11
Speaker 1: Would you explain to the listeners to be careful always,
5:14
Speaker 1: you know, just that everyone captures the concepts we're putting forward.
5:20
Speaker 2: Give me, say you have a glide paths. What's it
5:22
Speaker 2: all about?
5:23
Speaker 3: Yeah, So basically that's sort of taking your age as
5:27
Speaker 3: a barometer for when you might retire. So that might
5:31
Speaker 3: be mean that you're retiring around say sixty five. And
5:34
Speaker 3: then what it does is it uses that as a
5:38
Speaker 3: projection then of not only the age at which you're
5:41
Speaker 3: going to retire, but then also how long you're going
5:43
Speaker 3: to live for past retirement, and so how long your
5:46
Speaker 3: balance needs to work and needs to grow to sustain
5:50
Speaker 3: itself over your full lifetime.
5:52
Speaker 1: Yes, my dad retired at sixty and he thought this
5:56
Speaker 1: was wonderfully, you know, to him, this was an achievement
6:00
Speaker 1: that he could do. So he didn't know that he
6:02
Speaker 1: was going to live to ninety right, thirty years solid,
6:09
Speaker 1: and he didn't really think about it very deeply. He
6:11
Speaker 1: didn't think about inflation, so I'm aware of the risks
6:18
Speaker 1: when you have a kind of a conventional retirement plan.
6:21
Speaker 1: So more recently, I'm looking at a quote from you here,
6:24
Speaker 1: and basically you're saying that sixty five year olds should
6:27
Speaker 1: have growth assets closer to seventy percent these days. Now,
6:31
Speaker 1: that to me is a knockout, right, because, for instance,
6:33
Speaker 1: if you were a self managed super fund, I wouldn't
6:36
Speaker 1: think many people at sixty five have seventy percent growth asset.
6:39
Speaker 1: Do you think a large portion of the investing population
6:42
Speaker 1: have yet to catch up with the thinking that people
6:45
Speaker 1: like you in your position have.
6:49
Speaker 3: Yes, I think so. So. I think because we do
6:52
Speaker 3: all the actuarial modeling and all that, there's a whole
6:55
Speaker 3: hYP of mathematical modeling behind the structure of our option,
7:00
Speaker 3: and particularly behind that glide path or you know how
7:04
Speaker 3: much the waiting to your growth assets reduces and at
7:07
Speaker 3: what age, So the whole heap of modeling behind that.
7:11
Speaker 3: Nearly all the super funds similar sorts of modeling, and
7:15
Speaker 3: many of them have come to the same sorts of conclusions.
7:18
Speaker 3: So there's a fair alignment across the industry that because
7:22
Speaker 3: of things like longer life expectancies, but also the higher
7:27
Speaker 3: cost of living probably higher ongoing inflation at least for
7:33
Speaker 3: the next few years, but potentially even longer than that.
7:36
Speaker 3: These factors mean that you're going to need more growth
7:40
Speaker 3: assets in what is now a twenty thirty year in
7:44
Speaker 3: the case of your father, you know, period of retirement
7:47
Speaker 3: that itself is a really long time, like for many
7:50
Speaker 3: people that's as long as they're working lifetime. So it's
7:54
Speaker 3: really important then that that we're not too conservative at
7:59
Speaker 3: that age of a time, because we still need our
8:02
Speaker 3: balances to grow through our retirement. We don't want them
8:06
Speaker 3: static or they will start to be eroded away by
8:09
Speaker 3: inflation the cost of living and will start to see
8:14
Speaker 3: I will have in fact a higher risk of running
8:17
Speaker 3: out of money because ironically we've got a lower risk too,
8:21
Speaker 3: lower risk in our investment assets at retirement age.
8:26
Speaker 1: So do you think then a lot of people in Australia,
8:30
Speaker 1: regardless again of their choice of retirement format SMSF, big
8:36
Speaker 1: super fund, reach A super fund, may have ticked the
8:41
Speaker 1: wrong box when they were choosing between conservative and balanced
8:46
Speaker 1: and other options.
8:48
Speaker 3: Yeah, potentially, I mean we do in speaking to financial advisors,
8:52
Speaker 3: we do find there's still a lot of advisors who
8:54
Speaker 3: downweigh their client's growth assets to say fifty percent, you know,
8:59
Speaker 3: as early as the early fifties in age, and we
9:04
Speaker 3: think that's very young if someone's life expectancy is into
9:07
Speaker 3: the late eighties. So we do see that. I think
9:10
Speaker 3: the other one is that there is some statistics from
9:14
Speaker 3: OPRA that showed that for those investors who are over
9:18
Speaker 3: seventy years of age, that they had a growth allocation
9:22
Speaker 3: back in about twenty fourteen of about twenty eight percent
9:25
Speaker 3: only so really very conservatively invested. That has gone up
9:30
Speaker 3: to about forty two percent today. But that's still quite
9:34
Speaker 3: conservative now. Obviously depends, you know, it depends how healthy
9:38
Speaker 3: you are as well as.
9:39
Speaker 1: Of course, and we are talking averages thoughts. Okay, talking averages. Yeah,
9:45
Speaker 1: And to be fair to Anna and all in her area,
9:48
Speaker 1: we must keep that in mind, right this is these
9:51
Speaker 1: are broad observations. Yeah, okay, I want to stress test this.
9:55
Speaker 2: Anna.
9:55
Speaker 1: We'll take a short break and we'll be back in
9:57
Speaker 1: a moment. Hello, and welcome back to The Australian's Money
10:08
Speaker 1: Puzzle podcast. I'm with Anna Shelley, the Chief Investment Officer
10:11
Speaker 1: of AMP, who is putting forward, folks to my mind,
10:16
Speaker 1: I will certainly not say radical, but fresh and important
10:22
Speaker 1: observations about how you should do you should invest And
10:26
Speaker 1: this is the kernel of investing because we know that
10:29
Speaker 1: asset allocation is the primary determinant of you, of your
10:33
Speaker 1: investment outcomes or your retirement outcomes. So the choices you
10:36
Speaker 1: make be the formal choices inside the big fund of
10:39
Speaker 1: balance to a conservative for growth, or the choices you
10:42
Speaker 1: make and running in a salesman super fund. Are they are?
10:46
Speaker 1: They are the key determinant and how well you're going
10:48
Speaker 1: to do. And the thing I want to put to
10:50
Speaker 1: you is that you're in a position where you have
10:55
Speaker 1: a strong academic background, you have a strong experience in this,
10:58
Speaker 1: and so of many other people. And it's one thing
11:03
Speaker 1: to say this, it's another thing to do it, isn't it.
11:06
Speaker 1: I mean, how do you deal with the issue that
11:09
Speaker 1: as people get older, they become more conservative and it
11:13
Speaker 1: is scarier if you are thirty five and someone says, hey, listen,
11:18
Speaker 1: you haven't enough in growth at all. You need to
11:21
Speaker 1: restructure things, and you need to expose yourself more to
11:24
Speaker 1: the share market to get those strong returns, and you
11:26
Speaker 1: need to cool off on the stuff that's given you
11:29
Speaker 1: a fixed return. That's one thing. But if you're you know,
11:34
Speaker 1: let's say someone's still struggling, maybe they still have a
11:38
Speaker 1: mortgage or one more kid in school. Retirement isn't that
11:42
Speaker 1: far away, and they may not be able to control
11:44
Speaker 1: the day they retire. I mean, something might happen and
11:46
Speaker 1: the company might just say, hey, listen, you know sorry,
11:48
Speaker 1: you know, they might never get such a good job again.
11:51
Speaker 1: In that context, it can be very emotionally difficult to imagine
11:55
Speaker 1: to put yourself at risk because that is what is
11:59
Speaker 1: that is what you are asking people to do.
12:02
Speaker 3: Yes, So look, behavioral risk is it's very real, right,
12:07
Speaker 3: and we did talk about the fact that there are
12:09
Speaker 3: individual circumstances where people just may not be able to
12:13
Speaker 3: tolerate that risk. It might be stressful to them. So
12:16
Speaker 3: you do have to manage your own self. But there
12:19
Speaker 3: are some techniques that can help. So a common thing
12:22
Speaker 3: that many advisors do is that they segment away some
12:27
Speaker 3: of the savings and it could be say two years
12:30
Speaker 3: of spending for examt.
12:32
Speaker 2: The book is that the book of strategy sort of.
12:34
Speaker 3: The bucket strategy exactly exactly. So if you've got twos
12:38
Speaker 3: of spending, sometimes that can help you not to folk
12:42
Speaker 3: not to focus as much on the rest of your
12:45
Speaker 3: long term savings. And when the market has a crash
12:48
Speaker 3: or a wobble, as it always does, and we're in
12:50
Speaker 3: the media and commentators, we're always worried and scared and pesitistic,
12:54
Speaker 3: and you know there's a lot of it.
12:55
Speaker 2: We are the noise.
12:57
Speaker 3: Yes, yes, there's you know, the headlines. They can be
13:01
Speaker 3: very scary. But if you have this bucket, we know, okay,
13:05
Speaker 3: I have for sure two years of spending in this bucket,
13:09
Speaker 3: and then you it might help you then to not
13:11
Speaker 3: focus as much on the day to day movements in
13:14
Speaker 3: the rest of your long term bucket. So there are
13:17
Speaker 3: some strategies like that I think too. You should always
13:20
Speaker 3: remember that in Australia, because of the way the age
13:23
Speaker 3: pension works, it really acts like insurance for you. It's
13:27
Speaker 3: an income for so that's another factor sort of to
13:31
Speaker 3: have in the back of the mind. You know, even
13:33
Speaker 3: if my investments are going up and down and I'm
13:35
Speaker 3: feeling nervous, I've got this, I've got this backup plan,
13:39
Speaker 3: which is the age pension. I've got my two years
13:42
Speaker 3: of spending and try not to focus on the ups
13:44
Speaker 3: and down. So those things can help, but that you
13:47
Speaker 3: know there will always be circumstances perhaps where multiple things
13:50
Speaker 3: happen at once, whether it's ill, health, job loss, other
13:54
Speaker 3: pressures may be too much and the investor may just
13:58
Speaker 3: need to deread and have something that they can be
14:01
Speaker 3: comfortable with.
14:03
Speaker 1: Can I ask you specifically about with big funds, institutional funds?
14:09
Speaker 2: How would you do that?
14:10
Speaker 1: If you're asked to make a choice the day you
14:13
Speaker 1: sign up with AMP or Stanian super or whoever. If
14:17
Speaker 1: you're asked to make these choices between conservative, balanced and growth, then,
14:23
Speaker 1: by the way, we should say we are broadly saying
14:26
Speaker 1: keep away from conservative for longer?
14:29
Speaker 2: Are really as a choice? Okay? Making those choices?
14:32
Speaker 1: How do you incorporate the boocket strategy into making that choice?
14:35
Speaker 1: Because if you hit because you don't mean because you
14:39
Speaker 1: need cash for that strategy, how do you do that
14:42
Speaker 1: in a big super fund between the limited menu that
14:44
Speaker 1: it offers.
14:45
Speaker 3: Yeah, So what I would say is, firstly, when you're young,
14:49
Speaker 3: you don't need to have anything complex, right, you just
14:52
Speaker 3: try as much as possible to be in as high
14:53
Speaker 3: growth as possible, and potentially when you get within five
14:56
Speaker 3: years of retirement, you have a look at it, look
14:58
Speaker 3: at your own circumstance, perhaps sick advice. What you can
15:02
Speaker 3: do then is you can have because you can choose
15:06
Speaker 3: how to allocate your super, and even on a limited menu,
15:09
Speaker 3: you can have two years, estimate your two years of
15:12
Speaker 3: spending and put it in the cash option, and then
15:16
Speaker 3: you can have the remainder in a balanced or seventy
15:20
Speaker 3: five twenty five tight and you can you can do that.
15:24
Speaker 3: There's a lot more available today in terms of digital
15:27
Speaker 3: advice and modeling. We have at A and P surpers
15:30
Speaker 3: and really quite sophisticated digital advice that takes into account
15:35
Speaker 3: things like whether you have a spouse, whether your home
15:38
Speaker 3: is paid off. One of the things that we are
15:41
Speaker 3: seeing more frequently, sadly, is that many people are entering
15:45
Speaker 3: retirement still with mortgages. And that's a real factor again
15:51
Speaker 3: in this need for your super to work harder, because
15:54
Speaker 3: it not only has to pay off the remainder of
15:57
Speaker 3: your mortgage when you retire, but then it also has
15:59
Speaker 3: to sustain you for the rest of your life.
16:03
Speaker 1: So the presence of a mortgage would actually fortify your arguments.
16:07
Speaker 3: Really it does, I think so, yes, yeah, definitely, because I.
16:11
Speaker 1: Think but increasing the number of people are in that position,
16:15
Speaker 1: especially neu.
16:16
Speaker 3: Retorties exactly, and housing itself when it's fully paid off
16:21
Speaker 3: provides another level of flexibility, And perhaps flexibility is the
16:25
Speaker 3: other lever that if you have it and can have it,
16:30
Speaker 3: particularly around income draw down. Right, So you might say,
16:34
Speaker 3: I need, you know, forty thousand dollars a year to
16:37
Speaker 3: have a comfortable retirement. That's my aim, that's what I'm
16:40
Speaker 3: going to try and generate. But say the market has
16:43
Speaker 3: a big crash, if you are able to say, do
16:46
Speaker 3: you know what, this year, I'll just try and get
16:48
Speaker 3: by with a bit less, try and not take out
16:50
Speaker 3: quite as much, or maybe that extra holiday that I
16:52
Speaker 3: was going to take, I might just push that back
16:54
Speaker 3: to next year. That type of flexibility can have a
16:57
Speaker 3: real positive impact on your assets because it means then
17:01
Speaker 3: if you draw down a little less in those negative
17:04
Speaker 3: market years, that then it allows time for the market
17:08
Speaker 3: to recover and your assets then to recover as well. Now,
17:12
Speaker 3: not everyone has that flexibility. Certainly, it's probably more common
17:16
Speaker 3: in the wealthier retirees that they do have that flexibility.
17:20
Speaker 3: But the flexibility certainly is helpful, and if you think
17:23
Speaker 3: about the interaction of the age pension or the part
17:26
Speaker 3: age pension with your income, then that can be really
17:30
Speaker 3: beneficial as well. Another thing that might be useful for
17:34
Speaker 3: members and investors to think about is whether they might
17:37
Speaker 3: want to layer in, as well as their cash spending
17:40
Speaker 3: bucket and then their balanced fund exposure, whether they might
17:44
Speaker 3: want to layer in a lifetime annuity or income stream,
17:50
Speaker 3: because that can provide another layer of diversification but also
17:54
Speaker 3: have stability of income. So again that would give them
17:57
Speaker 3: that extra security.
17:59
Speaker 1: And you might just as a component as opposed to
18:03
Speaker 1: an answer.
18:04
Speaker 3: As a component. I think as a component, we have
18:06
Speaker 3: a lifetime income stream at AMP delivers very high income,
18:10
Speaker 3: much higher than normal annuities, and it's a very helpful tool.
18:15
Speaker 1: We're very skeptical of promoting any one product over another,
18:18
Speaker 1: but I just want.
18:19
Speaker 2: To say, I'm sure you could get the regular Liam short.
18:23
Speaker 1: On the last show, Financial Advisor did make the very
18:25
Speaker 1: same point that an annuity can be an option and
18:28
Speaker 1: a component option. I want to ask you just one thing.
18:31
Speaker 1: I had always thought you had to spend a lot
18:32
Speaker 1: to get in an innuity. What's the minimum amount you
18:35
Speaker 1: can I get a bite size inusity? Can I put
18:37
Speaker 1: fifty grand out in an annuity or is there a minimum.
18:40
Speaker 3: No, there's no minimum, so you can well, and it's
18:42
Speaker 3: going to depend on where you go, of course and
18:44
Speaker 3: what your providers are.
18:45
Speaker 1: But I presume there's a minimum in practice in effectiveness.
18:49
Speaker 3: Well within our super fund we normally talk about in
18:52
Speaker 3: terms of proportions of the total. Okay, Yeah, So I
18:56
Speaker 3: would say you'd have two years of spending income of
19:00
Speaker 3: seventy five percent in the balance fund. You might put
19:02
Speaker 3: half of that in an annuity, a lifetime income stream,
19:06
Speaker 3: and then that will add an extra lay of income
19:09
Speaker 3: and security with in your confidence.
19:12
Speaker 1: The innuity folks. As you know, we discussed ugly and
19:16
Speaker 1: we will discuss again. They have pros and cons. We'll
19:18
Speaker 1: come back to that one.
19:19
Speaker 2: Okay.
19:19
Speaker 1: I want to take a break, and in the next part,
19:22
Speaker 1: which I will be a fun part, certainly for me,
19:24
Speaker 1: I want to stress test some of the ideas that
19:27
Speaker 1: were put forward by Anna, and I'm thinking about whether,
19:31
Speaker 1: like inflation really is that much of a concern, for instance,
19:36
Speaker 1: in the immediate future. I'm also thinking, if you would
19:40
Speaker 1: consider this, Anna, that the whole notion of fixed and
19:45
Speaker 1: growth is under pressure in many ways at the moment.
19:48
Speaker 1: The whole concept that people lived with for so long
19:50
Speaker 1: that you know, very simply, you know, growth with shares
19:55
Speaker 1: and income was fixed income reflected largely by bonds, and
19:59
Speaker 1: that is here's the other question.
20:00
Speaker 2: We'll come back to that after the break.
20:08
Speaker 1: Hello, Welcome back to the Australians Money Puzzle podcast. I'm
20:11
Speaker 1: with Anna Shelley, chief investment officer at AMP, and we
20:16
Speaker 1: have been talking about it the changing nature, if you like,
20:20
Speaker 1: of investment, and it's very core, the very very core
20:23
Speaker 1: principles of investments, which is so important that you get
20:27
Speaker 1: this right because you can make all these.
20:28
Speaker 2: Tiny decisions right.
20:29
Speaker 1: You can buy this share and that share, and that's
20:32
Speaker 1: all fine, but really if you get your strategy wrong,
20:35
Speaker 1: then it's not going to make up for any small decisions.
20:38
Speaker 1: This is so important and I wanted to have a
20:40
Speaker 1: show and as the ideal guest on this, so I
20:43
Speaker 1: wanted to sort of just let's just kind of stress
20:46
Speaker 1: test for us some of the concepts Anna, that you've
20:49
Speaker 1: put forward. I mean, the first one is that you
20:53
Speaker 1: should do this because you live longer. I don't think
20:55
Speaker 1: anybody has any problem with that. The actuarian numbers are there.
20:58
Speaker 1: But about inflation, that more like a no one knows right,
21:03
Speaker 1: you're forecasting.
21:05
Speaker 3: Yeah, yeah, I think to inflation. When we say higher
21:08
Speaker 3: inflation over the next at least several years, but possibly
21:13
Speaker 3: even next decade. We're not talking about anything too scary, right,
21:16
Speaker 3: We're talking about three to four percent inflation instead of
21:19
Speaker 3: two to three percent inflation. Now, why does that matter?
21:22
Speaker 3: And as you said before, we've had high inflation in
21:25
Speaker 3: past periods and you know, people have got through and
21:27
Speaker 3: they've managed to retire and it's all been okay. The
21:30
Speaker 3: real key here is the length of time of that
21:33
Speaker 3: three to four percent, Right, So even a small one
21:38
Speaker 3: percent increase in inflation over thirty years makes a big
21:43
Speaker 3: that's a significantly higher challenge then for your assets.
21:47
Speaker 2: It erolled your spending power.
21:49
Speaker 3: Yeah, it absolutely does. Yeah yeah, And it's because of
21:52
Speaker 3: that longer period of life expectancy. That's why it's a
21:56
Speaker 3: big deal. And in fact, even if it was a
21:59
Speaker 3: half a percent higher than the you know, the RBI
22:01
Speaker 3: is two and a half percent target, you still you
22:04
Speaker 3: have to take account of it in your in designing
22:07
Speaker 3: your investment portfolios.
22:10
Speaker 1: When you were saying about seventy percent growth at sixty five,
22:14
Speaker 1: which is ane, I'm just yeah, what's the word bestarted
22:20
Speaker 1: by when you say growth, very broadly, can you tell
22:26
Speaker 1: me what is in growth? And because you know, we
22:29
Speaker 1: have this debate inside Australian superinnuation circles where unfortunately terms
22:35
Speaker 1: like balanced and growth are relatively robbery.
22:38
Speaker 2: And what's growth?
22:39
Speaker 1: What's in your growth fund compared to what's in the
22:41
Speaker 1: host plus growth fund compared to what's in the rest
22:43
Speaker 1: growth fund.
22:44
Speaker 2: They're not all the same.
22:46
Speaker 1: So just very broadly to the investor, when we say
22:49
Speaker 1: seventy percent growth, what's what what's in that?
22:55
Speaker 3: So added simplest growth assets are equities, the mess the
23:00
Speaker 3: global emerging markets, property, infrastructure, private equity, and then sometimes
23:08
Speaker 3: some alternative assets depending on what they are, so maybe
23:11
Speaker 3: hedge funds, but there are also low risk hedge funds.
23:13
Speaker 3: So that's where it gets a bit gray. But at
23:15
Speaker 3: it's very simplest. If you were an investor, you would
23:18
Speaker 3: say that the only really defensive assets are fixed income
23:22
Speaker 3: and cash.
23:24
Speaker 2: Okay, and fixed income is strictly bonds.
23:30
Speaker 3: Yes, but of course you can get things like infrastructure
23:34
Speaker 3: debt and different types of debt, some of them, say
23:38
Speaker 3: emerging market debt, you might regard. You know, they're going
23:42
Speaker 3: up the risk spectrum, so they're definitely heading into growth territory.
23:48
Speaker 2: Yeah, and in fact, say sorry, yes.
23:51
Speaker 3: I was going to say that APRA would say that,
23:54
Speaker 3: for example, higher yielding credit, higher yielding bonds have an
24:00
Speaker 3: element of growth to.
24:02
Speaker 1: Them, so the income bucket is pretty smaller in a.
24:07
Speaker 3: True safety term. Yes. And so one of the issues
24:10
Speaker 3: has been over the last period that the bonds have
24:13
Speaker 3: had that you know, they had a positive correlation with equities,
24:16
Speaker 3: and we saw in the Liberation they sell off in particular,
24:20
Speaker 3: that equities went down, bonds fell, and that's you know,
24:24
Speaker 3: that whole construct of having a gross and defensive part
24:28
Speaker 3: to your portfolio kind of fell apart a bit. But
24:31
Speaker 3: the good news is that actually the bond equity correlation
24:35
Speaker 3: has recently turned negative again. What that means is that
24:39
Speaker 3: going forward, if equities fall, bonds should rise, So they
24:43
Speaker 3: should rebalance your keep your portfolio a little bit in balance,
24:47
Speaker 3: provide a bit of protection as they used to in
24:50
Speaker 3: time's gone by. And you might say, well, why's that happened?
24:54
Speaker 3: And the thing about correlations is they do move around
24:57
Speaker 3: a lot over the short term, and so you've got
24:59
Speaker 3: to keep your eyes on them. You know, are my
25:01
Speaker 3: bombs still defensive, are they actually protecting the portfolio? And
25:05
Speaker 3: going forward, what we think is that we are entering
25:08
Speaker 3: a new market regime, a new bull market. Dare I say,
25:14
Speaker 3: a period of growth, definitely economic growth and possibly a
25:18
Speaker 3: return to disinflationary forces in the US, maybe not yet
25:22
Speaker 3: in Australia, but in the US. And therefore we've seen
25:26
Speaker 3: that correlation go back to how it was, so that
25:29
Speaker 3: bombs should now provide more protection against equity market falls,
25:34
Speaker 3: and we should see things like the defensive assets that
25:38
Speaker 3: have really run recently with concerns in the market, things
25:41
Speaker 3: like gold, they should probably revert back again to to
25:46
Speaker 3: history if that global economic growth acceleration does continue.
25:51
Speaker 2: So which leads me to the question.
25:54
Speaker 1: There is a strong debate, a fresh debed for some
25:56
Speaker 1: time now about not just sixty forty and the whole idea,
25:59
Speaker 1: the whole rule, but what defensive is and what growth
26:03
Speaker 1: is and the bond's correlation. As you say, the traditional
26:08
Speaker 1: let's just to make it easy for listeners, the traditional
26:12
Speaker 1: concept that you had bonds for defense and you had
26:16
Speaker 1: equities for growth was seriously tested for quite some time,
26:21
Speaker 1: almost since the GFC. But you're, first of all, it
26:26
Speaker 1: sounds to me like you are comfortable in the on
26:29
Speaker 1: the very long term and in your modeling, or you're
26:33
Speaker 1: thinking now that you are comfortable.
26:34
Speaker 2: That still holds. Is that right?
26:37
Speaker 3: Oh?
26:37
Speaker 2: Yes, and so yeah.
26:40
Speaker 1: So does that mean that for defensive holdings for investors
26:49
Speaker 1: you think something like gold doesn't stand up. I'm thinking
26:52
Speaker 1: of Morgan Stanley's and some of the top end of
26:56
Speaker 1: wealth managers basically reversing away from bonds, especially in the
27:01
Speaker 1: US where they were so central and so we was
27:04
Speaker 1: so liquid and so the deepest market in the world
27:07
Speaker 1: towards other assets or turnasives, specifically gold.
27:10
Speaker 2: Do you think that's actually.
27:14
Speaker 1: Fees a period of time as opposed to an enduring theme,
27:18
Speaker 1: do you So?
27:20
Speaker 3: Firstly, we do think that you could there's a place
27:24
Speaker 3: for gold in portfolios. So I think you could have
27:27
Speaker 3: up to maybe five percent in gold. And the reason
27:30
Speaker 3: you might do that is, you know, as a hedge
27:32
Speaker 3: against major currency weakness, financial turmoil, equity market dislocation, that
27:38
Speaker 3: sort of thing. The point I would make for Australian
27:42
Speaker 3: investors is to keep in mind that actually a lot
27:44
Speaker 3: of Australian investors already have exposure through gold mining shares
27:50
Speaker 3: and typically a quite overweight position in the Australian share market,
27:54
Speaker 3: and so bear that in mind because you might not
27:56
Speaker 3: then need a separate exposure to gold, but if you
28:00
Speaker 3: wanted to, you could have it. I think modeling shows
28:03
Speaker 3: that it is justified. But over the long term, what
28:06
Speaker 3: we've seen with gold as it goes through these long
28:08
Speaker 3: phases of long term upswings and then down swings, and
28:11
Speaker 3: then it does nothing for you know, years at a time,
28:14
Speaker 3: so it doesn't always play, you know, exactly the role
28:18
Speaker 3: you might want it to, and it is you have
28:21
Speaker 3: to think about it as a long term holding. At
28:25
Speaker 3: the moment, I would say we have had a bit
28:27
Speaker 3: of a phase because what we've seen is large central
28:31
Speaker 3: bank buying of gold, and that's come about because of
28:34
Speaker 3: this concern the geopolitical concern about the US, and so
28:38
Speaker 3: lots of central banks that had offloaded a lot of
28:41
Speaker 3: their gold reserves over the last sort of twenty years
28:44
Speaker 3: have been definitely piling back into gold. And some of
28:48
Speaker 3: that's their concern about US debt, they're concerned about the
28:51
Speaker 3: US government, the concern about US dollar weakness, and so
28:56
Speaker 3: there's definitely been some strong buying there that has supported
28:59
Speaker 3: the goal.
29:01
Speaker 1: Okay, very good. Thank you very much. I think we're
29:04
Speaker 1: running out of time. I really appreciate that.
29:06
Speaker 2: Anna. It's lovely to have you on the show.
29:09
Speaker 3: Thank you very much, James. That was lovely, very interesting
29:12
Speaker 3: chat and hope play listeners found that hopeful.
29:14
Speaker 2: I expect many of them would.
29:16
Speaker 1: Regardless folks, as I say, of what way you have
29:18
Speaker 1: you were investing, whether you have your money in big, super, small, super,
29:23
Speaker 1: your own super, I think the points are bound to everybody.
29:26
Speaker 2: Very good.
29:27
Speaker 1: Let's have some more correspondence. I didn't deal with correspondence today.
29:30
Speaker 1: It has been building up. I know I will get
29:32
Speaker 1: to it very quickly. Had some very interesting on the
29:34
Speaker 1: last show. Some correspondents and let's have some more the
29:38
Speaker 1: money puzzle at the Australian dot com dot Au. Today's
29:41
Speaker 1: show was produced by Leah Samma Glue. Talk to you soon.