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Inflation is eating your investment returns...what to do? · The Money Puzzle

0:10
Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
0:13
Speaker 1: James Kirby. Welcome aboard everybody. Now as an investor, you
0:16
Speaker 1: will know that inflation has come back with a vengeance
0:19
Speaker 1: really and that's why our interest rates had to be
0:23
Speaker 1: raised last week, which was a surprise too many people.
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Speaker 1: And you know on the show recently Anna Shelley from
0:30
Speaker 1: AMP made the same point that you know they are
0:33
Speaker 1: working on the assumption, these professional investors, that inflation is
0:36
Speaker 1: going to be remain high, consistently persistently high. If you like,
0:40
Speaker 1: as they say about inflation, you can't put the toothpaste
0:43
Speaker 1: back in the tube. So what are investors doing and
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Speaker 1: what are you doing about it? And gold would seem
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Speaker 1: to be what many people are doing right They're rushing
0:52
Speaker 1: into gold. It's the hedge against inflation, the damn good
0:55
Speaker 1: hedge against inflation, it would seem in recent times. But
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Speaker 1: I want to talk to you today about a much
0:59
Speaker 1: why approach and my guest is Chris Brickey of the
1:04
Speaker 1: stock spot Grooky. He has been on the show before
1:07
Speaker 1: and stock Spot, if you don't know, is that it's
1:09
Speaker 1: a robo advisor, basically automatic investing advisor, and when people
1:15
Speaker 1: deal with that group, they largely have a portfolio of ETFs,
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Speaker 1: which Chris is something of a guru on and very
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Speaker 1: useful on that because he's not actually from the ETF
1:24
Speaker 1: industry per se, so he's able to mix and match
1:27
Speaker 1: ETFs and it gives us a very good sort of
1:29
Speaker 1: helicopter view of the world.
1:32
Speaker 2: How are you, Chris?
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Speaker 3: All right? Well, James, thanks for having me back.
1:36
Speaker 1: You're braced now for this, are you? Because we're we
1:39
Speaker 1: have on our topic list here private schools, Japan, gold inflation.
1:44
Speaker 2: Is this going to wander around a bit.
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Speaker 3: Isn't it? It's quite a broad range of topics, quite
1:49
Speaker 3: a broader.
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Speaker 1: Range topics that might worry someone else, But I'm sure
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Speaker 1: you'll be well ve for it.
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Speaker 2: Look, let's done in very quickly to what.
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Speaker 1: I want to deal with here, which is inflation and
1:59
Speaker 1: the investor and what to do.
2:01
Speaker 2: And many investors have.
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Speaker 1: No experience really about dealing with inflation unless they are
2:09
Speaker 1: much older and can remember high inflation periods. And during
2:12
Speaker 1: those periods, gold did serve very well and it is
2:16
Speaker 1: serving very well now. But you have a much broader approach,
2:20
Speaker 1: and your concern is that investors A aren't thinking about
2:24
Speaker 1: it enough. B.
2:25
Speaker 2: When they do think about it.
2:26
Speaker 1: They think for income that they should go for high
2:31
Speaker 1: and com producing higher dividend payers.
2:33
Speaker 2: What's your approach here.
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Speaker 4: There's a bit to umpact there, but maybe kind of
2:39
Speaker 4: looking at the macro first, James, I think inflation hasn't
2:42
Speaker 4: been something investors have really had to concern themselves with
2:45
Speaker 4: too much over the last twenty or so years. You know,
2:48
Speaker 4: inflation has occasionally popped its head above three percent in
2:51
Speaker 4: Australia and they're able to knock it back down pretty quickly,
2:54
Speaker 4: and it's the same around the rest of the world. Now,
2:56
Speaker 4: we had that big inflation spike after COVID in twenty
2:59
Speaker 4: two twenty one twenty two, and inflation really jumped up,
3:02
Speaker 4: but then it came back down in twenty twenty four
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Speaker 4: or so, and I think a lot of people were
3:07
Speaker 4: relieved and hopeful that it would stay down and get
3:10
Speaker 4: back under that three percent level. What we've seen, as
3:13
Speaker 4: you sort of pointed out in the intro, is that
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Speaker 4: you can't get that toothpaste back in the bottle, and
3:18
Speaker 4: inflation expectations are now anchored a bit higher and it's
3:22
Speaker 4: becoming more difficult for central banks and governments to get
3:25
Speaker 4: inflation back down. We're seeing that here in Australia and
3:28
Speaker 4: it was why they had to raise interest rates recently
3:31
Speaker 4: in the US as well. Interest rates you haven't gone
3:34
Speaker 4: down as much as they would have if inflation had
3:36
Speaker 4: come down further. And so I think investors are now
3:39
Speaker 4: starting to reassess inflation as a risk. It's a different
3:42
Speaker 4: type of risk to market volatility risk or other risks
3:45
Speaker 4: that we are a lot more used to. Inflation risk
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Speaker 4: is the risk that you're purchasing power will be eroded
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Speaker 4: more quickly, and you've got to then think about what
3:53
Speaker 4: are the sorts of assets in a portfolio that can
3:57
Speaker 4: protect you against that purchasing power loss. And so I've
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Speaker 4: done a bit of research looking back in history at
4:03
Speaker 4: what assets have historically done better in those environments. And
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Speaker 4: it doesn't mean inflations, you know, it has to be
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Speaker 4: always high. I think it's in environments where inflation is
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Speaker 4: in a secular up trend or in a level more
4:18
Speaker 4: consistently over three percent. And what history shows is in
4:22
Speaker 4: those environments, bonds, which are typically the diversifier a lot
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Speaker 4: of investors have in their portfolios, don't do very well.
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Speaker 4: As a diversifier. So when markets become volatile, it's often
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Speaker 4: because inflation is pepped up, and that's when bonds are
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Speaker 4: selling off as well. And so a traditional sixty percent
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Speaker 4: shares and forty percent bond portfolio just doesn't provide that
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Speaker 4: level of downside protection.
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Speaker 3: And when markets.
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Speaker 4: Fall like we saw in twenty twenty two, bonds tend
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Speaker 4: to fall as well, and so you don't actually see
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Speaker 4: that cushion. And so in those sorts of environments, interestingly,
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Speaker 4: we haven't truly seen one since the nineteen seventy.
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Speaker 1: So CHRISTI also can I just say for the people
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Speaker 1: who may not have bonds, though obviously if you've got
5:03
Speaker 1: big super folks don't worry about that they've got bonds,
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Speaker 1: but independent investor you may not have, it's just as
5:10
Speaker 1: applicable to cash. I imagine that that argument is it.
5:14
Speaker 3: A little bit less. So with cash.
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Speaker 4: The benefit of bonds is when share markets fall, it's
5:18
Speaker 4: typically because the economy's you know, turning down or things
5:22
Speaker 4: are getting tougher, and then central banks cut interest rates.
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Speaker 4: Now bonds tend to go up when interest rates are
5:28
Speaker 4: going down, and so bonds not only you know, protect
5:31
Speaker 4: you from the market volatility like cash would, but they
5:34
Speaker 4: actually give you it extra return. So cash will obviously
5:37
Speaker 4: stay stable when markets fall, but bonds give you a
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Speaker 4: bit of an extra kicker historically.
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Speaker 1: Just to simplify it for a moment, with this inflation, folks,
5:47
Speaker 1: with it's three percent or creeping up towards four percent,
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Speaker 1: and you must. But when Chris is talking about historical periods,
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Speaker 1: he's talking about periods for it was seven, eight, nine, ten,
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Speaker 1: eleven percent, and that's entirely feasible at any given time
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Speaker 1: in history, and in the future, we don't know what
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Speaker 1: will happen, but it would not be unprecedented. But in
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Speaker 1: those environments, Chris, the issue is that cash is hopeless,
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Speaker 1: right if there's inflation, Like if you're getting three or
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Speaker 1: four percent on your cash and inflation is four percent,
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Speaker 1: guess what, You're actually not making any money. You're actually
6:15
Speaker 1: going backwards. So we must seek better returns. Is that
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Speaker 1: what you're saying, you must get higher returns with this
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Speaker 1: higher inflation.
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Speaker 4: Well, that's right, and I think listeners also have to
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Speaker 4: be aware that inflation is a rate of change year
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Speaker 4: on year, and so it is typical in periods where
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Speaker 4: inflation is structurally higher that it spikes up and then
6:32
Speaker 4: falls back like we saw in twenty twenty one to
6:35
Speaker 4: twenty twenty four, because it's looking over a one year
6:38
Speaker 4: rate of change. But if you think about your grocery
6:41
Speaker 4: prices now or electricity prices now, they're much higher than
6:43
Speaker 4: they wear in twenty nineteen, and that's because many years
6:47
Speaker 4: of compounding inflation at higher rates leads to a higher
6:49
Speaker 4: price level. I think people often get tricked into thinking, okay,
6:53
Speaker 4: inflations come down, therefore prices have come down. It doesn't
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Speaker 4: actually mean prices have come down, It just means they've
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Speaker 4: leveled off on year.
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Speaker 1: And historically, then what did people do successful investors do
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Speaker 1: when there was high inflation?
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Speaker 2: And are those rules applicable now?
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Speaker 4: So historically in those periods, James, there's a few asset
7:14
Speaker 4: classes that have tend to do much better than shares
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Speaker 4: or bonds or cash for that matter, and those have
7:21
Speaker 4: been commodities, you know, particularly gold, but commodities in general,
7:25
Speaker 4: including oil as well, tends to do better when inflation's higher.
7:29
Speaker 4: Resources shares so companies like BHP and RIO and Woodside
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Speaker 4: inflation link bonds is the other one. And infrastructure because
7:37
Speaker 4: typically within the infrastructure contracts, they have the ability to
7:40
Speaker 4: increase prices by inflation, like you'd see with your toll
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Speaker 4: roads every year, and so a portfolio that contains those
7:48
Speaker 4: sorts of assets historically would have done better in periods
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Speaker 4: when inflation's higher. And you mentioned our inflation portfolio. They're
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Speaker 4: the assets that portfolio is geared towards. They're typically known
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Speaker 4: as real assets or hard assets, and those are the
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Speaker 4: assets that tend to hold their value, and we're starting
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Speaker 4: to see that at the moment.
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Speaker 1: So I would have thought, I'm sure many investors think, okay, well,
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Speaker 1: I for income, am I going to need more income?
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Speaker 1: Am I going to need better dividends? And they're going
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Speaker 1: to have to be higher? And I need companies and
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Speaker 1: shares if they have a if their dividends are growing
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Speaker 1: faster than inflation, then I'm okay, But do you challenge
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Speaker 1: that theory to some degree?
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Speaker 4: Look, I think dividends can be useful, and definitely Australian
8:33
Speaker 4: investors love their dividends. But I think the point that
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Speaker 4: investors need to remember is that income and capital growth
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Speaker 4: are really just two sides of the same coin, and
8:42
Speaker 4: at any point, both you as an investor and companies
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Speaker 4: can turn one into another. They're interchangeable, so's magic. It's
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Speaker 4: just your own money coming back to you, and you
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Speaker 4: can essentially replicate that by selling part of your portfolio
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Speaker 4: each year. So if you imagine you had a portfolio
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Speaker 4: with no dividends that was growing ten percent a year,
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Speaker 4: you could easily sell five percent to generate those dividends.
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Speaker 4: I think in Australia there's a bit of an obsession
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Speaker 4: with dividends and it leads to sometimes people taking too
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Speaker 4: much risk because they concentrate their portfolio in companies that
9:13
Speaker 4: have higher paybacks, and then they may be actually missing
9:17
Speaker 4: out on assets like let's say gold that doesn't pay
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Speaker 4: a dividend, but even technology shares in the US is
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Speaker 4: a great example. These are businesses that have been reinvesting
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Speaker 4: into R and D rather than paying dividends, and they've done,
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Speaker 4: you know, fantastically as well.
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Speaker 1: Yes, so you apart like gold, for instance, I think
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Speaker 1: you can go way back decades and it's nine percent
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Speaker 1: a year, so you could say, all right, it doesn't
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Speaker 1: pay income, but actually it raises nine percent a year,
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Speaker 1: and if it rises nine percent a year, you can
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Speaker 1: sell off. Is that what you mean at the end
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Speaker 1: of every year you can take your you can make
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Speaker 1: your own dividend out of it.
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Speaker 2: Is that your point?
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Speaker 3: Yeah, that's right.
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Speaker 4: So even forgetting the fact that gold's tripled over the
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Speaker 4: last couple of years, and so it's returns are really increased.
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Speaker 4: If you look back thirty years up until twenty twenty three,
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Speaker 4: it had generated returns in US dollar terms of eight
9:58
Speaker 4: percent perannum. And so yeah, you can take out your
10:01
Speaker 4: four percent of gold, but take it out from a
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Speaker 4: capital perspective, I mean, one of the benefits of actually
10:06
Speaker 4: generating less income is that you end up paying less tax.
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Speaker 4: You only pay tax when you sell the capital.
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Speaker 3: Component of your portfolio.
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Speaker 4: So I know a lot of retiree listeners wouldn't mind
10:16
Speaker 4: as much if they're in a tax free environment, but
10:19
Speaker 4: certainly for younger investors if they're in their working years. Actually,
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Speaker 4: you want less dividends because you don't want to be
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Speaker 4: paying tax every year. You want those returns to be compounding.
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Speaker 1: Okay, and just tell us briefly, Topaz t your pa
10:32
Speaker 1: z you're what is that? It's a kind of a
10:35
Speaker 1: tiery you have or an approach.
10:38
Speaker 4: Also, Topaz is the name of our high risk, high
10:41
Speaker 4: growth portfolios. And we have a few different tilts to
10:44
Speaker 4: this portfolio. The one we've been talking about is the
10:46
Speaker 4: inflation version of it, which is more geared towards hard assets.
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Speaker 2: So tell us what's in that, Chris.
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Speaker 4: So in that portfolio, it has a bunch of different ETFs,
10:56
Speaker 4: so we only use ETFs in our portfolio, and it
10:59
Speaker 4: has eight different e It has Australian resource shares, it
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Speaker 4: has global gold miners, it has emerging market shares, it
11:07
Speaker 4: has physical silver, It has a commodity futures ETF, so
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Speaker 4: it invests in a whole bunch of different commodities, and
11:15
Speaker 4: it has global infrastructure, so they're the growth assets. And
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Speaker 4: on the defensive side, it has inflation protected bonds, so
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Speaker 4: these are bonds that we also protect you against inflation, which.
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Speaker 1: Is exactly what you mentioned at the start of the show.
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Speaker 1: The only bit I can't well say I can't reconcile it,
11:30
Speaker 1: but the listener might say, better's emerging markets fit in there.
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Speaker 4: So emerging markets is an interesting asset class. You know,
11:38
Speaker 4: they've done actually quite poorly compared to US shares over
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Speaker 4: the last decade, and that's because inflation has been relatively low.
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Speaker 4: But in emerging markets tend to have more exposure to commodities,
11:50
Speaker 4: and they tend historically to do better when inflation is
11:53
Speaker 4: higher and also when the US dollar is weaker, which is.
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Speaker 1: I see, what do they do better? I can see
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Speaker 1: the dollar, but why do they do better when inflation
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Speaker 1: is higher?
12:03
Speaker 3: I mean, there's a few different reasons.
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Speaker 4: Part of it is also that a lot of their
12:07
Speaker 4: debt is denominated in US dollars, so when there's higher inflation,
12:10
Speaker 4: they're inflating their way out of their debt burden. So yeah,
12:14
Speaker 4: there's a few reasons why there's quite a positive correlation
12:17
Speaker 4: between emerging markets and if you think of economies like
12:20
Speaker 4: China and India, but also some of the big oil
12:22
Speaker 4: countries and commodity countries like Brazil or Saudi Arabia, they
12:27
Speaker 4: they tend to do well when inflation is higher.
12:30
Speaker 3: Compared to developed markets like the US.
12:33
Speaker 2: Okay, well, take a short break.
12:34
Speaker 1: I want to talk to Chris about gold, and again
12:38
Speaker 1: he has some very distinct views about gold and something
12:41
Speaker 1: that you should be aware of if you don't have
12:45
Speaker 1: any Hello, Welcome back to the Australian's Money Puzzle podcast.
12:57
Speaker 1: James Kobe here with Chris Brickey of the Stocks Art Group.
13:01
Speaker 2: Chris.
13:01
Speaker 1: We were talking about inflation and I really like the
13:04
Speaker 1: way you've broadened it out, folks. And he talked about
13:08
Speaker 1: infrastructure for instance, and again that that's a well worn theory. Obviously,
13:13
Speaker 1: the infrastructure. The attraction obviously is that they are their
13:17
Speaker 1: prices are linked with inflation. We have less infrastructure stocks
13:20
Speaker 1: than we used to, but there are other ways into it.
13:22
Speaker 1: You also talked about emerging markets, You talked about gold,
13:26
Speaker 1: You talked about commodities and commodity and miners, interestingly, the
13:30
Speaker 1: actual miners, not just the commodities, which again takes us
13:33
Speaker 1: back to REO and PHP and many other miners when
13:36
Speaker 1: we've had some shows talking about miners of late and
13:40
Speaker 1: gold mining in particular. And you talked about inflation link bonds,
13:43
Speaker 1: so very interesting. I like that part of the portfolio.
13:46
Speaker 1: Let's take a quick look at gold. You said to
13:49
Speaker 1: me recently something very interesting. You said that you think
13:55
Speaker 1: for most Australian investors, if they're in a big fund
13:58
Speaker 1: as opposed to a self managed superfund, chances are that
14:00
Speaker 1: fund manager has missed the whole gold rally and doesn't
14:04
Speaker 1: have gold. And then I can't remember what your right,
14:06
Speaker 1: So when I said to you, and you prove it,
14:09
Speaker 1: what did you say.
14:11
Speaker 4: Prove that they don't have gold? I mean, I think
14:12
Speaker 4: some of them have openly said they don't own gold.
14:14
Speaker 2: So, by the way, I'm not doubting you. I'm just
14:16
Speaker 2: trying to recall.
14:17
Speaker 1: I'm trying to recall for how you come to that conclusion. Okay,
14:21
Speaker 1: so some of them have said we don't. I think
14:23
Speaker 1: it was that John Pierce said he didn't even like
14:25
Speaker 1: it as a we wouldn't have it.
14:27
Speaker 2: Is that right?
14:27
Speaker 3: Yeah, that's right.
14:28
Speaker 4: In twenty twenty so gold was trading about a third
14:31
Speaker 4: the price it is today. He came out and said
14:33
Speaker 4: that he doesn't believe in it as an asset class
14:36
Speaker 4: because it doesn't generate any income, which takes.
14:38
Speaker 3: Us back to our last conversation.
14:40
Speaker 2: That was unisuper, that was uni super so.
14:42
Speaker 3: The CIO yes.
14:44
Speaker 1: And that might be typical. Perhaps they didn't like it.
14:47
Speaker 1: They told us the old thing, the barbarous relic. They
14:50
Speaker 1: couldn't judge it. It didn't have income. Do you think that's
14:53
Speaker 1: still the case that a lot of the big funds
14:54
Speaker 1: don't have gold.
14:56
Speaker 4: Well, I mean, more than anything, I think it's two things, James.
14:59
Speaker 4: One is return chasing. You know, big funds and a
15:01
Speaker 4: lot of asset allocators tend to chase returns, and gold
15:04
Speaker 4: had a bad decade, and so they really saw no
15:07
Speaker 4: need to be in the asset class and they didn't kind.
15:09
Speaker 3: Of look forward.
15:10
Speaker 4: I think as well, there's a bit of a conflict
15:12
Speaker 4: within the big super funds in that a lot of
15:15
Speaker 4: them that rely on the advice of asset consultants, and
15:18
Speaker 4: asset consultants tend to hate gold. You know, all of
15:20
Speaker 4: the ones I've been involved in or seen really have
15:23
Speaker 4: recommended not having an allocation to gold. Part of that,
15:26
Speaker 4: I believe is because they're really paid to analyze funds
15:31
Speaker 4: within an asset class. That's that's one of the primary
15:33
Speaker 4: roles of an asset allocator and an asset consultant, and
15:37
Speaker 4: if there's no funds to allocate and they're simply saying
15:40
Speaker 4: plank ten or fifteen percent into gold, then it really
15:43
Speaker 4: negates their role as.
15:45
Speaker 3: An asset consultant.
15:46
Speaker 4: So I think there's a conflict in the industry that
15:48
Speaker 4: leads to assets like gold that are ultimately very liquid
15:51
Speaker 4: and low cost from getting ignored as well.
15:53
Speaker 1: There's certainly liquid yes, yeah, and tell me I ask
15:56
Speaker 1: everyone on the shore this this is very much the
15:58
Speaker 1: issue de jure gold.
16:00
Speaker 2: Did you have it? How much did you have?
16:02
Speaker 1: What do you think for the independent investor listening to
16:06
Speaker 1: this show? Is there a portfolio allocation of gold that
16:10
Speaker 1: you think is required or sensible?
16:14
Speaker 2: Yes?
16:14
Speaker 3: There is.
16:14
Speaker 4: So since we've existed the last twelve years, we've always
16:18
Speaker 4: had between a ten and fifteen percent allocation. So at
16:21
Speaker 4: it's lowest point at ten percent for.
16:23
Speaker 2: Ten years ago, that was high, wasn't it?
16:26
Speaker 3: Well?
16:26
Speaker 4: It was, but I mean over ten years it's tripled
16:28
Speaker 4: and it's done better than any other asset class. And
16:30
Speaker 4: so the way we got to that range, James, is
16:34
Speaker 4: in the analysis I did in terms of looking at
16:37
Speaker 4: gold's ability to diversify and reduce risk in a portfolio.
16:41
Speaker 4: It was clear that in some environments it doesn't add
16:44
Speaker 4: a lot of value, particularly when inflation is low. Bonds
16:47
Speaker 4: and chairs tend to do fine. But actually it's a
16:50
Speaker 4: fantastic insurance policy for periods when those asset classes don't
16:53
Speaker 4: do well. So it's part of your portfolio that there
16:56
Speaker 4: will be long stretches maybe even decades, or it doesn't
16:59
Speaker 4: do well. Nineteen seventies was a wonderful example. Over ten
17:02
Speaker 4: years that went up by twentyfold, and over those ten
17:05
Speaker 4: years shares and bonds added no returns from a real sense, and.
17:10
Speaker 2: Then it fell nearly fifty percent.
17:12
Speaker 4: Chris, Absolutely, then it fell more than fifty percent, like
17:15
Speaker 4: eighty percent I think in real terms.
17:17
Speaker 2: So people need to be alert to that outter it's and.
17:21
Speaker 4: I think that goes to James White. Shouldn't be eighty
17:24
Speaker 4: percent of your faulty or fifty percent because it is
17:26
Speaker 4: going to go through long periods of you know, high
17:29
Speaker 4: growth and then you know, really you know, as markets changed,
17:32
Speaker 4: it's going to fall as well. But I think it
17:35
Speaker 4: is quite risky not having an allocation at all, because
17:39
Speaker 4: it means that if you're only exposed to assets like
17:42
Speaker 4: shares and bonds and cash, you could go through a
17:44
Speaker 4: decade of no returns.
17:46
Speaker 1: Do you include gold miners within that.
17:50
Speaker 2: Percentage?
17:50
Speaker 4: Gold miners are interesting because they obviously the gold price
17:53
Speaker 4: is a big driver of when you.
17:55
Speaker 1: Were talking about the percent of ten to fifteen percent,
17:58
Speaker 1: Would gold miners fit in the ten to fifteen or
18:00
Speaker 1: is it bullion?
18:01
Speaker 3: No, not at all.
18:02
Speaker 4: So this is bullion held within an eighty billion that's
18:05
Speaker 4: stored in a volt gold mine is are different. They
18:08
Speaker 4: have some you know, they often move in the same
18:11
Speaker 4: direction as gold, but margins and the oil price and
18:13
Speaker 4: other factors drive them, so it's less clean.
18:16
Speaker 1: Yeah, and one more thing on gold, again a recurrent question.
18:20
Speaker 2: I've yet to get it answer. I'm happy with on gold.
18:25
Speaker 1: If the theory is and it's not just the theory,
18:26
Speaker 1: it's been the case for decades, for generations.
18:29
Speaker 2: If gold is a non correlated assets which we.
18:32
Speaker 1: Can depend on to go up when things when the
18:34
Speaker 1: rest sort of goes down, and if it's been rising
18:38
Speaker 1: and it's been accelerating, the rise has accelerated in recent years,
18:42
Speaker 1: but there's nothing wrong with the markets. Is there a
18:45
Speaker 1: danger that it has become correlated to the markets, And
18:48
Speaker 1: then is there a danger that if the markets fall,
18:50
Speaker 1: it would not do with traditional job of giving us
18:53
Speaker 1: something that goes up when everything else goes down.
18:55
Speaker 3: I think that's a great question.
18:57
Speaker 4: And yeah, one that I'm always focused on is looking
19:00
Speaker 4: at the correlations between the different assets in our portfolios.
19:03
Speaker 4: And yeah, like you say, one of the benefits gold
19:05
Speaker 4: had was not that it had zero correlation. It usually
19:09
Speaker 4: has a negative correlation with Australian shares, However, what's important
19:13
Speaker 4: to recognize is correlations are always changing because the market
19:16
Speaker 4: dynamics always changing, and so something we noticed towards the
19:20
Speaker 4: end of last year is exactly what you've mentioned, that
19:23
Speaker 4: the correlation between gold and equities actually turned positive, and likewise,
19:28
Speaker 4: bonds and shares correlation has been positive. And this is
19:31
Speaker 4: a bit of a concern because if all risk assets
19:34
Speaker 4: are moving in the same direction at the same time,
19:36
Speaker 4: including gold, then absolutely they could be a period where
19:39
Speaker 4: they all sell off together and maybe US dollars is
19:42
Speaker 4: where you want to be for that reason. Actually, James,
19:45
Speaker 4: at the end of last year, we reduced our allocation
19:47
Speaker 4: in gold from fifteen percent to about twelve and a
19:50
Speaker 4: half percent because we are seeing at the moment it's
19:54
Speaker 4: having less of a diversification benefit. It doesn't mean it
19:57
Speaker 4: won't go up, but it certainly means it could have
19:59
Speaker 4: some show pullbacks like it had in the nineteen seventies.
20:02
Speaker 2: Okay, well, thank you. That's the best answer so far, Chris.
20:05
Speaker 2: Let's put that way, all right, Okay, we'll be back
20:09
Speaker 2: in a moment.
20:09
Speaker 1: We have some questions and one or two quick issues
20:12
Speaker 1: I want to talk to Chris about. Talk to them. Hello,
20:20
Speaker 1: Welcome back to the Australian's Money Puzzle podcast James Kirby
20:23
Speaker 1: with Chris Bricky, CEO of the Stockspot Group, the digital
20:27
Speaker 1: robo advisory group, which basically heavily deals in ETF set is.
20:32
Speaker 1: It sets portfolios and creates them for people out of ETFs. Chris,
20:36
Speaker 1: a couple of quick ones Japan. I mean, not everyone's
20:39
Speaker 1: gone out to start buying Japan. But you can buy
20:41
Speaker 1: Japan and just go into an ETF and buy Japan.
20:44
Speaker 1: You can buy Japanese years if you want to get
20:45
Speaker 1: more advanced about it.
20:46
Speaker 2: But you're pretty you've put out a couple of.
20:48
Speaker 1: Notes that suggest Japan as a single market ETF could
20:53
Speaker 1: really pop this year.
20:54
Speaker 2: Why is that, Well, that's right.
20:56
Speaker 4: Every year I put out a few non consensus ideas,
20:59
Speaker 4: just areas where I don't think everyone's focus that might
21:01
Speaker 4: turn out to work out. Maybe not Japan. I think
21:03
Speaker 4: this year is an interesting one.
21:05
Speaker 3: You know.
21:05
Speaker 4: It's share market obviously had a had its big run
21:08
Speaker 4: in the nineteen eighties and which ended in the early nineties,
21:11
Speaker 4: went nowhere for decades. You know, recently it's popped through
21:14
Speaker 4: its high of nineteen eighty nine and is starting to
21:18
Speaker 4: power up again. I think partly because of corporate reform
21:20
Speaker 4: and governance changes in that country, as well as the
21:24
Speaker 4: currency dynamics and debt dynamics. So they have a huge
21:27
Speaker 4: amount of government debt and it's really depreciating the end,
21:30
Speaker 4: which is making them more competitive. So I think there
21:33
Speaker 4: are some real structural forces supporting Japan at the moment.
21:37
Speaker 4: You know, Buffett, you might remember a few years ago,
21:39
Speaker 4: started to invest heavily into Japan, so he he saw this, Yeah,
21:44
Speaker 4: he saw this trend coming a long way out. But
21:47
Speaker 4: I think it's an interesting country because of some of
21:49
Speaker 4: these dynamics. You know, the balance sheets are strong of
21:51
Speaker 4: these companies, they're increasing their buyer backs and it's an
21:55
Speaker 4: under owned country still. So you know, we look at
21:58
Speaker 4: we give our clients the ability to airbowl tom some
22:01
Speaker 4: thematic ETFs onto their portfolios, including some single country ETFs.
22:05
Speaker 4: Japan is the least popular of all of them, which
22:08
Speaker 4: surprised me when I looked at the data recently. But
22:11
Speaker 4: that's why I think it's still a bit of a
22:12
Speaker 4: contrarian call, because most retail investors aren't investing into Japan now.
22:17
Speaker 4: They just had an election about a week ago and
22:20
Speaker 4: the incoming leader is seen as someone who will be
22:23
Speaker 4: positive for markets and be you know, someone that continues
22:27
Speaker 4: to spend. And so, you know, I think it's definitely
22:29
Speaker 4: a market to look at. You know, it could be
22:31
Speaker 4: one that has a bit of a blowoff top this year.
22:33
Speaker 4: It could run up very quickly and fall just as quickly,
22:36
Speaker 4: but certainly one to keep an eye on.
22:38
Speaker 1: Okay, very briefly, you did a piece for The Australian
22:42
Speaker 1: recently about private schools versus investing. It's hard to deal
22:46
Speaker 1: with this quickly, but what was your core theory there?
22:50
Speaker 1: What was your core what was your core contention there?
22:52
Speaker 1: In relation to private schools and their endlessly inflation proof fees.
22:58
Speaker 1: By that, I mean they seem to ignore inflation and
23:01
Speaker 1: just basically pop the fees up much higher than infliction.
23:03
Speaker 2: What was your care contention? I never did very well well.
23:06
Speaker 4: I think if you could invest in an ETF that
23:08
Speaker 4: gave you access to private school fees, that might be
23:10
Speaker 4: a good inflation head. I don't know how we can
23:12
Speaker 4: invest into private schools, but they definitely seem inflation proof.
23:15
Speaker 4: I think this year we saw that fees went up
23:17
Speaker 4: by six point seven percent and it inspired me just
23:20
Speaker 4: to write an article, you know, not necessarily saying any choices, right,
23:24
Speaker 4: I think every choice you know can make sense for
23:26
Speaker 4: you know, a certain family, a certain kid. But really
23:29
Speaker 4: just making parents a bit more conscious of the decision
23:32
Speaker 4: they're making around private schools. I think a few things.
23:36
Speaker 4: Parents often underestimate the impact of compounding. So if that
23:39
Speaker 4: money was put somewhere else, how much would it be
23:42
Speaker 4: in the end. And I worked out that for a typical,
23:45
Speaker 4: you know, top tier private school, if you put those
23:47
Speaker 4: save the same fees into a investing account from grade
23:51
Speaker 4: six to grade twelve, you'd have about four hundred thousand dollars.
23:54
Speaker 4: And so it's just a question I think parents should
23:57
Speaker 4: be asking, is it more worthwhile the education? In a
24:00
Speaker 4: lot of cases, I think parents say yes absolutely, or
24:03
Speaker 4: could that four hundred thousand go towards a house deposit?
24:05
Speaker 4: And potentially for some people that may make more sense,
24:09
Speaker 4: you know, I think for some families there's social pressure
24:12
Speaker 4: that drives this decision. So I really just wrote it
24:14
Speaker 4: to make people a bit more conscious of the opportunity.
24:17
Speaker 2: Cost very good.
24:18
Speaker 1: I suppose the ultimate price there is if you spend
24:22
Speaker 1: the money on the private schools, you probably may not
24:25
Speaker 1: have the money to give them a deposit for their house.
24:28
Speaker 1: So the pressure becomes towards the next generation to be
24:31
Speaker 1: able to do it and maybe give you don't put
24:34
Speaker 1: them on private schools and you are building well at
24:37
Speaker 1: the same time, then they may get a house early
24:42
Speaker 1: earlier because you'll help them. But did they optimize the
24:47
Speaker 1: potential skills and education or networks that they may have
24:50
Speaker 1: built a private school. Boy, That's an entry. You could
24:52
Speaker 1: write a book about that. Chris, Okay, I have a
24:54
Speaker 1: question I have kept for you from Nathan. He says,
24:57
Speaker 1: listen to your last episode about super I've been in
25:01
Speaker 1: the bullmarket for a few years now. Would this be
25:04
Speaker 1: any reason to hold off switching from conservative to high
25:08
Speaker 1: growth super options? For example, if there was theoretically a
25:11
Speaker 1: downturn in the next year, there would it be any
25:14
Speaker 1: positive to holding off switching. I'm twenty three, so presuming
25:19
Speaker 1: that any downturn that would drive growth stocks lower would
25:22
Speaker 1: be followed in my lifetime by an upturn that would
25:24
Speaker 1: effectively cancel out any losses. Also, I'm aware I'm being
25:30
Speaker 1: way too cautious as a twenty three year old.
25:32
Speaker 2: Ha.
25:33
Speaker 1: Thanks James, Okay, that's Nathan. So he's saying, why on
25:37
Speaker 1: earth he'd being conservative at twenty three?
25:39
Speaker 2: I just don't know.
25:40
Speaker 1: But on the broader issue, for anyone like Nathan or
25:43
Speaker 1: anyone as who's looking at the markets now and making
25:47
Speaker 1: guesses as how to how it will operate, and then
25:51
Speaker 1: concluding from those guesses how they should fix their choices
25:57
Speaker 1: in super conservative balanced growth, you have to say about that.
26:02
Speaker 4: I mean, it's great that Nathan's so engaged in here Super.
26:04
Speaker 4: I think he raises a couple of really interesting areas
26:07
Speaker 4: to talk about. One is that, you know, changing from
26:10
Speaker 4: a one investment mix like high growth to conservative, I mean,
26:13
Speaker 4: super is actually a market timing kind of call.
26:16
Speaker 3: Obviously.
26:17
Speaker 4: Here he's decided that he wants to time the market
26:20
Speaker 4: and hope that he can buy lower. The big challenge
26:22
Speaker 4: with timing markets is that it's very difficult to get
26:25
Speaker 4: it right because you have to make two decisions right.
26:27
Speaker 4: You need to work out when to sell and when
26:29
Speaker 4: to buy back again. Sometimes easy to get one right, it's.
26:31
Speaker 3: Very difficult to get ors right and to work out
26:34
Speaker 3: where the bottom is.
26:35
Speaker 4: Ask Nathan, at what point you know, will you decide
26:39
Speaker 4: that maybe your decision to move to conservative wasn't right
26:42
Speaker 4: and move back to high growth because sometimes markets never
26:45
Speaker 4: go back down to the point that you sold them,
26:47
Speaker 4: and you could be in the same conservative mix for
26:50
Speaker 4: forty years if you don't switch back. So for our clients,
26:54
Speaker 4: we recommend up until the age of fifty two a
26:57
Speaker 4: high growth mix, you know, simply because is that you
27:00
Speaker 4: do have that time to recover from market downturns. You've
27:03
Speaker 4: got those SG contributions coming in allowing you to dollar
27:06
Speaker 4: cost average in over time, and market timing is so
27:10
Speaker 4: difficult to do consistently over time. So you know, we
27:14
Speaker 4: we certainly wouldn't recommend our clients switch to conservative options
27:19
Speaker 4: to time the market because the chances are you won't
27:22
Speaker 4: time it correctly and it's just adding extra risk and
27:25
Speaker 4: extra hassle for something that should be a passive, long
27:28
Speaker 4: term investment.
27:29
Speaker 1: Strategic rather than tactical. Okay, last question. Anna Shelley was
27:34
Speaker 1: on the show last week, chief investment officer of AMP,
27:37
Speaker 1: really interesting making the point that the old sixty forty idea,
27:41
Speaker 1: the idea that you have your age, you know that
27:43
Speaker 1: your age determines how much growth stocks you have, And
27:48
Speaker 1: she challenged that and she basically said, you know that
27:51
Speaker 1: people should have much higher growth portfolios, higher portion of
27:57
Speaker 1: their portfolios in growth in super for much longer than
28:01
Speaker 1: they ever had before, because we're all living longer and
28:04
Speaker 1: we will needed for longer.
28:05
Speaker 2: And super What do you think of that?
28:08
Speaker 1: And have you have your own has your own work
28:12
Speaker 1: reflected that or the way you advise people.
28:16
Speaker 4: It's something we've had to think about a lot recently
28:18
Speaker 4: because we launched a super product chain, so in designing
28:21
Speaker 4: that product, we've really had to do the analysis to
28:23
Speaker 4: understand this quite well. Our view is that really up
28:27
Speaker 4: until the age, as I mentioned before, a fifty two
28:29
Speaker 4: at least high growth makes sense, you know, and this
28:32
Speaker 4: is based on a typical retirement age in your mid sixties.
28:36
Speaker 3: Then typically we.
28:37
Speaker 4: Would migrate someone gradually from a high growth mix to
28:41
Speaker 4: a forty sixty so forty percent growth asset sixty percent
28:45
Speaker 4: defensive asset mix by the time they reach retirement. This
28:49
Speaker 4: is where it gets interesting. I think a lot of
28:51
Speaker 4: people then would potentially leave it as conservative or even
28:54
Speaker 4: go more conservative over time. The research that we've read,
28:58
Speaker 4: and the best research I've come across, really suggests that
29:01
Speaker 4: from a sequencing risk perspective, sequencing risk is about the
29:05
Speaker 4: risk of the timing of market falls. Your biggest risk
29:08
Speaker 4: comes in the ten years after you retire, because the
29:12
Speaker 4: impact of market falls has the biggest impact on your
29:14
Speaker 4: overall outcome. So the theory goes is you should actually
29:18
Speaker 4: stay conservative for the first ten years after retirement, but
29:21
Speaker 4: then after that it actually makes sense to dial up
29:24
Speaker 4: the risk again.
29:25
Speaker 1: Which is a which psychologically I a mug as exceptionally difficult.
29:29
Speaker 4: Of course, for most people this isn't something they're likely
29:32
Speaker 4: to do, but the theory goes, that's going to give
29:34
Speaker 4: you the best chance of extending that money as long
29:37
Speaker 4: as possible. See not even do it, Chris No, I think,
29:41
Speaker 4: like you say, it's psychologically so difficult, you know. I think,
29:44
Speaker 4: you know, my parents have a very long term time horizon.
29:48
Speaker 4: So for their self managed super fun I think even
29:51
Speaker 4: though they're now in their sixties and seventies, they don't
29:54
Speaker 4: think a conservative mix makes sense, and so they're in
29:56
Speaker 4: a higher growth mix. But I think particularly for people
29:59
Speaker 4: who who haven't lived through market cycles or who don't
30:02
Speaker 4: have that experience, I think it's difficult, you know, to
30:05
Speaker 4: weather a you know, twenty percent fall in your portfolio
30:08
Speaker 4: if you're relying on drawing down five or six percent
30:10
Speaker 4: every year.
30:11
Speaker 1: And I did put forward the idea of the bucket strategy,
30:14
Speaker 1: you know, where people put a certain amount of cash site,
30:16
Speaker 1: say for a year or two years, so they can
30:17
Speaker 1: write out any storms.
30:19
Speaker 2: Yeah.
30:19
Speaker 4: I think that's a way to get around it psychologically,
30:21
Speaker 4: is to take out a couple of years of cash
30:23
Speaker 4: and then go into a you know, a less conservative
30:26
Speaker 4: mix so you don't feel like you've got that time
30:28
Speaker 4: pressure of taking out money. But I think really you
30:31
Speaker 4: don't even need to do that if you consider that
30:34
Speaker 4: markets are going to go up and down, and each
30:36
Speaker 4: year are only taking out four or five or six percent.
30:39
Speaker 4: It doesn't matter if the market's down twenty percent because
30:41
Speaker 4: you're only taking out five percent and next.
30:43
Speaker 3: Year it will be up.
30:44
Speaker 4: And so actually the fact that you're only drawing down
30:47
Speaker 4: a small percentage every year negates the concern around markets.
30:51
Speaker 2: Anyway, Easier said than done, I would think. Terrific. Kay,
30:56
Speaker 2: Thank you very much, Chris RICKI, great to have you
30:58
Speaker 2: on the show again. We'll talk again.
31:00
Speaker 3: Thanks James.
31:02
Speaker 2: That was Chris Brickey of the stock Spot Group.
31:04
Speaker 1: Great to talk to him. As always, do keep the
31:07
Speaker 1: correspondence up. Thank you for that. Nathan. I have many
31:10
Speaker 1: other questions for different guess that was one that was
31:12
Speaker 1: suitable for Chris.
31:13
Speaker 2: I have a lot of questions that.
31:14
Speaker 1: Will be aimed at a financial advisor. We'll get to
31:17
Speaker 1: them next week on Tuesday with James Gerard. We'ld definitely
31:20
Speaker 1: get through a few of those. Keep them rolling the
31:22
Speaker 1: money puzzle at the Australian dot com dot Au