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How Amateur Investors Can Maximize Their Returns · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
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  Speaker 2: Welcome to Merrin Talks Your Money, the personal finance edition
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  Speaker 2: of Marin Talks Money. In these bonus podcasts, we talk
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  Speaker 2: about the best strategies for making the most of your money.
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  Speaker 1: I'm Marry Sunset Web and with Me Senior.
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  Speaker 2: Have brought her and Money Distilled author John Depek Hi
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  Speaker 2: John Hi meil.
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  Speaker 1: So this week we are answering a question from Sarah.
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  Speaker 2: Sarah wrote in, So we haven't got the audio for that,
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  Speaker 2: so I'm going to have to read the question.
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  Speaker 1: Sorry about that, she wrote.
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  Speaker 2: In, and she says, I'm a reasonably savvy investor and
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  Speaker 2: I'm monitor my investments closely, although investing is not my
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  Speaker 2: day job, given that I'm smaller, nippy unlike the funds.
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  Speaker 2: How realistic is it set myself a twenty percent per
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  Speaker 2: annum growth target from a mix of thirty percent growth shares,
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  Speaker 2: thirty percent trackers, and thirty percent actively managed funds. Okay,
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  Speaker 2: this is an interesting question, but our answers to this,
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  Speaker 2: I just want to be clear before we get going,
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  Speaker 2: John and I are not going anybody specific advice here,
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  Speaker 2: but we're just trying to do We're going to try
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  Speaker 2: and talk around this subject a little bit and give
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  Speaker 2: a general idea of how to approach this question, this dilemma.
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  Speaker 2: But the first thing to say, and I think we
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  Speaker 2: are going to put a number on it, John one
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  Speaker 2: to ten, ten being realistic, one being not very realistic.
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  Speaker 2: How realistic is for anybody, not just Sarah, but anybody
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  Speaker 2: to make twenty percent a year on their investments year in,
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  Speaker 2: year out.
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  Speaker 3: I'm afraid it's a wine. Okay, So it's highly highly unlikely.
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  Speaker 2: Well, there's almost nobody who has ever done this, right
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  Speaker 2: in our experience. You might get people who, over time
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  Speaker 2: might come out with a really impressive return, but even
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  Speaker 2: with ups and downs, twenty percent a year is fairly spectacular.
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  Speaker 2: But to do that every year for a series of years,
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  Speaker 2: I mean, who's done that?
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  Speaker 1: Who is there?
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  Speaker 3: Well, there are a few people who've mineaged to meet
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  Speaker 3: I mean Stan Druckin Miller, who's like one of the
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  Speaker 3: world's most respected hedge fund managers, consistently mine to make
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  Speaker 3: apparently thirty percent a year between nineteen eighty six and
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  Speaker 3: twenty ten.
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  Speaker 2: Kyle but Lynch, But wait, wait, so without without ever
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  Speaker 2: having a down yet, because that's okay, without ever having
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  Speaker 2: a year when he had a draw down a twenty
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  Speaker 2: thirty forty fifty percent consistently.
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  Speaker 3: Yeah, I mean he was. He's staggeringly good. And there's
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  Speaker 3: also Fidelities Magellan Found, which was run by Peter Lynch
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  Speaker 3: who wrote One Up on Wall Street, which is an
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  Speaker 3: excellent book that you should all read, and he made
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  Speaker 3: twenty nine percent a year between nineteen seventy seven and
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  Speaker 3: nineteen ninety so it's it can be done. But they
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  Speaker 3: are also the world's best investors him and actually it
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  Speaker 3: was their day job as well, so they're not you know,
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  Speaker 3: they're not part time investors.
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  Speaker 2: The other thing that should be said here is there
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  Speaker 2: an argument to be made that if you keep tossing coins,
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  Speaker 2: there's always going to be someone who gets twenty years
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  Speaker 2: worth of heads, right, well.
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  Speaker 3: Yeah, this is it. I mean yeah, I mean this
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  Speaker 3: all goes into, you know, the whole argument about active
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  Speaker 3: fund managers and somebody's got to win the lottery, even
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  Speaker 3: though the odds are winning the lottery are extremely low
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  Speaker 3: for any one person. So yeah, just because you win
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  Speaker 3: the lottery doesn't mean that your skill. That just means
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  Speaker 3: that you happen to be the one in a million
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  Speaker 3: people that did it, so again, Yeah, it's very difficult
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  Speaker 3: to separate out the low I would say that we
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  Speaker 3: believe in active management having the potential to add alpha,
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  Speaker 3: as it were. There is also a very good argument
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  Speaker 3: to be made about you know, monkey's tossing coins and
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  Speaker 3: one of them getting lots of heads in a row.
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  Speaker 1: Yeah, what about that wonderful Warren Buffett.
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  Speaker 3: Was I was doing in this because I mean, yeah,
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  Speaker 3: if you're looking at things a little bit closer to
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  Speaker 3: the modern day, and also the sorts of funds that
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  Speaker 3: pop into your head instantly if you look back over
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  Speaker 3: the last decade roughly, and I'm taking this in pound terms,
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  Speaker 3: so you've actually also enjoyed a certain amount of currency
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  Speaker 3: benefits here as well, because the pound is largely good
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  Speaker 3: weaker against the dollar. Over the last ten years, Scottish
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  Speaker 3: Mortgage Trust, which is one that I think most of
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  Speaker 3: our readers would imagine, has been an absolute stellar performer
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  Speaker 3: that's done about sixteen percent a year over the last decades.
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  Speaker 3: Perks of Hathaway's managed about sixteen and a half percent,
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  Speaker 3: and to be fair, the IS and P five hundred
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  Speaker 3: has done sixteen percent as well over that period. So
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  Speaker 3: and that those are those are amazing returns by comparison
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  Speaker 3: to you know, the kind of long term return on equities.
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  Speaker 3: So I think the kind of point there is, even
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  Speaker 3: if you'd been invested in what I think most people
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  Speaker 3: would think we're very good investments over the last ten years,
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  Speaker 3: you still wouldn't have managed to hit the twenty percent
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  Speaker 3: of a year.
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  Speaker 2: Yeah, and those are also very good investments in a
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  Speaker 2: period when my marckets have mostly gone up, and particularly
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  Speaker 2: when American markets have mostly gone up, so they've had
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  Speaker 2: a fantastic tail wind at the same time.
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  Speaker 3: Yeah, I mean, so it's been a very good time
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  Speaker 3: for those, well I suppose. I mean, one using we
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  Speaker 3: picked them is because they have been among the better
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  Speaker 3: perform investments. So and also obviously if you'd stuck all
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  Speaker 3: your money in any of those that had been highly concentrated,
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  Speaker 3: you know, putting one hundred percent of your money into
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  Speaker 3: even Warren Buffet's fund, you know, is taking a big
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  Speaker 3: sort of non diversification risk. So basically twenty percent is really, really,
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  Speaker 3: really hard, and it's the sort of thing that only
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  Speaker 3: the world's best investors. They're probably taking risks that your
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  Speaker 3: average private investor cannot or should not over you know,
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  Speaker 3: a prolong period of time and using an awful lot
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  Speaker 3: of expertise.
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  Speaker 2: Okay, So John, what is a realistic expect for Sarah?
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  Speaker 3: I mean the long term reton or in equities editatingly,
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  Speaker 3: I don't have it in front of me, but it's there,
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  Speaker 3: about seven and eight percent.
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  Speaker 1: Studying that high.
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  Speaker 2: I thought it was more like six percent. If you
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  Speaker 2: look at all the very long term studies for the US,
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  Speaker 2: you're talking about six percent raere, aren't you sorry?
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  Speaker 3: Six percent real? I think I'm thanking the nominal terms.
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  Speaker 2: Yeah, so once once you've adjusted for inflation about about
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  Speaker 2: six percent.
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  Speaker 1: Although I have to tell you I.
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  Speaker 2: Was speaking of build inning at Waverturn and he was
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  Speaker 2: pointing out to me that the beginning of two thousand
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  Speaker 2: and nine, the UK stock market, adjusted for inflation, that's
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  Speaker 2: the key bit, stood no higher than it was in
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  Speaker 2: sixteen ninety three. It was also lower the marit finished
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  Speaker 2: every year between seventeen sixteen and seventeen fifty nine, and
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  Speaker 2: below its level every year from eighteen ninety three to
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  Speaker 2: nineteen thirteen. So that's not really ideal, is it. That's
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  Speaker 2: not the kind of returns were after.
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  Speaker 3: That's bad. But the same thing the UK Kana is
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  Speaker 3: known as an income market, and I do think that.
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  Speaker 3: I mean, like the DAKS the gym and DAX is
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  Speaker 3: a good example here. You know, it's recently made new records.
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  Speaker 3: But what most people don't fully appreciate is that the
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  Speaker 3: DAKS is a total return index, so it includes the
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  Speaker 3: income from dividends in it. And if the foots one
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  Speaker 3: hundred is of total return index, it would look very different.
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  Speaker 3: I do feel excluding your I get why people do it,
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  Speaker 3: but I also don't see that it's of that much
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  Speaker 3: use if you're looking at long term returns to calculator.
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  Speaker 2: Like that mega John steppeck Oh is available to defend
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  Speaker 2: the UK. Thanks John, that's it, are you right?
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  Speaker 1: Of course?
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  Speaker 3: I think that there's a slightly there's another issue here
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  Speaker 3: the way that say that's thinking about this. So she's
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  Speaker 3: looking at wanting to make twenty percent growth a year,
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  Speaker 3: and then another part of her questions, she sort of
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  Speaker 3: com makes a comment that implies that she wants to
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  Speaker 3: make twenty percent every year in each kind of discrete year,
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  Speaker 3: and I think that that shows that she's thinking to
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  Speaker 3: short term, like why why does it need to be
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  Speaker 3: twenty percent a year?
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  Speaker 1: So she can double that money in three years, John, Well.
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  Speaker 3: Yeah, no, and that would be great. I'd love to
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  Speaker 3: do that too. But it's more I think you need
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  Speaker 3: to start from the perspective like, well, what is my
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  Speaker 3: end goal? What is a realistic return that an average
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  Speaker 3: person would make? And then if I mine to beat that,
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  Speaker 3: that's great, But what's the average return? And then how
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  Speaker 3: much do I need to be saving it this end
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  Speaker 3: to make sure that I have the best chance of
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  Speaker 3: meeting my goal. I think in the way she sort
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  Speaker 3: it feels as if she's looking at this backwards, it's
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  Speaker 3: like she's kind of started with, well, twenty percent would
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  Speaker 3: be a nice number, and perhaps hasn't truly thought through, well, actually,
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  Speaker 3: what is my end goal and what am I doing
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  Speaker 3: this for?
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  Speaker 1: Yeah?
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  Speaker 2: Yeah, okay, And we know that she's most likely to
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  Speaker 2: fail to hit this goal, which means that she might
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  Speaker 2: start making the wrong decisions. I'm not getting it with
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  Speaker 2: this mix of both earlier, So I'm going to change
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  Speaker 2: this portfolio quickly because I might get up with this
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  Speaker 2: other kind of portfolio. I'm not getting in with that
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  Speaker 2: kind of portfolio, So maybe I'll change and try this
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  Speaker 2: kind of portfolio, which, as we know, is the is
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  Speaker 2: the root to ruin really, because you end up racking
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  Speaker 2: up transaction fees and taking far too much risk along
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  Speaker 2: the way.
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  Speaker 3: It's easy to panic if you have the wrong target.
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  Speaker 2: Yeah, And the other thing that we should talk about,
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  Speaker 2: I think, and you said this is that if we're
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  Speaker 2: talking about growth shares, trackers and actively manage funds, what
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  Speaker 2: are we actually talking about. That's not really an accid allocation,
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  Speaker 2: that is a style allocation.
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  Speaker 3: Well yeah, and it's not even a style allocation because
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  Speaker 3: you're like, well, the trackers at this point in time
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  Speaker 3: almost certainly all are basically growth funds because you know,
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  Speaker 3: the S and P five hundred is run by or
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  Speaker 3: setting up until very very very recently has been run
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  Speaker 3: by growth stocks all the rest of them, so basically,
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  Speaker 3: and then the active funds will what type of active
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  Speaker 3: funds are you looking at? And that's before you get
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  Speaker 3: to things like your country allocation and your more more importantly,
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  Speaker 3: your asset allocation. So have you get any money in bonds,
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  Speaker 3: you get any money in gold, that sort of thing.
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  Speaker 3: So there's a lot of questions about diversification and exactly
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  Speaker 3: have you properly thought through where your money is because
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  Speaker 3: it sounds to me, like with that mex it would
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  Speaker 3: be extremely top heavy growth at the moment and bottom
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  Speaker 3: heavy everything else.
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  Speaker 2: Well, I mean it would be because I mean, let's
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  Speaker 2: say that growth shares means what the Mega seven track means,
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  Speaker 2: A very large percentage is in the Mega seven or
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  Speaker 2: at least in US tech stocks and in particular in
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  Speaker 2: the US and thirty percent actively managed funds. Now, that
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  Speaker 2: could mean anything at all. But it's also true that
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  Speaker 2: most actively managed funds these days will have a relatively
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  Speaker 2: high allocation to those same momentum driven technology stocks, because
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  Speaker 2: without it you will almost definitely underform, perhaps not going forward,
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  Speaker 2: but historically you would definitely have one performed. If you
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  Speaker 2: didn't tell this doc said, if you hold those two
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  Speaker 2: things and you don't think about it.
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  Speaker 1: Very carefully, you are effectively in momental investor. Yeah, which
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  Speaker 1: is probably not what you want to be over the
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  Speaker 1: long term.
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  Speaker 3: Yeah No, because you again, you need to diversify by
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  Speaker 3: style as well. And I think this is the other issue,
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  Speaker 3: isn't it. I mean, obviously depending on how active you
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  Speaker 3: want to be, But you can't predict the future, so
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  Speaker 3: you probably want to have exposure to more than one strategy.
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  Speaker 3: You don't want all your eggs in one basket. And
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  Speaker 3: the only other thing that we can usually say with
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  Speaker 3: a moderate degree of confidence is that if you buy
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  Speaker 3: stuff when it's cheaper, then you've got a better chance
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  Speaker 3: of getting a better return than if you buy it
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  Speaker 3: when it's expensive. I recognize that that has not entirely
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  Speaker 3: been the you know, like betting on the expensive stuff
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  Speaker 3: has been a good bet for quite a while and
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  Speaker 3: play for longer than I'm normal, But that doesn't mean
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  Speaker 3: that you know, they can rules of investing, if you like,
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  Speaker 3: have been can retracted all our time. If you buy
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  Speaker 3: stuff that is cheap, then you should do better than
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  Speaker 3: buying stuff that's expensive.
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  Speaker 1: Yeah. I think that's always our message, isn't it. So
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  Speaker 1: there you go.
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  Speaker 2: Lots of things to think about, Sarah, But the key
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  Speaker 2: point there is that I'm afraid twenty percent is unrealistic.
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  Speaker 2: In fact, it's very unrealistic, and maybe we need to
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  Speaker 2: go back to the drawing board with this one.
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  Speaker 1: Think about what it is.
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  Speaker 4: That you really want, how long you have to reach
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  Speaker 4: the goal, and start thinking about it from the grand up,
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  Speaker 4: and also, in particular, think about asset allocation a little
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  Speaker 4: bit more carefully.
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  Speaker 2: And I think that's X for this week on that question.
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  Speaker 1: But just to be clear again, we are not giving advice.
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  Speaker 1: We are giving things to think about, which is different.
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  Speaker 1: Thank you for listening to this week's Mary Talks Money.
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  Speaker 2: If you like us, share, rate, review, and subscribe wherever
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  Speaker 2: you listen to podcasts, and be sure to follow me
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  Speaker 2: and John on X or Twitter at marins w and
• 12:58
  Speaker 2: at John Underscore. This episode was produced by some Asadi
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  Speaker 2: Production Importance. Sound designed by Blake Naples. Questioning comments on
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  Speaker 2: this show and all our shows are always welcome. Our
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  Speaker 2: show email is merin Money at Bloomberg dot ne