Latest / Merryn Talks Money / The Portfolio Reset: Episode 3

Transcript

The Portfolio Reset: Episode 3 · Merryn Talks Money

• 0:02
  Speaker 1: Bloomberg Audio Studios. Podcasts.
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  Speaker 2: Radio.
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  Speaker 3: News.
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  Speaker 1: We already seen the peak of US exceptionalism.
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  Speaker 4: This for me is where Europe and particularly the UK
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  Speaker 4: start to get more interesting.
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  Speaker 5: This is a different environment that's going to require higher
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  Speaker 5: rates for longer.
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  Speaker 2: Geopolitical fragmentation is one driver of that.
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  Speaker 3: John, so there is one thing that you can take
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  Speaker 3: from all that and it is this. It is that
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  Speaker 3: the next 10 years may look very, very different from
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  Speaker 3: the last 10. But the question then is, Different how?
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  Speaker 3: And where does that leave you as an investor?
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  Speaker 6: Well, yeah, that's the point. Because for two episodes now,
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  Speaker 6: we've been telling you that investing has changed. So the
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  Speaker 6: market is more concentrated. A lot of the fastest growing
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  Speaker 6: companies have stayed private for longer. And putting your money
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  Speaker 6: into a passive fund, just because it's called a passive fund,
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  Speaker 6: that doesn't get rid of all the decisions you have
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  Speaker 6: to make.
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  Speaker 3: So this time we want to turn that around. We
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  Speaker 3: don't want to spend another episode telling you what's changed.
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  Speaker 3: This time we want to talk about what you actually
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  Speaker 3: do about it. We want to talk about how we
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  Speaker 3: should invest for the next 10 years rather than the
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  Speaker 3: last 10. Welcome back to Portfolio Reset, our special Merrin
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  Speaker 3: Talks Money series on how to get your money to
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  Speaker 3: do more. I'm Merrin Somset-Webb, editor-at-large for Bloomberg UK Money
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  Speaker 3: and author of the weekly Merrin Talks Money newsletter.
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  Speaker 6: And I'm John Stepak, senior reporter at Bloomberg and author
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  Speaker 6: of the daily Money Distilled newsletter.
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  Speaker 1: This is episode three.
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  Speaker 3: Now, in episode one, we looked at how passive investing
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  Speaker 3: became the new investment wisdom and why that was exactly
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  Speaker 3: the right thing at the time.
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  Speaker 6: Then in episode two, we looked at what's changed around it. Concentration, valuations,
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  Speaker 6: index flows, the dominance of the US and the fact
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  Speaker 6: that more growth is now taking place outside public markets.
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  Speaker 3: And we end it with a slightly uncomfortable conclusion. You
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  Speaker 3: can invest passively, but you can't really be a passive
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  Speaker 3: decision maker. So today we're going to try to answer
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  Speaker 3: the questions that follow from that. If those decisions belong
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  Speaker 3: to you, what are they exactly? And how should you
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  Speaker 3: go about making them?
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  Speaker 5: Investment funds are a means of transport for but they
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  Speaker 5: don't set the destination.
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  Speaker 3: That's Paul Kearney from ARC Investors, a familiar voice in
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  Speaker 3: this series by now, I think. And he said this nicely,
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  Speaker 3: the questions that you have to ask and the decisions
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  Speaker 3: that you then have to make when you are resetting
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  Speaker 3: your portfolio.
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  Speaker 5: What, as an investor, you need to decide is what
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  Speaker 5: destination do you want to go to? And by that,
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  Speaker 5: I mean, what are your return objectives and what risk
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  Speaker 5: are you comfortable taking on the way through?
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  Speaker 3: You have to decide what you're investing for, how much
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  Speaker 3: risk you're prepared to take, assets you want to own,
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  Speaker 3: and then crucially, how you want to put them together.
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  Speaker 6: So let's just start with what are you investing for?
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  Speaker 1: If you are younger, you have age ahead of you.
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  Speaker 1: Time is the greatest gift. You have that horizon.
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  Speaker 6: That's Jumanis Al-Hin of Vanguard. She stresses the time horizon
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  Speaker 6: of your investment journey is important to understand. In other words,
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  Speaker 6: how long you've got. Saving for a house in five
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  Speaker 6: years is obviously completely different from saving for a retirement
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  Speaker 6: that's 40 years away, for example.
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  Speaker 2: When you're young, a huge part of your wealth, in fact,
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  Speaker 2: most of your wealth is in the form of future earnings.
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  Speaker 1: That's Bloomberg columnist and author Alison Schrager. That means you're
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  Speaker 1: more placed to take risks.
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  Speaker 2: As opposed to when you're retired, most of your past
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  Speaker 2: earnings are behind you. So most of your wealth is
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  Speaker 2: whatever's in your account.
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  Speaker 3: Now, if you've got decades of earnings ahead of you,
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  Speaker 3: you've got much more time to recover from markets falling.
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  Speaker 3: If you're actually about to need to start spending the money,
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  Speaker 3: you totally don't. And that's why asking how much risk
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  Speaker 3: can I take isn't just a question about how brave
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  Speaker 3: you feel. It's about when you need the money, whatever
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  Speaker 3: assets and income you have, and what happens if markets
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  Speaker 3: fall at exactly the wrong moment for you.
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  Speaker 2: What is a successful retirement look like? And for most people,
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  Speaker 2: that is replacing a large share of their income that
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  Speaker 2: they had while working so they don't have to worry
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  Speaker 2: about financial stress, but you need a foundation of stable
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  Speaker 2: income to feel good about that.
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  Speaker 3: This is a useful way to bring this down from
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  Speaker 3: the theoretical. The point isn't to produce the cleverest portfolio.
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  Speaker 3: The point is to fund your life.
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  Speaker 6: Once you know what the money's for, then you can
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  Speaker 6: ask what each investment is there to actually do.
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  Speaker 5: The two main asset classes are clearly equities and fixed income.
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  Speaker 5: But within that, you've then got either geographic spread of
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  Speaker 5: equities and the same sort of applies to fixed income,
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  Speaker 5: which are bonds.
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  Speaker 6: ARC's Paul Kearney makes an important point. We're not trying
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  Speaker 6: to identify the one asset that will win. You're trying
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  Speaker 6: to combine things that respond differently to whatever comes next.
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  Speaker 6: And to do that properly, you have to understand the
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  Speaker 6: different asset classes. So let's start with equities or shares
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  Speaker 6: or stocks. They all mean the same thing. At its simplest,
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  Speaker 6: equity just means ownership. You own a stake in a
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  Speaker 6: productive business. If that business grows and becomes more profitable,
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  Speaker 6: you participate in that growth. But you are also heavily
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  Speaker 6: exposed to the risk too.
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  Speaker 3: Bonds, also known as fixed income, as Paul was saying,
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  Speaker 3: are different.
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  Speaker 1: They are loans.
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  Speaker 3: Usually you're giving money to a government or a company
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  Speaker 3: in return for an agreed.
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  Speaker 1: Stream of payments.
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  Speaker 3: And assuming everything goes to plan, which it doesn't always,
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  Speaker 3: you're capital back at the end. So you don't have
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  Speaker 3: the same upside as an equity owner, but you're usually
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  Speaker 3: taking rather less risk.
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  Speaker 6: But Barry Ritholtz, CIO of Ritholtz Wealth Management and host
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  Speaker 6: of Bloomberg's Masters in Business podcast, argues that if you're
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  Speaker 6: very young and have decades ahead of you, you may
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  Speaker 6: not need much in the way of bonds at all.
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  Speaker 7: I don't think you need bonds till you're in your
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  Speaker 7: 60s or 50s or have a very specific set of
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  Speaker 7: income needs. Why do I need something that's going to
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  Speaker 7: generate 1% or 2% after inflation when I could have
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  Speaker 7: an asset class that's going to generate 7% or 8%
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  Speaker 7: after inflation.
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  Speaker 6: But if you're closer to needing the money or you
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  Speaker 6: simply don't want to take equity-level risk, bonds can play
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  Speaker 6: a very useful role.
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  Speaker 1: Then there is cash.
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  Speaker 3: Not exciting, but wonderfully liquid, wonderfully stable, and it gives
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  Speaker 3: you optionality. So with cash, you have the ability to
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  Speaker 3: take advantage of opportunities when everybody else is panicking about
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  Speaker 3: things they already own falling in value.
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  Speaker 1: And of course, gold.
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  Speaker 6: Gold doesn't produce profits or pay interest, but that doesn't
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  Speaker 6: mean it has no purpose. It behaves differently to all
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  Speaker 6: the other assets that we've mentioned, and it's very good
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  Speaker 6: as a diversifier or a store of value. It particularly
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  Speaker 6: comes into its own when investors get worried about the
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  Speaker 6: stability of the financial system, which happens surprisingly regularly. So
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  Speaker 6: that gives us four very different building blocks, or I
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  Speaker 6: like to think of them as the kind of primary
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  Speaker 6: colours of asset allocation. Equities, bonds, cash and gold.
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  Speaker 1: And the important thing here isn't necessarily which one wins.
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  Speaker 3: The important thing is that they don't all behave in
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  Speaker 3: the same way at the same time. One of the
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  Speaker 3: oldest and simplest examples of how you can put all
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  Speaker 3: these building blocks together is Harry Brown's permanent portfolio.
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  Speaker 1: This is simple stuff. Four equal chunks.
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  Speaker 3: 25% equities, 25% long government bonds, 25% cash, 25% gold.
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  Speaker 7: Easy.
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  Speaker 1: Yeah, so the.
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  Speaker 6: Whole point of this one is that you don't even
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  Speaker 6: pretend to know which economic environment is coming next. So
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  Speaker 6: if you get strong economic growth, your equities should do
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  Speaker 6: well then. If there's recession or deflation, bonds might help
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  Speaker 6: with that. If you get inflation or monetary panic, that's
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  Speaker 6: where gold comes in. And cash, meanwhile, gives you the
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  Speaker 6: stability and the optionality. And also it tends to keep
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  Speaker 6: up with base interest rates.
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  Speaker 3: So the individual assets here aren't the strategy in themselves.
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  Speaker 3: It's their different behavior that is the strategy. You are
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  Speaker 3: not taking a bet on which asset will do best.
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  Speaker 3: That's very hard. And you're not trying to predict what's
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  Speaker 3: happening next in the economy. All you are doing is
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  Speaker 3: ensuring that your portfolio can survive regardless of what is
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  Speaker 3: going on around it.
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  Speaker 6: And obviously, there are other ways to do this. You
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  Speaker 6: don't have to use those exact percentages either.
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  Speaker 3: Yeah. So Charlie Morris, founder of independent investment advisory ByteTree,
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  Speaker 3: has a much more adventurous example, risky example, depending on
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  Speaker 3: how you look at it. He combines only two assets,
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  Speaker 3: Bitcoin and gold, in his bold ETF. There was magic
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  Speaker 3: between the assets because you put these two assets together
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  Speaker 3: and you rebalance them and you allocate them according to
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  Speaker 3: their risk and special things happen. what special things you
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  Speaker 3: might be wondering. So Charlie is proposing replacing the gold
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  Speaker 3: portion of your portfolio with a combination of Bitcoin and gold.
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  Speaker 3: He's absolutely not saying that your entire portfolio should be
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  Speaker 3: gold and Bitcoin. That would not be a well-diversified portfolio.
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  Speaker 3: But his argument is that if you hold gold and
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  Speaker 3: Bitcoin in the right proportions, then you have better odds
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  Speaker 3: of avoiding collapses in either of them while maintaining a
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  Speaker 3: good amount of the upside you'd get if you held
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  Speaker 3: just one of them alone. Yes.
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  Speaker 6: So the idea is that when gold isn't quite working out,
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  Speaker 6: Bitcoin is going stratospheric or whatever it does on a
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  Speaker 6: regular basis and the other way around. And it's not
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  Speaker 6: necessarily easy to DIY this one because Charlie rebalances this
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  Speaker 6: regularly based on the volatility of the two assets. But
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  Speaker 6: the rough mix is something like 80% gold and 20% Bitcoin.
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  Speaker 3: Okay, so one very old asset in which we have
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  Speaker 3: a lot of confidence, one very new, one relative defensive,
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  Speaker 3: one spectacularly volatile. But once again, the point is that
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  Speaker 3: if you mix them up, in a sensible way, you
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  Speaker 3: take less risk, but you should also make reasonable returns.
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  Speaker 6: And then there's another technique I think lots of listeners
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  Speaker 6: will enjoy even more.
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  Speaker 1: The cowboy account.
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  Speaker 7: The entire purpose of the cowboy account is a behavioral
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  Speaker 7: hack to distract you.
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  Speaker 1: The idea is.
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  Speaker 7: Leave your real money alone and let it compound over time.
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  Speaker 7: Humans have a bias towards action. We hate the idea
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  Speaker 7: of just sitting there. We feel like we have to
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  Speaker 7: do something.
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  Speaker 6: So having an account with just a little bit of
• 10:37
  Speaker 6: your investment allowance feeds that need to do something. So
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  Speaker 6: you don't feel compelled to do something actually quite risky
• 10:45
  Speaker 6: or possibly even stupid with your money that actually matters.
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  Speaker 7: And so taking 5% of your liquid net wealth and
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  Speaker 7: playing around with it, I don't care what you do
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  Speaker 7: in it. You could buy stocks, futures, options. You could
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  Speaker 7: market time. You could stock pick. You can sector rotate.
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  Speaker 7: Whatever you want to do in that portfolio, who cares?
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  Speaker 7: It's a small percentage.
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  Speaker 1: I love this idea. I do it myself, actually. Your
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  Speaker 1: sensible portfolio sits over there.
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  Speaker 3: And then on the other side, you have a small
• 11:17
  Speaker 3: amount of money, which you let yourself, give yourself permission
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  Speaker 3: to do something potentially ridiculous and high risk.
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  Speaker 1: So individual shares, individual small caps, companies.
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  Speaker 3: That don't make any money, Bitcoin, the brilliant investment idea
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  Speaker 3: someone told you about over dinner.
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  Speaker 1: That happens to me a lot, by the way.
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  Speaker 3: You can scratch the itch without actually risking your retirement fund.
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  Speaker 6: Yeah, I think the genius of this is that it
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  Speaker 6: recognises that investing is partly, in fact, even majoritively a
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  Speaker 6: behavioural problem. Like most people just find it really hard
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  Speaker 6: to sit and do nothing. So rather than pretending that
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  Speaker 6: you're never going to speculate or you're going to be sensible,
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  Speaker 6: just ring fence it. Have a gambling account, basically.
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  Speaker 3: Now we come to something that really connects this episode
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  Speaker 3: to the last one.
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  Speaker 1: And it is this.
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  Speaker 3: You can have a wonderfully diversified looking portfolio, but when
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  Speaker 3: you look at it more deeply, you find it actually
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  Speaker 3: horribly concentrated.
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  Speaker 1: Yeah, exactly.
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  Speaker 6: Because diversification doesn't stop at saying, oh, own some equities,
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  Speaker 6: some bonds and some gold. Let's say you decided that 60%
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  Speaker 6: of your portfolio should be in equities, or even 80%.
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  Speaker 6: You then have another decision, obviously, which equities?
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  Speaker 3: And you can answer that by buying a global tracker,
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  Speaker 3: which makes a decision for you according to market capitalization.
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  Speaker 3: We talked about this. It looks perfectly sensible, but it
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  Speaker 3: is still a decision. And if you make that decision
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  Speaker 3: right now, what you end up with is very, very
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  Speaker 3: hefty exposure to America and within America to America's biggest companies.
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  Speaker 6: You have to ask yourself, Do you deliberately want as
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  Speaker 6: much exposure to America as the index currently gives you?
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  Speaker 6: Do you really want, you know, X percent of your
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  Speaker 6: portfolio to be in Nvidia, for example? And this is
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  Speaker 6: where the old idea of home bias becomes interesting. Now,
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  Speaker 6: home bias is something that people talk about where you
• 13:17
  Speaker 6: basically have too much exposure to your own market. And
• 13:20
  Speaker 6: British investors in particular used to be told that owning
• 13:24
  Speaker 6: too much Britain wasn't properly diversified. So we went global,
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  Speaker 6: started sticking all our money in the S & P
• 13:29
  Speaker 6: tracker funds. The problem is a British investor who buys
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  Speaker 6: a market cap weighted global tracker today may have simply
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  Speaker 6: swapped their British home bias for an American bias instead.
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  Speaker 3: Okay, so now we've got somebody else's home bias. So
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  Speaker 3: the key here is that, yeah, sure, you've got to
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  Speaker 3: diversify between asset classes.
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  Speaker 1: Of course you do.
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  Speaker 3: But you've also got to diversify within them. Equities isn't
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  Speaker 3: just equities. Within equities, you've got to look at the geography.
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  Speaker 3: You've got to look at company size. You've got to
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  Speaker 3: look at sector. You've got to look at style. And
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  Speaker 3: within bonds, which governments, which companies, which maturities, which countries
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  Speaker 3: The idea then is not to find a single place
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  Speaker 3: that will outperform.
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  Speaker 1: That is too hard.
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  Speaker 3: It is to reduce your dependence on any single prediction
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  Speaker 3: being right.
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  Speaker 6: Yeah, and you absolutely don't have to throw away passive investing.
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  Speaker 6: This is not anything against passive investing. Barry Ritzholz has
• 14:26
  Speaker 6: quite a festive way of explaining it.
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  Speaker 1: Think about a Christmas tree. That's your core investment.
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  Speaker 7: Passive index, your core tracker stock. And that's what you
• 14:36
  Speaker 7: build the portfolio around. The ornaments, the garland, the lights,
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  Speaker 7: maybe it's South Korea, maybe it's Japan, maybe it's emerging markets,
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  Speaker 7: momentum stocks, value stocks, micro cap, India.
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  Speaker 3: So a cheap, sturdy core, and then around it, deliberate
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  Speaker 3: choices that give you exposure to other geographies, other styles,
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  Speaker 3: other opportunities.
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  Speaker 6: And once you've built that portfolio, there's another active decision
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  Speaker 6: you have to make. What happens when it stops looking
• 15:02
  Speaker 6: like the portfolio you built in the first place? We
• 15:05
  Speaker 6: mentioned this earlier, rebalancing.
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  Speaker 1: Oh, rebalancing.
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  Speaker 3: So let's say that you started with 60% equities. That
• 15:13
  Speaker 3: was your positive choice, what you wanted, to have 60%
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  Speaker 3: of your portfolio in equities.
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  Speaker 1: But then the stock market has a great run, happens
• 15:20
  Speaker 1: all the time.
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  Speaker 3: Suddenly, equities are 75% of your portfolio, and that portfolio
• 15:26
  Speaker 3: is not the one you wanted. It's a riskier portfolio
• 15:30
  Speaker 3: than the one you originally decided was appropriate for you.
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  Speaker 5: You were comfortable with the risk. encapsulated by 60-40. But
• 15:38
  Speaker 5: you roll forward five years, 10 years, 15 years, and
• 15:41
  Speaker 5: all of a sudden, your equity allocation isn't 60%. Because
• 15:45
  Speaker 5: over that period, bonds haven't probably done particularly well. Equities
• 15:49
  Speaker 5: have done spectacularly well. So maybe you're now at an
• 15:52
  Speaker 5: 80-20 portfolio. So quietly or stealthily, the market has chosen
• 15:57
  Speaker 5: the risk appetite for you.
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  Speaker 6: That's Paul Kearney there making the point, you have to
• 16:02
  Speaker 6: think about rebalancing the And all that means is that
• 16:05
  Speaker 6: every so often you bring your portfolio back towards the
• 16:08
  Speaker 6: allocation you first chose.
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  Speaker 5: And that's tough because you're selling winners to buy something
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  Speaker 5: that hasn't performed as well. So you're dialing down your
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  Speaker 5: most successful asset class. But if you want to keep
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  Speaker 5: the risk even, bounded by the one you're comfortable taking,
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  Speaker 5: that's what you have to do.
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  Speaker 3: And that forces you to do just a little of
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  Speaker 3: what investors always say they actually want to do. It
• 16:33
  Speaker 3: gets you to buy relatively low and to sell relatively high.
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  Speaker 6: And that is a nod to another important point. In
• 16:41
  Speaker 6: an ideal world, you want to buy assets when they
• 16:44
  Speaker 6: are cheap in historic terms and largely be selling them
• 16:48
  Speaker 6: when they're expensive in historic terms. And the way the
• 16:51
  Speaker 6: market cap weighted passive investing works just now, you're actually
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  Speaker 6: doing the opposite.
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  Speaker 3: John, if valuation matters again and concentration is creating these
• 16:59
  Speaker 3: distortions all over the place, then there is one more
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  Speaker 3: possible conclusion. Maybe, just maybe, this is the sort of
• 17:07
  Speaker 3: environment in which a good active manager suddenly becomes useful again.
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  Speaker 1: I mean, that.
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  Speaker 6: Is an interesting idea, this idea that possibly we've come
• 17:16
  Speaker 6: full circle here. Because when you think, we know what
• 17:18
  Speaker 6: a genuinely active fund manager is supposed to do. They
• 17:21
  Speaker 6: are meant to look at the company, they're meant to
• 17:23
  Speaker 6: look at the balance sheet, look at the management, actually
• 17:26
  Speaker 6: sit down and work out what the business may be worth.
• 17:30
  Speaker 6: And then compare it to the price and refuse to
• 17:32
  Speaker 6: buy it if the price is ridiculous compared to their
• 17:35
  Speaker 6: valuation of the stock.
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  Speaker 4: You find a good active manager and they are still
• 17:40
  Speaker 4: doing the old school thing of checking the quality and
• 17:43
  Speaker 4: the valuation of the companies that they're buying.
• 17:46
  Speaker 3: That's Simon Evan Cook again, fund manager at Downing Fund Managers.
• 17:49
  Speaker 3: So Simon's argument here is that the concentration that we've
• 17:52
  Speaker 3: been talking about may be creating opportunities away from the
• 17:56
  Speaker 3: biggest companies. So people who've been invested in, say, the
• 17:59
  Speaker 3: smaller and the mid-cap businesses have spent years watching large
• 18:02
  Speaker 3: companies go up while.
• 18:04
  Speaker 1: Theirs do not.
• 18:06
  Speaker 3: But those small and mid-cap businesses are now significantly cheaper
• 18:10
  Speaker 3: than the big ones.
• 18:12
  Speaker 6: Yeah, this is the problem for active managers. They are
• 18:15
  Speaker 6: exposed to career risk. So if you keep on performing
• 18:18
  Speaker 6: the benchmark, you eventually get fired. But the ones who
• 18:21
  Speaker 6: manage to survive through this particular period and have managed
• 18:27
  Speaker 6: to avoid buying the same enormous companies as everybody else
• 18:30
  Speaker 6: and have managed to avoid benchmark hugging and still are
• 18:33
  Speaker 6: in their jobs are They may actually be the good
• 18:36
  Speaker 6: active managers.
• 18:38
  Speaker 4: The really, really good ones, the ones who are brave
• 18:41
  Speaker 4: enough to stick to their guns and invest in the
• 18:45
  Speaker 4: companies they like. They are moving towards these smaller and
• 18:48
  Speaker 4: mid-cap areas where you've got amazing companies at cheap valuations.
• 18:53
  Speaker 3: Now, there is an enormous catch in all this. It
• 18:57
  Speaker 3: sounds good, right? But in order to reap the rewards
• 19:01
  Speaker 3: of active management, you need to pick the good manager.
• 19:05
  Speaker 3: And the difficulty of doing that was one of the
• 19:06
  Speaker 3: things that drove investors towards passive funds.
• 19:09
  Speaker 1: In the first place.
• 19:12
  Speaker 6: So what should you look for?
• 19:13
  Speaker 3: Well, first you want to check, are they genuinely active?
• 19:17
  Speaker 3: If you're paying active fees for a portfolio that looks
• 19:20
  Speaker 3: exactly like the index, you might as well buy the index.
• 19:23
  Speaker 1: So have a look, check the portfolio. Is it really
• 19:27
  Speaker 1: differentiated from the index?
• 19:29
  Speaker 6: So no closet trackers.
• 19:31
  Speaker 3: Second thing, can you understand what they do? What are
• 19:33
  Speaker 3: they looking for? What makes them buy? What makes them sell?
• 19:36
  Speaker 3: What would make their strategy underperform? Because if you hire
• 19:40
  Speaker 3: an active manager, what you're doing here is you are
• 19:42
  Speaker 3: hiring them to disagree with the market occasionally. And that
• 19:46
  Speaker 3: means that they are inevitably going to look wrong sometimes, possibly.
• 19:50
  Speaker 3: quite a lot of the time, which has been the
• 19:51
  Speaker 3: difficulty for active managers over the last 20 years. So
• 19:54
  Speaker 3: you need to know whether the investment process is still working,
• 20:00
  Speaker 3: even when the performance isn't.
• 20:02
  Speaker 1: What are they doing? Are they sticking to the guns?
• 20:05
  Speaker 3: Do they have a strategy that can work long term?
• 20:09
  Speaker 6: And of course, we mustn't forget price matters too.
• 20:12
  Speaker 1: Absolutely.
• 20:12
  Speaker 3: And this again is one of the reasons why passive
• 20:15
  Speaker 3: really kicked off. Fees are certain, outperformance isn't. When you
• 20:19
  Speaker 3: buy a fund, the only thing you know for sure
• 20:22
  Speaker 3: is how much it costs. You don't know anything else. Also,
• 20:26
  Speaker 3: of course, the more you pay, the greater the hurdle
• 20:30
  Speaker 3: the manager has to clear to outperform because what you
• 20:32
  Speaker 3: pay comes off first, right? And it should probably go
• 20:35
  Speaker 3: without saying, don't pick somebody just because they were top
• 20:38
  Speaker 3: of the performance tables last year. Got to try harder
• 20:42
  Speaker 3: than that. If you buy last year's top performer, you
• 20:45
  Speaker 3: might just be buying whatever investment style has just had
• 20:49
  Speaker 3: a good run rather than one that is going to
• 20:52
  Speaker 3: have a good run.
• 20:56
  Speaker 6: Yeah, and that brings us to the final problem. So
• 20:59
  Speaker 6: let's see, I've got this wonderfully diversified portfolio, and then
• 21:03
  Speaker 6: I look, and the S & P 500 has gone
• 21:06
  Speaker 6: up 25% in the last year, and my portfolio has
• 21:09
  Speaker 6: only gone up 12%. Am I an abject failure?
• 21:13
  Speaker 1: No, no. I mean, not necessarily, anyway.
• 21:18
  Speaker 3: This is really important, actually, because the wrong benchmark can
• 21:22
  Speaker 3: destroy a perfectly sensible investment strategy. If you deliberately built
• 21:28
  Speaker 3: a portfolio with less risk in it than the S &
• 21:31
  Speaker 3: P 500, i.e. you've got bonds, you've got gold, you've
• 21:34
  Speaker 3: got some commodity exposure, whatever it is, comparing yourself with
• 21:37
  Speaker 3: the S & P 500 every six months or indeed
• 21:41
  Speaker 3: ever makes absolutely no sense at all. So Paul Kearney
• 21:45
  Speaker 3: is just thinking about this in three ways.
• 21:47
  Speaker 5: We look at the returns that the strategic asset allocation
• 21:51
  Speaker 5: with gifts? What proportion of equities? What proportion of bonds?
• 21:54
  Speaker 5: What proportion of other assets? What could you have just
• 21:56
  Speaker 5: got with the risk you were comfortable with? The second is,
• 21:59
  Speaker 5: how have you performed against preserving your wealth?
• 22:02
  Speaker 1: So three comparisons.
• 22:04
  Speaker 3: One, Did you get roughly what someone taking your level
• 22:07
  Speaker 3: of risk should have got? Two, did you preserve and
• 22:11
  Speaker 3: grow your purchasing power after inflation? That's actually the most
• 22:15
  Speaker 3: important thing there is, by the way. And three, could
• 22:17
  Speaker 3: somebody else reasonably have done better for you at the
• 22:21
  Speaker 3: same level of risk?
• 22:23
  Speaker 6: Okay, so that is much, much healthier than looking at
• 22:25
  Speaker 6: the hottest asset in the world and wondering why you
• 22:28
  Speaker 6: didn't put your entire pension into it. Much better for
• 22:31
  Speaker 6: your ego.
• 22:32
  Speaker 7: Humans are very bad at making risk-reward decisions in the
• 22:36
  Speaker 7: capital market. And in fact, the more decisions we make,
• 22:42
  Speaker 7: the more chances we give ourselves for mistakes. So a
• 22:47
  Speaker 7: very surprising way to make fewer mistakes is is make
• 22:52
  Speaker 7: fewer decisions.
• 22:54
  Speaker 1: This might all.
• 22:54
  Speaker 3: Sound like a slightly odd conclusion to a series in
• 22:56
  Speaker 3: which we spent three episodes arguing that investors need to
• 23:00
  Speaker 3: make more active decisions.
• 23:02
  Speaker 6: Yeah, but I think the distinction is pretty simple. You
• 23:04
  Speaker 6: need to make the important decisions.
• 23:07
  Speaker 1: Exactly. What are you investing for? How much risk can
• 23:10
  Speaker 1: you actually take?
• 23:11
  Speaker 3: What do you own? What do you want to own?
• 23:13
  Speaker 3: Are you genuinely diversified? When should you rebalance? Now, those
• 23:17
  Speaker 3: are the decisions that matter. And what Barry is saying
• 23:20
  Speaker 3: quite rightly here is that once you've made those decisions,
• 23:23
  Speaker 3: don't spend every day.
• 23:24
  Speaker 1: Making a hundred more. Exactly.
• 23:27
  Speaker 6: Don't confuse being an active investor with constantly doing something.
• 23:32
  Speaker 1: It's a life lesson, not just an investing lesson, isn't it, John?
• 23:35
  Speaker 6: Exactly.
• 23:36
  Speaker 1: Anyway, that brings us back to where we started this series.
• 23:38
  Speaker 3: So passive investing gave ordinary investors something enormously valuable and
• 23:42
  Speaker 3: something we are very keen on, by the way. Cheaper
• 23:45
  Speaker 3: access to markets, diversification, lower fees, and freedom from constantly
• 23:49
  Speaker 3: having to pick individual winners.
• 23:51
  Speaker 1: None of that has disappeared. It's still great.
• 23:54
  Speaker 6: Yeah, but the mistake might have been confusing what is
• 23:57
  Speaker 6: a very good tool with an entire investment philosophy. So
• 24:01
  Speaker 6: a tracker allows you to buy something cheaply, but it
• 24:04
  Speaker 6: doesn't tell you what to own. It doesn't tell you
• 24:06
  Speaker 6: how much risk to take. It certainly doesn't tell you
• 24:09
  Speaker 6: whether today's price is sensible. It doesn't tell you whether
• 24:12
  Speaker 6: you're genuinely diversified in the way that they're currently structured.
• 24:15
  Speaker 6: You're probably not. And it certainly doesn't know what you're
• 24:19
  Speaker 6: saving for.
• 24:19
  Speaker 3: Those decisions still belong to you. And perhaps that's the
• 24:25
  Speaker 3: answer to how we invest for the next 10 years.
• 24:27
  Speaker 3: Not by pretending we know exactly what those 10 years
• 24:31
  Speaker 3: will look like, but by going back to all the
• 24:33
  Speaker 3: old-fashioned questions.
• 24:35
  Speaker 1: What do I own? Why do I own it? What
• 24:37
  Speaker 1: am I paying?
• 24:38
  Speaker 3: What risk am I taking? What happens if I'm wrong?
• 24:41
  Speaker 3: And then build deliberately in case you are wrong. Yep.
• 24:46
  Speaker 6: Diversify, rebalance, keep your costs under control. Use active management
• 24:52
  Speaker 6: where you think there's a compelling reason to pay for it.
• 24:56
  Speaker 6: And then, but it's hardest of all, sit on your
• 24:59
  Speaker 6: hands and give the portfolio time to work.
• 25:02
  Speaker 1: Don't build a portfolio for the future you expect.
• 25:05
  Speaker 3: Build one that can survive a future that might surprise you.
• 25:12
  Speaker 3: Thanks for listening to the final episode in our three-part
• 25:15
  Speaker 3: investment series. And a reminder, next week we are answering
• 25:18
  Speaker 3: your questions. Send them to merrimoney at bloomberg.net. You can
• 25:21
  Speaker 3: email us or send a voice note and we may
• 25:24
  Speaker 3: even play your question on the show. And as always,
• 25:27
  Speaker 3: if you like the podcast, share it with a few
• 25:29
  Speaker 3: friends and leave us a review wherever you listen. This
• 25:32
  Speaker 3: episode was produced by Sam Asadi, Moses Andam and Jennifer Seeley.
• 25:36
  Speaker 3: Amy Keaton is executive producer for Talk Podcast and Shara
• 25:39
  Speaker 3: Brumley is our head of podcasts. Thank you.