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Building a shock-proof investment portfolio · The Money Puzzle

• 0:10
  Speaker 1: Hello and welcome to the Australians Money Puzzling Podcast. I'm
• 0:13
  Speaker 1: James Kirby. Welcome aboard everybody. Now. Since the beginning of
• 0:16
  Speaker 1: the financial year, what we've tried to do on this
• 0:18
  Speaker 1: show is offer you a clear backdrop about the basically
• 0:25
  Speaker 1: the picture through which you're making your investment decisions. And
• 0:28
  Speaker 1: in the last show we heard from Tim Towey of
• 0:32
  Speaker 1: Capital who was sort of outlining economic fundamentals if you
• 0:35
  Speaker 1: like as to where we are just now. So imagine
• 0:39
  Speaker 1: if you could go around the world and you could
• 0:41
  Speaker 1: go to top conferences forever, UK, US, you might even
• 0:45
  Speaker 1: go to Monaco if needs be, just to figure out
• 0:49
  Speaker 1: where are we right? What are the top people in
• 0:52
  Speaker 1: market saying the top economists, top fund managers, top money makers.
• 0:56
  Speaker 1: Our regular guest Will Hamilton of Hamilton Well Partners has
• 0:59
  Speaker 1: just returned basically from a tour like that. I was
• 1:01
  Speaker 1: going to say he was on a you know, around
• 1:03
  Speaker 1: the world in eighty conferences. A bit of an exaggeration
• 1:06
  Speaker 1: that would you will, But it's now is the time
• 1:09
  Speaker 1: to talk to you about We talked and you had
• 1:12
  Speaker 1: three outstanding takeaways right from that and in a way
• 1:15
  Speaker 1: it is a privilege to be able to do that,
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  Speaker 1: so they're want to talk about them today. So, folks,
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  Speaker 1: the first thing that Will pointed out to me was
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  Speaker 1: that portfolio construction, right, that is the way in which
• 1:26
  Speaker 1: you mix your investments and you have them laid out
• 1:30
  Speaker 1: is now the primary source of value. Now what do
• 1:33
  Speaker 1: you mean by that, Will? What does that mean for
• 1:35
  Speaker 1: the average investor? You understand it, I understand it, and
• 1:38
  Speaker 1: it's crucial, But explain what it is and why it
• 1:40
  Speaker 1: is crucial.
• 1:41
  Speaker 2: So that's an allocation of the buckets, so to speak.
• 1:45
  Speaker 2: There's Australian equities, there's developed market equities, there's emerging market equities.
• 1:49
  Speaker 2: Then you've got your private market allocations, so your private
• 1:53
  Speaker 2: equity diversify credit, maybe direct, real estate, et cetera.
• 1:59
  Speaker 3: And diverse.
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  Speaker 2: Portfolio construction is about not just yeah, let's say, okay,
• 2:04
  Speaker 2: I've got a fund end private equity, so that gives
• 2:06
  Speaker 2: me my private equity exposure. It's about building within each
• 2:10
  Speaker 2: asset class, so you have diversification not just amongst the
• 2:16
  Speaker 2: asset classes, but within the asset classes.
• 2:20
  Speaker 1: So very broadly, like Lemon's view, is it just to
• 2:23
  Speaker 1: be perfectly diversified.
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  Speaker 2: Yes, there is that, and what we do, and a
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  Speaker 2: lot of you know, my competitors do.
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  Speaker 3: Is we're looking not just at.
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  Speaker 2: The returns, but the volatility so within the portfolio, and
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  Speaker 2: we get that monitored and I'm sure other firms do
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  Speaker 2: as well. So you're delivering those returns with less risk,
• 2:46
  Speaker 2: so ensuring that the returns are there, but the risk
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  Speaker 2: to just the straight out markets or beta is less
• 2:53
  Speaker 2: than that. And that's a really important thing, and I
• 2:56
  Speaker 2: think that's what we're trying to achieve.
• 2:59
  Speaker 1: So the thing you took away from these meetings overseas
• 3:02
  Speaker 1: this year was that portfolio construction is the primary source
• 3:06
  Speaker 1: of value. Now, just explain what that means, because I
• 3:08
  Speaker 1: would have thought it was always the primary source of value.
• 3:10
  Speaker 1: In other words, if I get up on July one
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  Speaker 1: and I say I'm going to lift my allocation on
• 3:17
  Speaker 1: emerging markets from ten percent to twenty percent, and next
• 3:21
  Speaker 1: year that pays off beautifully, then that's an example of
• 3:26
  Speaker 1: how my allocation was crucial to how I returned. But
• 3:31
  Speaker 1: can you explain more broadly what people mean when they
• 3:34
  Speaker 1: say when they say portfolio construction is the primary source
• 3:37
  Speaker 1: of value, I mean it always is. So first of all,
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  Speaker 1: explain how it always is and then why has it
• 3:43
  Speaker 1: become more important?
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  Speaker 2: So the fact that I said allocation is importantcause that's
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  Speaker 2: the drivers of your portfolio, both of your returns, but
• 3:49
  Speaker 2: the risk you have in your portfolio. And that's absolutely
• 3:54
  Speaker 2: key because you want to be able to capture the
• 3:57
  Speaker 2: upside when markets go up, but when markets correct, you
• 4:01
  Speaker 2: want to make sure that your portfolio, as always call it,
• 4:03
  Speaker 2: refer to it as it bends, it doesn't break. And
• 4:06
  Speaker 2: that's really important. So instance, your emerging markets example is
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  Speaker 2: a great example because emerging markets have done extremely well.
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  Speaker 2: This emerging Asia has done extremely well this calendar year.
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  Speaker 2: But it's three stocks Skhinex, it's Samsung, and it's TSMC
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  Speaker 2: in Taiwan.
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  Speaker 1: You have three chip makers in Asia pushing the whole correct.
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  Speaker 2: Yeah, that's rash so and as we've seen, what can
• 4:31
  Speaker 2: go up can also go down Skhnix and I know
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  Speaker 2: it's just the last footy out hours, but it's been
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  Speaker 2: very volatile and it's we've captured some downside lately.
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  Speaker 3: So that's a very good example.
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  Speaker 2: You just don't want to have three stocks, yes, you
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  Speaker 2: want to be able to capture the upside. Then the
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  Speaker 2: trend that's going on within that asset class, but you
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  Speaker 2: also want to be able to be measured and make
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  Speaker 2: sure Like one of the fund managers we've been exposed
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  Speaker 2: to actually at the end of June cut their exposure
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  Speaker 2: to those three.
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  Speaker 1: Stocks because the we're putting their acid allocation metrics above
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  Speaker 1: the sensation of them is that well.
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  Speaker 2: The valuations of just you know, what goes up, what
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  Speaker 2: can definitely come down. And this has been really hot,
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  Speaker 2: and I think that why I say that the discussion
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  Speaker 2: around the prime portfolio construction is now the primary source
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  Speaker 2: of value is yep. Markets have been great, no one's
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  Speaker 2: doubting that, but people are underestimating the correlation to everything
• 5:28
  Speaker 2: to the tech trade at the moment, and you might
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  Speaker 2: and so like for instance, a lot of people are
• 5:32
  Speaker 2: hiding and resources saying great area to hide. But as
• 5:35
  Speaker 2: someone gave me a statistic about the amount of steel
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  Speaker 2: that was in Wembley Stadium. So I'm going to put
• 5:40
  Speaker 2: that in the Australian perspective because I went in fact
• 5:43
  Speaker 2: checked and I don't just take it's a quote. It's
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  Speaker 2: been true. But there's fifty two eight hundred tons of
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  Speaker 2: steel in Sydney Harbor Bridge to build a one gig
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  Speaker 2: le work data center. It's over two hundred thousand tons
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  Speaker 2: of steel, so four times the amount. Now you might say, well,
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  Speaker 2: not every there's not that many. One gig data center
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  Speaker 2: is being built. One Thropic just last week said that
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  Speaker 2: one point four gigaworts of capacity in Australia.
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  Speaker 3: So it's real.
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  Speaker 1: Even domestically, I think the amount that has been spent
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  Speaker 1: on the planned on capex in the data centers is
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  Speaker 1: now starting to narrow towards mining capex, so unbelievably in
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  Speaker 1: Australian context, something is challenging how much we're spending on
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  Speaker 1: mining in a given year and it's going to be
• 6:27
  Speaker 1: data centers. And as you say, there's this enormous correlation.
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  Speaker 1: But that to Tim Tooey as well, where is there
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  Speaker 1: to hide? I mean normally when you have a market
• 6:35
  Speaker 1: that's running red hot, I say, oh, well it's overvalued,
• 6:38
  Speaker 1: and you might go to bonds, or you might go
• 6:40
  Speaker 1: to gold, you might go to cash. He was expressing
• 6:43
  Speaker 1: concern that it's filtering through everything. So for instance, bonds,
• 6:46
  Speaker 1: corporate bonds are becoming effectively AI bonds, not in many
• 6:50
  Speaker 1: cases or at least AI linked bonds, so that that
• 6:53
  Speaker 1: overpricing is spreading through the market talking about acid allocation.
• 6:58
  Speaker 1: If I'm standing here with my portfolio in front of me,
• 7:01
  Speaker 1: just looking at the new year, where are the areas
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  Speaker 1: which might offer some resilience to the risk of the
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  Speaker 1: AI team.
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  Speaker 3: Infrastructure?
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  Speaker 2: But look at real infrastructure, and there are some managers
• 7:15
  Speaker 2: I'm not going to mention their names, but you know
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  Speaker 2: that it is what I'm what I call real infrastructure, roads, bridges,
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  Speaker 2: et cetera, not data.
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  Speaker 1: Centers, incation that linked infrastructure retire.
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  Speaker 2: So that to me stands out as the number one area.
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  Speaker 2: But again, be careful, make sure you understand what's in
• 7:31
  Speaker 2: those funds or those ETFs or whatever it is you're buying,
• 7:34
  Speaker 2: because you don't, otherwise you could end up with lots
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  Speaker 2: of data centers as well. And that's where the correlation
• 7:39
  Speaker 2: comes in.
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  Speaker 1: Right, But that's it's a risk everywhere, even in that
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  Speaker 1: area infrastructure, because the centers would be regarded as infrastructure
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  Speaker 1: and supporters.
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  Speaker 2: Is that it imature ones? Yeah, not on the not
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  Speaker 2: on the building ones. So some people are treating it
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  Speaker 2: that way. Some are treating it that way, some are
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  Speaker 2: treating as real estate. But you know, I think that
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  Speaker 2: this is the what I heard was a lot of
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  Speaker 2: concern because markets have run so well. You're seeing a
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  Speaker 2: lot of capex. Everyone's saying it's going to be at
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  Speaker 2: least seven hundred billion, is going to hit a trillion,
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  Speaker 2: but you know a lot of there's a lot of
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  Speaker 2: people throwing out that trillion dollar figure on capex amongst
• 8:16
  Speaker 2: the big tech companies. Interest rates potentially going up in
• 8:20
  Speaker 2: the United States. We were originally at the Talk of
• 8:22
  Speaker 2: the year talking about two or three decreases. Now, like
• 8:26
  Speaker 2: I heard NABS saying this morning, they even think it
• 8:29
  Speaker 2: could be this month you could get an interest rate rise.
• 8:31
  Speaker 2: It all depends on the CPI figure today. And then
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  Speaker 2: IPOs there's some huge raisings out there.
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  Speaker 3: We saw SpaceX.
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  Speaker 2: Straight out, You've got open AI coming, You've got Anthropic
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  Speaker 2: coming as well. That money has to come from somewhere.
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  Speaker 2: And so the thing that everyone's watching of those three
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  Speaker 2: things the amount of capex, because when you've got seven
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  Speaker 2: hundred billion or be at a trillion, let's go for
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  Speaker 2: the live figure to keep that momentum, it has to
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  Speaker 2: be maintained next year or go up. And by the way,
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  Speaker 2: you also need to get return on this. What is
• 9:02
  Speaker 2: the interest rate environment in the us going to be
• 9:04
  Speaker 2: because we know that increase interest rates aren't friendly the
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  Speaker 2: way Quinnie markets if it's multiple interest rate risers. And
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  Speaker 2: then as I said, these are IPO raising. So they
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  Speaker 2: are three things that I kept hearing over and over again,
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  Speaker 2: and therefore the importance of portfolio construction.
• 9:18
  Speaker 1: Very good. We take a short break, we'll come back.
• 9:20
  Speaker 1: We're going to open this up and we're going to
• 9:22
  Speaker 1: look at how it affects you what you should be
• 9:25
  Speaker 1: doing in this area. Hello, welcome back to The Australian's
• 9:37
  Speaker 1: Money Puzzle podcast. I'm James Kirby talking to Will Hamilton
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  Speaker 1: of Hamilton Weld Partners. Now, folks, what we've talked about
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  Speaker 1: in that first half was this idea about portfolio construction,
• 9:48
  Speaker 1: which I'm sure you're familiar with, but specifically portfolio allocation.
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  Speaker 1: Put very simply, it means that, as well said, the
• 9:54
  Speaker 1: buckets in which you have your money as an investor
• 9:57
  Speaker 1: will determine largely how you do okay, Like this year,
• 10:00
  Speaker 1: if you had AI stocks, you did better than average.
• 10:02
  Speaker 1: If you didn't, you missed it. The year before, if
• 10:04
  Speaker 1: you had gold, you did better than average. If you
• 10:06
  Speaker 1: didn't have it, you missed it. Unfortunately, We can't tell
• 10:09
  Speaker 1: you what's going to come down the line each year
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  Speaker 1: because it's always different, but we can tell you, first
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  Speaker 1: of all, as Will delineated their start of the show,
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  Speaker 1: the big risks now are this enormous kapex demand build
• 10:21
  Speaker 1: up from AI. And we have it here in locally
• 10:24
  Speaker 1: too to some degree if you look at NEXTDC for instance.
• 10:26
  Speaker 1: But Will was talking about the giant ones in the
• 10:28
  Speaker 1: US open AI, anthropic, et cetera. Then we have the
• 10:33
  Speaker 1: distinct new risk of rising rates in the US, which
• 10:36
  Speaker 1: is the market that really matters to investors. And that's
• 10:38
  Speaker 1: with the new FED chairman Wash who is sounding vaguely hawkish.
• 10:42
  Speaker 1: I think we might say, and we have the sense clear,
• 10:45
  Speaker 1: unambiguous picture that share markets are overheated. They're twenty percent
• 10:52
  Speaker 1: plus return in the US share markets last year. So Will,
• 10:56
  Speaker 1: would you explain to listeners what maybe they should have
• 11:01
  Speaker 1: more of in this environment in terms of acid delocation
• 11:04
  Speaker 1: and what they should be trimming off if they might
• 11:08
  Speaker 1: have all we done it in some portress.
• 11:11
  Speaker 2: So you need to look at what your exposure is
• 11:15
  Speaker 2: in equities. Like a great example is the Russell two thousand,
• 11:20
  Speaker 2: So the small the one of two thousand companies in
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  Speaker 2: the US and the companies that don't have earnings and
• 11:26
  Speaker 2: seeing the outperformance since I think it's July last year,
• 11:29
  Speaker 2: so for the last twelve months against those that had earning.
• 11:32
  Speaker 2: So I think it gets And one of the big
• 11:34
  Speaker 2: phenomenons is, like I think it's we're going through the
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  Speaker 2: worst period and only twice in the last twenty years
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  Speaker 2: has quality businesses underperformed greatly to the rest of the market.
• 11:46
  Speaker 2: And so when I say that, it's about making sure
• 11:51
  Speaker 2: what you've got is for your exposure. Also, you want
• 11:54
  Speaker 2: to have growth, there's no doubt about that, but quality
• 11:56
  Speaker 2: of businesses that have growth, but they've also got earnings.
• 11:59
  Speaker 2: And I think that's it's back to the basic principles
• 12:02
  Speaker 2: that everyone used to say when we had the tech wreck.
• 12:06
  Speaker 2: You know, these things are just running on revenue and
• 12:09
  Speaker 2: no earnings. There's actually a lot of companies out there
• 12:11
  Speaker 2: that are running on exactly that. Again, and I'm not
• 12:14
  Speaker 2: saying that big guys are doing that. It's down in
• 12:16
  Speaker 2: the small area and just make sure in your equity
• 12:19
  Speaker 2: exposure that you've got things that can weather some downside.
• 12:23
  Speaker 1: Right, Okay, So I sort of a return to basics
• 12:27
  Speaker 1: to be careful not to be carried away. Basically, Yeah,
• 12:29
  Speaker 1: with the sensational aspects of the market, like Space Act,
• 12:32
  Speaker 1: which is just the perfect example. It has no profits.
• 12:36
  Speaker 1: That's one of the biggest companies in the world. We
• 12:37
  Speaker 1: are led to believe because by its market cap. All right,
• 12:41
  Speaker 1: that's one thing in terms of trimming off. What about
• 12:45
  Speaker 1: in terms of what people should have and can I
• 12:47
  Speaker 1: ask you what are the what would you think are
• 12:52
  Speaker 1: the staples in the market in this market going forward
• 12:56
  Speaker 1: that an investor really needs.
• 12:58
  Speaker 2: Well, you should always you go among stacid allocation. We
• 13:01
  Speaker 2: think it's important to have exposure across the asset classes.
• 13:04
  Speaker 2: But some you're underweight and some you're overweight. Diversify credit
• 13:08
  Speaker 2: for instance, we are underweight, and we've also made sure.
• 13:12
  Speaker 3: We've got liquidity.
• 13:14
  Speaker 2: But you also want to be looking at what that
• 13:16
  Speaker 2: interest rate spread is, and that's very tight at the moment,
• 13:18
  Speaker 2: So you want to have make sure you've got exposure
• 13:21
  Speaker 2: that can withstand if spreads bleue out a little bit
• 13:25
  Speaker 2: the bare And secondly you want to make sure you've
• 13:28
  Speaker 2: got liquidity. I think that's really important. As I said
• 13:31
  Speaker 2: before we talked about infrastructure, I think that's important. But again,
• 13:34
  Speaker 2: make sure you've got the right exposure to infrastructure. And
• 13:38
  Speaker 2: there's this is where I'm not pushing come to affirm
• 13:43
  Speaker 2: like ours or competitors, but just make sure you do
• 13:46
  Speaker 2: your homework with respect to what your exposure is and
• 13:49
  Speaker 2: just don't go and buy an evergreen exposure to private equity.
• 13:54
  Speaker 2: Maybe there are some more liquid options that are listed
• 13:57
  Speaker 2: on the stock exchained through ETFs or something like that
• 14:00
  Speaker 2: that can give you that exposure. But make sure you
• 14:02
  Speaker 2: know what the underlying exposures are. I think that's really important.
• 14:05
  Speaker 1: And what about the balance between home and abroad. I mean,
• 14:08
  Speaker 1: all the big super funds, the ones that did best
• 14:11
  Speaker 1: this year were the ones but the largest overseas share allocation.
• 14:15
  Speaker 1: And I wonder is there a is it appeared where
• 14:19
  Speaker 1: we might find the message finally gets through to local
• 14:21
  Speaker 1: investors they should have more offshore allocation at exactly the
• 14:24
  Speaker 1: wrong time, because I see, look at reading US financial coverage,
• 14:28
  Speaker 1: which I do quite deeply and all the time inside
• 14:30
  Speaker 1: the US, they're telling the US investors to go off shore.
• 14:34
  Speaker 2: Well, when they talk about offshore, they're talking about Europe,
• 14:36
  Speaker 2: they're talking about Japan. I wouldn't look at the UK
• 14:41
  Speaker 2: at the moment. Having just returned from there, it's good
• 14:43
  Speaker 2: to see an economy which is just like Australia.
• 14:46
  Speaker 3: But you've got to.
• 14:46
  Speaker 2: Remember the Australian market is dominated by banks thirty percent
• 14:49
  Speaker 2: by by financial institutions, and with what the budget's done,
• 14:53
  Speaker 2: and with the way the housing market, outlook is these
• 14:56
  Speaker 2: things depend on housing lines and they're not going to
• 14:58
  Speaker 2: get that growth at the moment. So this market, I've
• 15:02
  Speaker 2: been quite outspoken. We are underweight. I've got clients that
• 15:06
  Speaker 2: want to be further underweight. What our recommendation is.
• 15:09
  Speaker 1: When you say underweight, you have less Australian shares than
• 15:12
  Speaker 1: you might have had in the past. Correct Just in
• 15:15
  Speaker 1: that underweting, did you trim off banks or what did
• 15:18
  Speaker 1: you do?
• 15:19
  Speaker 3: Yes?
• 15:20
  Speaker 2: Absolutely so. Our exposure to Australia has never been lower.
• 15:24
  Speaker 2: So in a balanced portfolio it's nine point five percent,
• 15:27
  Speaker 2: and a growth portfolio it's four nine point five percent.
• 15:30
  Speaker 2: It has never been lower. And as I said, with
• 15:33
  Speaker 2: some that's maximum. With some clients we are half that
• 15:38
  Speaker 2: zero at their request, especially since the budget has said
• 15:43
  Speaker 2: there are some difficulties in this economy which are going
• 15:45
  Speaker 2: to mean that to the earnings are going to be
• 15:47
  Speaker 2: more difficult than the prospects offshore, be it the US,
• 15:50
  Speaker 2: be Japan, be it Europe, that they can see better
• 15:53
  Speaker 2: opportunity with global exposure, and say Europe, you don't need
• 15:56
  Speaker 2: to just there are a lot of global companies there
• 16:00
  Speaker 2: and that's emerging markets, which we talked about before as well.
• 16:05
  Speaker 1: When you say that across the portfolios, the exposure to
• 16:08
  Speaker 1: the Australian economy, particularly the AESX has never been so low.
• 16:12
  Speaker 1: Do you think that it'll stay there or is this
• 16:17
  Speaker 1: a trend?
• 16:18
  Speaker 3: I think this is going to continue to be a trend. Yeah,
• 16:22
  Speaker 3: I can't see.
• 16:22
  Speaker 2: I can't see a reason to be increasing your exposure
• 16:25
  Speaker 2: to Australia at the moment at all.
• 16:27
  Speaker 3: Yeah.
• 16:27
  Speaker 1: Yeah, and you think that actually could be permanent.
• 16:31
  Speaker 2: Yes, So I think a strategic allocation in Australia which
• 16:34
  Speaker 2: has been coming down. So what is your benchmark in
• 16:36
  Speaker 2: Australia every year we review that strategic allocation, it goes,
• 16:41
  Speaker 2: it's been coming down every year for the last decade.
• 16:44
  Speaker 2: And then our tactical allocation. So that's against a strategic
• 16:47
  Speaker 2: bench but we're underweight, right.
• 16:49
  Speaker 1: Yeah, yeah, yes, I see, so basically on every front. Okay,
• 16:54
  Speaker 1: that's what thinking about folks. I think it's really interesting.
• 16:57
  Speaker 1: I think anyone who has a serf made of super
• 16:59
  Speaker 1: fund listening to the show would say, well, the chances
• 17:02
  Speaker 1: are you're probably a bit disappointed you didn't do as
• 17:04
  Speaker 1: well as those big super funds because you probably have
• 17:06
  Speaker 1: a home bias and whether you think that, whatever you
• 17:12
  Speaker 1: think of the future, it's interesting to know that in
• 17:14
  Speaker 1: Will's world the exposure to Australian assets has never been
• 17:19
  Speaker 1: so low and he doesn't think it will actually change.
• 17:24
  Speaker 1: Well take short break. Hello, Welcome back to The Australian's
• 17:36
  Speaker 1: Money Positive podcast. I'm James Kirby and I'm talking to
• 17:38
  Speaker 1: Will Hamilton, Well partners, regular on the show and indeed
• 17:41
  Speaker 1: a regular contributor to The Australian. It was the piece
• 17:44
  Speaker 1: actually that Will had in the weekend Australian Just Gone,
• 17:48
  Speaker 1: that has prompted this interview and this show where he
• 17:50
  Speaker 1: talked about this issue of acid allocation now and the
• 17:54
  Speaker 1: risk coming down the line and how to basically be
• 17:57
  Speaker 1: prepared for that. A couple of questions Willing It's stick around,
• 18:00
  Speaker 1: Peter says. On a recent podcast, one of your guests
• 18:03
  Speaker 1: said he owned an investment property in New Zealand where
• 18:06
  Speaker 1: no capital gains tax addlies. I think it's worth clarifying.
• 18:10
  Speaker 1: Under Australian law doesn't matter where you are. As long
• 18:14
  Speaker 1: as you are in Australian resident taxpayer, you are still
• 18:17
  Speaker 1: liable for CGT on any global asset. If you really
• 18:20
  Speaker 1: want to avoid CGT, it may require shifting residents. Thank
• 18:25
  Speaker 1: you very much for that, Peter. All right, none of
• 18:27
  Speaker 1: this is advice, it's information only. Ben. This is very
• 18:31
  Speaker 1: much close to what we're talking about. Will Ben says,
• 18:35
  Speaker 1: I like the idea of keeping cash to fund one
• 18:38
  Speaker 1: year as a buffer against the crash. Now, this will
• 18:41
  Speaker 1: follow the show I did about were people ready for
• 18:45
  Speaker 1: a market crash? And we had that articulation of that
• 18:49
  Speaker 1: notion of buffers people might have for especially if they
• 18:52
  Speaker 1: were retired, that they might have one year liquidity, one
• 18:55
  Speaker 1: year cash, possibly two years depending on who they are.
• 18:58
  Speaker 1: And if they had that, though it would reduce their
• 19:02
  Speaker 1: earnings on an average year, it would allow them never
• 19:05
  Speaker 1: to be caught selling into a down market, which is
• 19:09
  Speaker 1: something you don't want as an investor. Now, Ben says,
• 19:12
  Speaker 1: no one ever talks about Japan. If you did this
• 19:15
  Speaker 1: stuff in nineteen eighties Japan, it wouldn't have worked out
• 19:17
  Speaker 1: well because between nineteen nineteen twenty twenty five, the Japanese
• 19:21
  Speaker 1: market basically went nowhere. I think your guests may have
• 19:27
  Speaker 1: a recency bias. In other words, Ben is saying that
• 19:32
  Speaker 1: there are times where the markets just don't come back,
• 19:34
  Speaker 1: and so maybe that booket scenario is imperfect. What do
• 19:38
  Speaker 1: you think will.
• 19:41
  Speaker 2: Well, One, we've just been talking about asset allocation, and
• 19:44
  Speaker 2: you'd never have all your assets in one bucket so
• 19:46
  Speaker 2: to speak, then, especially the Japanese markets, and you are
• 19:49
  Speaker 2: waiting in Japan's two percent. So I think that we
• 19:55
  Speaker 2: do for certain clients talk about having a crash buffer
• 20:00
  Speaker 2: or keeping some cash, and you've got to remember that
• 20:02
  Speaker 2: as you get cash flow coming in. So let's say
• 20:04
  Speaker 2: you have two years and you've got simple factors dividends
• 20:08
  Speaker 2: and interest rates, etcetera.
• 20:10
  Speaker 3: Get paid.
• 20:10
  Speaker 2: It actually ends up being more than two years. And
• 20:13
  Speaker 2: it is an approach for some people. And as we said,
• 20:15
  Speaker 2: if you've got your asset allocation right, you're never going
• 20:18
  Speaker 2: to protect against downside, but you're hopefully your portfolio, if
• 20:22
  Speaker 2: it's constructed properly amongst them within asset classes, it will
• 20:26
  Speaker 2: bend or won't break. And having a cash buffer if
• 20:28
  Speaker 2: that's the right for you, especially those in retirement phase.
• 20:33
  Speaker 3: It's not a bad.
• 20:33
  Speaker 1: Idea, You're right, okay, Yes, And just we talked about
• 20:37
  Speaker 1: diversification earlier on the show. I was just wondering whether
• 20:40
  Speaker 1: you had any acceptions to that, whether you are actually
• 20:42
  Speaker 1: like a classic you run to the classic idea that
• 20:45
  Speaker 1: you should just be thoroughly and fully diversified, or do
• 20:48
  Speaker 1: you have any clauses or get out closes on that.
• 20:51
  Speaker 1: So whatever thing is something that maybe you don't touch,
• 20:53
  Speaker 1: maybe you don't like bonds, maybe you don't like gold.
• 20:56
  Speaker 2: The crash buffer I think is right for the right people.
• 20:59
  Speaker 2: In fact, to those that are very conservative, this is
• 21:01
  Speaker 2: all it is. You know, they've retired. I think it's
• 21:04
  Speaker 2: a great thing to do. The other thing is never
• 21:07
  Speaker 2: invest in something you don't understand. So it doesn't matter
• 21:10
  Speaker 2: if we recommend it. We want to make sure the
• 21:11
  Speaker 2: client understands what they're investing in. And then and lastly
• 21:16
  Speaker 2: that if there's anything liquid, that they understand that and
• 21:20
  Speaker 2: they can withstand that as well in their portfolio. So
• 21:24
  Speaker 2: there's sort of a few golden rules that should never
• 21:26
  Speaker 2: be broken.
• 21:27
  Speaker 1: Okay, all right, And just to finish on the diversification
• 21:33
  Speaker 1: is ranting people should know about. That is ranting you
• 21:35
  Speaker 1: think is flawed in the notion of being thoroughly and
• 21:38
  Speaker 1: fully diversified.
• 21:40
  Speaker 2: Well, the big thing is, and you know we saw
• 21:42
  Speaker 2: that in twenty twenty two, is the correlation between bonds
• 21:46
  Speaker 2: and equities. And this is the big debate, is the
• 21:50
  Speaker 2: sixty forty portfolio dead being that correlation between bonds and equities.
• 21:54
  Speaker 2: And then twenty twenty two when interest rates went up,
• 21:57
  Speaker 2: the equim out of market fell both when you lost
• 22:00
  Speaker 2: money in both areas at the same time. So you
• 22:03
  Speaker 2: need to also look at and we didn't capture that
• 22:07
  Speaker 2: downside in bonds because we went to zero duration. We
• 22:09
  Speaker 2: just sort of interest rates are going up and duration
• 22:12
  Speaker 2: is you know, the infrastright length in the fixed income market.
• 22:15
  Speaker 2: So we sort of said, right, we need to be
• 22:17
  Speaker 2: one year max or lower in our fixed income exposure.
• 22:21
  Speaker 1: Right, what do you think of them Schwartz's notion that
• 22:23
  Speaker 1: for many Australian investors or listeners to the show, they
• 22:27
  Speaker 1: can start step bonds entirely and use a laddered approach
• 22:31
  Speaker 1: to deposits cash deposits.
• 22:34
  Speaker 3: Well, effectively, that's what we did.
• 22:35
  Speaker 2: As I said, we had a maximum exposure one year
• 22:38
  Speaker 2: and we just we brought bonds in. I think it
• 22:40
  Speaker 2: was in October twenty twenty two. We had to sell
• 22:44
  Speaker 2: about March twenty three. Our scenario didn't play out well enough.
• 22:48
  Speaker 2: Clients made money, but I can tell you the hated
• 22:51
  Speaker 2: the exposure. Quite Australians they like bonds as well. That's
• 22:54
  Speaker 2: the other thing.
• 22:54
  Speaker 1: Yeah, well, you know understandably. So I think for five
• 23:00
  Speaker 1: years solid now, No, have I been unfair?
• 23:02
  Speaker 2: Yeah, you're not being unfair. It's just yeah, we don't,
• 23:05
  Speaker 2: we don't. Yeah, it's not something we really look at you.
• 23:08
  Speaker 1: But I presume they're still in the mix for you,
• 23:10
  Speaker 1: are they?
• 23:10
  Speaker 2: Yeah, but we take that more lowish duration when you
• 23:15
  Speaker 2: can get something a coupon effectively with you know, and
• 23:20
  Speaker 2: it's more at the secure end and you're getting five
• 23:22
  Speaker 2: or six percent versus yeah, what you're exposed to in bonds,
• 23:26
  Speaker 2: we'd prefer to take that coupon, yeah, rather than the risk.
• 23:29
  Speaker 3: Yeah.
• 23:30
  Speaker 1: So if you can get five percent, well you can
• 23:32
  Speaker 1: get five percent right now in cash in deposits.
• 23:36
  Speaker 3: So that's the staked approach to deposits.
• 23:38
  Speaker 1: So he's right, yeah, okay, okay, I think on that
• 23:42
  Speaker 1: positive note, or at least that very useful note for you,
• 23:45
  Speaker 1: the listener. We might wrap today so very interesting. Well.
• 23:49
  Speaker 1: I think your point about being prepared for the next
• 23:52
  Speaker 1: phase of markets, being fully diversified, being aware of liquidity
• 23:56
  Speaker 1: is very important. I like the as you say, the
• 23:59
  Speaker 1: equity you need to look at. Really, folks, we don't
• 24:02
  Speaker 1: know is this nineteen ninety nine, is this nineteen ninety eight.
• 24:05
  Speaker 1: It's one or the other. We are very toase to
• 24:08
  Speaker 1: a peak of a very hot market globally on one theme,
• 24:12
  Speaker 1: which is ai you know the risk is there now?
• 24:15
  Speaker 1: I hope you have found out maybe a little bit
• 24:18
  Speaker 1: more about what to do and how to prepare for
• 24:19
  Speaker 1: what may come next. Thanks very much, Will, great to
• 24:22
  Speaker 1: have you.
• 24:23
  Speaker 3: Thank you, James, thanks for having me.
• 24:25
  Speaker 1: That was Will Hamilton of Hamilton Wealth Partners. Today's show
• 24:28
  Speaker 1: was produced by Leah Sam mcglue. Do keep those questions
• 24:31
  Speaker 1: rolling the Money Puzzle at the Australian dot com dot au.
• 24:36
  Speaker 1: Talk to you soon.