DR LAURA RUSU | from Diversiview

· Podcast Episodes
Where risk meets return in balancing your portfolio for optimal outcomes. Dr Laura Rusu Founder and CEO of Diversiview
Sharesight Award Winning Portfolio Tracker

In this episode I'm joined by Dr Laura Rusu from Diversiview. Today, we're diving into a crucial aspect of building wealth over the long term – the art of combining the investments in your portfolio to ensure maximum return for your chosen level of risk. Sure, choosing the right investments is vital, but the real magic happens in how you bring them together.

In our conversation, Laura highlighted how risk and volatility, though often used interchangeably, have nuanced differences. While every investment carries the risk of loss, volatility refers to the extent of price fluctuations. It's not just about stocks; volatility can exist in various asset classes.

Mastering long-term returns involves understanding the risk tolerance you're comfortable with. After all, nobody wants to lose money. This sets the stage for the next crucial step in the investment journey – the art of combining investments.

The way you bring your investments together can significantly impact both your returns and your risk exposure. It's not just about picking winners; it's about creating a harmonious portfolio that balances potential gains with manageable risk levels.

The main driver of your return over the long term lies in how you combine your investments. It's not a solo performance but a symphony of carefully selected instruments playing in harmony. Recognizing the distinctions between risk and volatility is the first step, and the second step is mastering the art of combining investments for optimal returns with manageable risks.

Find out more about Diversiview on my review page. It's a highly useful service that allow you to easily access institutional grade portfolio analysis. Create a free account and receive 20 bonus credit points when you sign up with the promo code SFB23.

Get 4 months free on an annual premium plan when you use Sharesight, the award-winning portfolio tracker. Sign up for a free trial today.

Sharesight automatically tracks price, performance and dividends from 240,000+ global stocks, crypto, ETFs and funds. Add cash accounts and property to get the full picture of your portfolio – all in one place.

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Chloe (1s):

Shares For Beginners, Phil, Muscatello and Finpods are authorized reps of MoneySherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

Laura (12s):

The main driver of your return long term is how you combine your investments. It's very important of course, what investments you choose to invest your money in. But then the second step is how do you combine them because the way you combine them will impact your return and will also impact your risk.

Phil (29s):

G'day. And welcome back to Shares for Beginners. I'm Phil Muscatello. How much do stocks go up and down by over time? How can that information be measured and used to calculate the risk that you're comfortable in taking to achieve your future returns? Joining me today is Dr. Laura Rusu from Diversiview. You g'day Laura.

Laura (49s):

Hello Phil I. think you inviting me to Shares for Beginners.

Phil (52s):

Oh, no worries, no problems at all. but I really like the idea of diversiew you as a concept and as a product and a service. And I just wanted to go through and work out some first principles here. And these are some of the concepts that diverse of you use to measure diversification and also to measure portfolio optimization. So let's start with a simple explanation of risk and volatility. Is it simply how much a stock goes up and down by?

Laura (1m 20s):

So first, let's say that you can have volatility in our asset classes as well. So you can have volatility in property, you can have volatility in crypto of course, but because we are now speaking about Shares for Beginners, let's, let's use the stocks as examples. People use these two terms risk and volatility interchangeably, and they are of course very much related, but there are some slight differences. So let's explain each investment, including Shares of course has a risk of loss. Nobody wants to lose money when they invest in something, but the risk is there and because every day people will buy and sell stocks, price is really a question of supply and demand. So, if you think about when more people want to buy, when people want to sell, the price will go up.

Laura (2m 5s):

And when more people want to sell for various reasons where people who want to buy, then the price will go down. And this is normal market activity in all markets for each stock each, each security. And the thing is, how much of a price will go up and down And that will determine the volatility. if you have a price, you know, share, which has a price fluctuating a lot between highs and lows in some relatively short intervals of time when you have volatility and people think about volatility only when it goes down, but it's same. I mean, volatility is the same when it goes up. So it'll go up, people are happy, you know, investors are happy, their share prices grow, their investments grow in value, and we think about volatility when it goes down.

Laura (2m 46s):

So this second part, when the prices go down is where you have a risk of loss of money. And this is why risk and volatility are sort of used interchangeably because you have a risk of loss when you have high volatility and when prices go down.

Phil (3m 3s):

It's interesting, isn't it, because professionals, and I found this during the podcast, is professionals talk about volatility and risk as being the same thing, whereas normal punters think that risk is the the risk of losing all your money, not the amount that it's going up and down by. Yeah,

Laura (3m 16s):

Yeah. If, you have something which will go up, will go down. It, it's, it's in a, in a volatility range, as I said, people don't think about volatility when it goes up. Everyone is happy because it's, it's a good thing when it prices go up. But they think about volatility when it goes down and if a price go down more than what was, for example, your purchase price when you lose money is not just losing some of the gains but you can lose some of the money you invested. And I can give a small example, which is quite a recent, it's not advice again, it is just an example to to understand, imagine you bought BHP stock on 16th of October was $45 on the day And, it went up to 46 by 18th of October, so in two days.

Laura (4m 1s):

And when it went down to 43 by 24th of October. So you first had a small positive return, 2.2% for two couple of days and then you had an actual loss of 4.4% from your purchase price. So you paid 45, you end up with 43 on 24th of October. So this was your, you know, immediate risk of loss of money from what you bought. It went up, it went down, it went down more than what you purchased, so you lost money. So volatility is normal. It's about how much you know, how big is this volatility, how much can go up and down and how often as well. This is what will impact the risk of loss So, if you want to think about maybe long term, ideally you want your investment to have a positive growing trend.

Laura (4m 44s):

This is, you know, ideal, no volatility just grows up, everyone is happy, but that's not possible. So there will be some volatility and you can think about the risk as this probability of not getting that constant increase. So the fluctuations this up and down, the down part of a price so when it goes down will actually eat a bit from your earnings when it went up. So you'll get less long term if you have a high volatility because of this down part of a price eating from a up or part of a price increase. So you'll end up with a lower value long term than if you have a low volatility for the same return annual return. It's, it's you mathematics.

Phil (5m 24s):

It is. And I should mention as well that you are a highly qualified mathematician and so this is, you'll actually love

Laura (5m 30s):

The numbers science I'd say. Yep,

Phil (5m 32s):

Computer science, but it, it is math as well, isn't it? Yeah, yeah, yeah. And you do love mathematics and yes, I And what And, what it shows. You mentioned asset classes previously And that there's different volatility profiles for different asset classes. Can you just quickly run us through an overview of what they might be

Laura (5m 50s):

Before talking about that? I would say first that investors will need to look at individual investments, volatility and for overall portfolio volatility compared with just looking at asset classes. But indeed everyone, you know, for example, cash is has less risk than bonds and bonds have less risk than property and property have less risk than stocks. So when you invest in something like you invest in property, expect to be the price and the volatility of those, you know, properties, prices going up and down over the market in different locations, different suburbans and so on. Do we expect volatility to be lower than volatility of Shares for example of, and of course cryptocurrencies are much more volatile than Shares.

Laura (6m 30s):

So people have this understanding of different asset types having different risks which comes from this volatility of prices going up and down. but I would say that we need to look at individual investments because even in in the same asset class and let's say the same industry, different securities could have different volatilities. So you can think about this asset classes as you know you have a bit of cash and you have some property and you have some Shares and maybe want to tap into a bit of crypto, but you cannot make a accurate assessment of your total risk just by looking at the high level asset classes. You need to go and look at individual and as I mentioned for example, in materials you can have for example, again not endorsing any of the stocks, it's just example, Amcor has 18% volatility, expect volatility at this stage in November few days ago, James Hardie the Bluescope, 32% BHP to 28%.

Laura (7m 29s):

So there are some differences between volatilities of investments even in the same asset class. So we need to go a bit more granular and people need to look at individual investments. What's the risk of each, I mean the risk of loss for each due to high volatility. And then look overall, what's the risk of loss for the entire portfolio due to individual volatilities coming together? I would, I would say so it's much more good to start with high level asset classes and have this kind of split in your mind about how much you want to invest in different asset classes with different levels of risk. But you also need to go granular and then look inside each asset class, what's the volatility of individual or let's say property, there might be different price increases and decreases in property in Sydney versus Melbourne or in a suburb versus another suburb.

Laura (8m 21s):

So you can say yes, property is less volatile or is it is less risky than Shares but you need to look inside as well to see what risk you take. Maybe some areas are more risky than ours, not from crime risk or something, it's from a risk of not getting the price you want in that property in long term.

Phil (8m 39s):

So how is volatility measured over time?

Laura (8m 43s):

So volatility as we mentioned is, is a mathematical formula. So it's really a standard variation from average return. So you have an average return, which you have historical average return or unexpected average return and you can only calculate volatility based on what historical data. So what we do, for example, in Diversiview, we calculate an expectation of a return based on compound daily average from the past three years. And then you calculate volatility, the standard deviation from that expected return and you could expect is sort of normal and common sense to expect the stock or number security to have pretty much same volatility going forward. They wouldn't change dramatically unless something you know, extraordinary happens.

Laura (9m 27s):

For example, I, I was looking recently, for example, again, if you look at BHP between December last year and November this year, so pretty much one year volatility sort of for BHP was between 28 and 33%. Or for Vanguard, Australian, Shares, ETF, which people you know love it and it's very much popular volatility in during this time was between 15% and 19%. So there is some variation because in time prices fluctuates, so this volatility will change as well, but it not change, you'll not expect something which has 5% latitude to become 50 or something, which is very volatile to become very calm, you know, to be less volatile. So looking at the past volatility from what happened in the past, you can sort of expect something for the future.

Laura (10m 14s):

And like with all, you know, disclaimers, which everyone say you cannot guarantee the future, but you can create, you know, can look at some expectations of return or of volatility. So

Phil (10m 25s):

How are you measuring the return then you, you've just spoken about the risk side or the volatility side. What about the return? Is that again an an historical so figure that you're looking at?

Laura (10m 36s):

One way of calculating which we do in Diversiview is to look at historical. So you, you look at daily returns of that security over a period of time and when you calculate a compound daily return and then you analyze that. So it's, it is based on historical but because it's a dramatical return, so compound return where each day is, you know, based on this previous day, you get an expectation of return based on that historical data. So you can say, well you have an expectation of let's say 8% for stock, it may go to 10, it may go to five, but that's your expectation based on the history. And now of course many people, they have their own understanding or their own, let's say ideas about how a company may go in future due to some information they have.

Laura (11m 22s):

For example, you have a mining company, maybe they discover some new, you know, exploration and so on, and you don't look just at the historical data. You may have another understanding and say, well my history says I, I should expect let's say 10%, but I know based on some of information and I think it may be 15% or 20%, you know, just an example. So it's important to look about historical but in Diversiview as well have ability to enter your own preference or your own knowledge about the future return and calculate based on that and volatility, it's calculated based on this expectation of return,

Phil (11m 59s):

How do you put in your own thoughts on future returns or volatility?

Laura (12m 4s):

In Diversiview or in general

Phil (12m 5s):

You mean? No, in diversiview.

Laura (12m 7s):

So in Diversiview we have an option where you can analyze. So you enter your stocks, your securities stocks, ETF or whatever you have in your portfolio, you enter them and then you have an option. You, you run with a calculated Diversiview returns and then you have an option to enter the expected return for each individual investment and recalculate with that. So we still say that the volatility is Diversiview calculated volatility, so based on historical data, but you can enter your own expected return and then recalculate for the entire portfolio. Where some of your investments may not all, but some may have, you know, your other expectation of return, not just the historical calculation.

Phil (12m 47s):

So this measure, we're only talking about a single stock at the moment, but then the picture becomes far more complex when you start introducing two or three or even more stocks in a portfolio. How many combinations are possible mathematically? Oh, many. I like, I like hearing, I like hearing these big numbers. Big

Laura (13m 4s):

Numbers, yes. Many So, if you think about for two stocks, let's say takes two stocks and you imagine just 1% increments. So it can have 1% in one stock, 99 in a second, 2% in one stock, 98 in second. Yeah. So you have this 99 combination and as I've said, just one stock, 1% increments. You if you have decimals, you know, 0.5 and it's many more combinations. But if we stick with 1% increments for two, you have 99 combinations for free stocks, you have 4,851 combinations for four stocks, you already have over 150,000 combinations for five stocks, it's more than 3 million, 700,000 combinations.

Laura (13m 48s):

So imagine, you know, go, go to 10, 20, whatever people have maybe 25 stocks on 13 their portfolios. A number of ways in which you can combine these stocks. Percentage wise it's huge as your portfolio grows. And even for three or four you something, you know, you cannot go through all of this in, in Excel and try to figure out for each what's the return and what's the risk for each combination. Because the weights are very important in both portfolio returns, overall portfolio return, what you expect return to get. And also the overall portfolio risk and formula for return is a bit, you know, simpler. It is just a weighted average of individual expected returns.

Laura (14m 29s):

But for portfolio risk volatility of the entire portfolio, it's much more complex and it's quite difficult to calculate even for 3, 4, 5, we can do it, but you know, it takes time and it also requires information about correlations between these stocks, which we can talk about as well. But what

Phil (14m 48s):

I'm, oh, can't wait to, can't wait to talk about correlation as well.

Laura (14m 50s):

Yeah, but what I wanted to say is as your portfolio grows, the number of ways you can combine your securities, it grows a lot So, it is not feasible to do it by hand or in Excel or whatever way to, for each combination you have to go and calculate the total portfolio risk and total portfolio return and then look at all of them and see, oh well look, this combination is, is best for me or for whatever, you know, goal you have because your goal is a financial goal. Let's say you want to get to whatever, millions by retirement, but you also want to sleep at night. So you want to have a low risk, and this is another thing

Phil (15m 26s):

Or a, a low vol, low volatility. Low

Laura (15m 27s):

Volatility, yes. So low, low risk of loss. You don't want to lose money along the way. So, and this is not impossible to have a, a good return on low volatility. So because this can be combined in so many ways, how do you calculate first and how do you choose like then what combination is best for you becomes it becomes quite impossible to do by hand or you know, humanly possible. So this is why we build this technology to, to help people calculate. So look through all this combination and then figure out, you figure out you as a user, I mean figure out what which of them will work best for you.

Phil (16m 1s):

Yeah, because most people, when they're putting a portfolio together, they just simply go, oh well I've got 15 stocks, so, you know, divided by 15, a hundred divided by 15 for

Laura (16m 10s):

Each one. No, it's not

Phil (16m 10s):

It, but, but they, the weights for each of those companies is really important, isn't it?

Laura (16m 15s):

It's very important. And there is a lot of research also showing that the main driver of your return long term is how you combine your investments. And this is something I want to transmit to people and people who will watch this podcast is that it's very important how you combine them, not what what you choose. So it's very important of course what investments you choose to invest your money in. But then the second step is how do you combine them because the way you combine them will impact your return and will also impact your risk. And as I mentioned earlier, having a high volatility to eat up from your gains long term so it'll get you less money long term compared with a portfolio which has a, you know, good return and low volatility and how you find it.

Laura (16m 59s):

This is what we do in Diversiview. We'll show you all this, you know, this picture and then you figure out, you know, what you wanna get. We'll not tell you how to combine them. It's up to you as a user to choose what's best for you.

Phil (17m 11s):

Okay, I think this might be a good point to introduce the efficient frontier. Yes. Now I'm tempted when we discuss this to leave out the risk-free rate part of the calculation, is it possible to do that, just to simplify it before we introduce the risk-free rate? Yes.

Laura (17m 26s):

Yeah, yeah. I mean the, the efficient frontier means the set of, so we spoke about many combinations for your securities millions. if you If you go to a a big portfolio, a subset of these combinations will have the best return for a level of risk. So imagine in all these millions of combination, you can have some of these combination of weights which have the same, same risk, let's say just saying 20% volatility. And some of this combination will, will have a better return for that risk 20% or some of them will have a lower return for the, the 20% risk. So what you want is that the one which has the highest return for vol, that level of risk.

Laura (18m 7s):

So it's a bit difficult to explain with our visual, but when you, when you

Phil (18m 12s):

Well we can we'll put a link in the, the episode notes to the website where we can, yes, we've got plenty of explanations about this And,

Laura (18m 18s):

What it

Phil (18m 19s):

Looks like. So, 'cause it kind of looks like an upside down Nike symbol doesn't it? The soft

Laura (18m 23s):


Phil (18m 23s):


Laura (18m 25s):

Frontier. Yeah, yeah. So, if you plot all these combinations, you get a a sort of shape like ellipsoidal thing and the part of the top, which in our tool in diversity is shown in some orange points. The top part are those positions which will maximize the level of return for a given level of risk. And we can help you calculate that combination, which you'll take you to one of those points, whatever you choose. So overall, when you say about efficient frontier And, what people hear about this is not some very, you know, I mean it is a complex mathematics behind, but you can think about simplest, the set of positions of combinations for my securities that give me the best return for a lower, medium higher risk, whatever risk I prefer to take.

Phil (19m 11s):

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Phil (20m 0s):

And so when you're looking at that curve and those orange points on the curve, that is showing you different rates of return and the optimal kind of risk for that return, is that a way of talking about it?

Laura (20m 15s):

Optimal portfolio, this is what you,

Phil (20m 17s):

Because you need to decide what your level of risk is as well, don't you? Yeah,

Laura (20m 21s):

Yeah, yeah. So that shape, it'll go, you know, from left to right and many people know about the shape for two stocks, which I mentioned 99 If, you put 99 points, you'll get that shape. Yeah. And most people saw this, you know, maybe in school or our places and the risk increases as you go from left to right and the return will also increase as you go left to right. And because of this shape, but this limited shape, which gets mentioned in many places or in many videos and so on, people started to, you know, to say quite simply, but high risk will give you high return and low risk will give you low return, which is not totally correct. You can have a position which will give you high risk.

Laura (21m 2s):

So from left to right you go to variety. So high risk of your volatility of your total portfolio for a low return or you can have good enough return for a low risk. So as I said, you cannot simply, you need to first use technology to look at it and then understand that there are so many positions that is not simply, it's not black and white. You cannot say, oh I'll take high risk, you know, while I'll just get into cryptocurrencies, I have, you know, I'll get millions tomorrow, but you can lose a lot tomorrow as well. Or you know, it is, it is not as simple as say low risk, low return, high risk. There are so many other combinations, so many gray, all sorts of shades between black and white.

Laura (21m 43s):

But you need to look at it and figure out where you are now, where is your portfolio is from a recent term perspective, do you take more risk that maybe you need? Do you maybe can you get more return for that level of risk then you now get, so first figure out where you are and then see what other options are including that efficient frontier and see where you want to go. That's, that's,

Phil (22m 4s):

Yeah, I think the, I think the important takeaway is is that even if you've got the, your favored portfolio of companies in your portfolio, the way that you combine them has such a bearing on what the returns and the risk and the volatility are into the future. That's basically it

Laura (22m 20s):

Isn't, that's the takeaway. Yeah, yeah. How we combine it is as important as what you invest in.

Phil (22m 25s):

So how difficult is it to achieve true diversification?

Laura (22m 30s):

It's not easy. Again, if you look at variety information, again, it's not very difficult ever. So true diversification means that you select a set of investments, whatever you want, whatever you give you the return you want. But those investments are not correlated with each other. They're moving their own way or they're negatively correlated in a sense that, you know, when one grows we one may, you know, fall in price. So common example is the guy with a store who bought umbrellas for winter and sunglasses for summer. So he always sells something in summer, we'll sell glasses in winter will sell umbrellas.

Laura (23m 9s):

So they're not correlated. There are two different things but of course we stock is much more complex and this theory of diversification, it comes back to portfolio risk because the total portfolio risk is not simply an average of individual portfolios risk, not even a weighted average like portfolio return. But formula is much more complex and I'll not attempt to explain it here, but very important part of it is operation value between two individual stocks to the securities. So that means how they move together up and down in time. And it's very important that you calculate the correlation for a long period of time. And I saw again some places where people say, oh this month co and such and such, but you cannot calculate just for one month.

Laura (23m 51s):

I mean it's it you can, but it's not accurate from a statistical point of view. You have to calculate based on a long set of data points to see how strong those tools sets of data are correlated. And it goes from minus one to one one. if you two stocks, two securities are very, you know, strongly correlated, they tend to move in the same direction up and down together pretty much at the same time. Maybe not even the same altitude let's say, but the best, let's say strongest correlation is one, it's not the best, the strongest, the lowest correlation is minus one when they move in totally opposite way, one goes up, one goes down, Now, I haven't seen one or minus one in our data sets.

Laura (24m 33s):

But you can find correlations like 0.8 or zero point close to 0.9 for minus.

Phil (24m 38s):

Sorry, what's that? What's that measure? The minus one, the plus one is that,

Laura (24m 41s):

So that's strengths of correlation. One is when two securities or two data sets, because correlation can be between other, but in this case two securities history of share price for two securities when they move together. So you're pretty much sure that if let's say BHP and Rio Tinto have a high correlation between them because they're from the same industry, you know, pretty much same people invest in both. So I could pretty sure that in one

Phil (25m 7s):

Similar, similar commodities that

Laura (25m 9s):

Demand, yeah, similar, very similar. When one will go up, one will, the other one will go up as well. And we have a way around. But coming back to diversification, what you want is your home want strong investment opportunities. So which will give you a high expectation of return but which are not correlated. So if one of them for some reason will go down for whatever like geopolitical risks, economic policies, whatever fiscal policies, whatever happens or internal operations or something happens with that investment of yours, if one goes down, the others will not go down together with them with that on. So you want strong investments expectation of returns but which are not correlated or which are negatively correlated because that combination will give you the lowest possible risk.

Laura (25m 58s):

So you can have the highest possible return with very good selection of individual investments and if you combine them in the right way in having less correlated or zero correlation, then you can get the lowest no potential risk volatility.

Phil (26m 15s):

And it's important to keep in mind about diversification and correlation these days because with many people investing in ETFs, there can be strong correlation between ETFs or ETFs and single stocks, you know, in the same portfolio. Yes,

Laura (26m 28s):

That's a very good point actually. I was looking again recently, they were doing a like a case study and I was looking at for example, a correlation between two very popular stocks, sorry ETFs and I was looking at the Sharesight top 20 most popular trades in past financial year. And for example, between beta Shares, NASDAQ 100 ETF, so NDQ and Vanguard International Shares, ETF, VGS. It's a very high correlation 0 87. So that means if you love these two ETFs and you put your money in both of them, it's simply like putting the double the the same double money in one because they will tend to go together and, and the explanation is because if you look at top 20, at least because they have more holdings of course each of them, but if you just look at the top 20 ones, they are all stocks and eight of them are the most popular, which people know, you know, Apple, Microsoft, Amazon and so on.

Laura (27m 28s):

So eight of those 20 are the same with different allocations, different ratings. But when you have top 20, the biggest one pretty much similar of course those ETFs as a whole, they'll tend to look pretty much similar even if the rest of 80% is different holdings and you can have high correlations as well between ETFs and stocks or you can have low correlation between ETFs and stocks for example, and NDQ, Betashares, NASDAQ 100 ETF and would say energy WDSI noticed zero 16. So close to zero means there is no pretty much no correlation between them. So again, these are examples, we don't endorse any of these or you don't criticize any of them.

Laura (28m 12s):


Phil (28m 12s):

People, you're looking at these be aware, you're looking at these, yeah, you're looking at these like a mathematician, just you're looking at the numbers And what the numbers,

Laura (28m 18s):

Yes, the

Phil (28m 18s):

Numbers. So, and the data throws out, people

Laura (28m 20s):

Should look at the same. So I, I'm investing with tfs not just because it's popular and it'll give me a lot of money, maybe I can invest the same amount of money which I have, whatever it is, 50,000 K whatever, $50,000 maybe I can invest. I mean a different way to give me, you know, better result outcome. Not just because I love whatever vanguard to fund or something or because my friends do the same So it, it's really to look inside and look at them how correlated they are. Should you, do you take more risks? Of course ETFs are designed to be with a widespread and of holdings and fund managers who build VFS will look at individual correlation inside the ETF and they will aim to have a better diversification and so on.

Laura (29m 5s):

But that's for one, if you get two or three ETFs, you should look at how they combine together, either a big overlap between them, between their holdings because it means you pretty much get into the same thing twice. So, if you really want to be diversified, you look at ETFs which are not correlated or have different set of holdings or between ETFs and stocks, as, as we said, same story. if you have a ETF which has let's say the top 20 and you buy into those top 20 separately as individual stocks, it means you'll have an overlap. You'll have the same stocks again in way tf. So your exposure to the risks which come with those securities will, will double. So you can do it of course, but you just need to be aware that you take some extra risk which may not be necessary.

Laura (29m 49s):

Maybe you can look into a different set of securities or a different combination of the same securities. It's comes back to to doing your homework.

Chloe (29m 58s):

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Phil (30m 11s):

I often think about times when markets go through tough times that you hear about fund managers rotating into defensive stocks. What are those kind of stocks and why would they call 'em defensive? Is it something like that they're not correlated or that they have less volatility? Do you think that's the kind of measures that they're

Laura (30m 29s):

Looking at? Yes, that that will be the measure. And some fund ``managers also look, you know, in derivatives like options or others where you have sort of different betts against the security solar hedging, which is a bit more complex to discuss, but you say that you invest in something and then you invest in an option which will go contrary to your original investment. So you take sort of your balance, the risk here with opportunity in the option. But yes, going to defensive, I know you probably heard many people heard about, you know, gold coming, you know, many funds investing in gold now many more superannuation funds investing in gold or other commodities for the same reason because it's sort of seen as a lower risk long-term play against some of more risky securities on the market bonds, again, everyone heard about bonds being suddenly more volatile but people thought they would be And.

Laura (31m 26s):

That comes again from geopolitical things happening and some countries becoming, you know, having a higher debt when ours and not being able to serve debts bonds. So things are not stable and every now and then you need to have a look at your portfolio and and see If you want, maybe you should not, but If you want and maybe you want to change, like you mentioned with fund managers, maybe you want to change the composition of, of your portfolio going to more defensive assets with less risk or just stay and weight. But comes back to, to mathematics. I mean stay and weight is not simply hoping for better, you know, future something miracle will happen and you'll come back.

Laura (32m 9s):

Of course there are things like economic cycles and so on and we can, if you look from a higher level, you can think that things will go, you know, back in shape in seven or 10 years or so. But yeah,

Phil (32m 20s):

The idea behind the, the idea behind long-term holding that you don't worry about when it goes down. Yeah, yeah. Your dollar cost average into it and eventually

Laura (32m 26s):

Into overall cost. Yeah, the overall cost but can comes back to to user preferences and user, you know, risk tolerance and how safe you think this approach is and how well you can sleep with it. I mean if you're not really convinced that that you'll come back in 10 years time, you'll be very stressed in action. So maybe in that case it's better for yourself an approach where you keep a close line on your portfolio and make changes, even if those changes may cost you some, you know, transaction fees. Sometime it's good to make some changes but sometime maybe it's to wait. if you look at long term, of course you say well banks let's say are mining or something, they'll be there in 10, 20 years time, but you never know what if you retire in five years let's say, or 10 years and for whatever reasons.

Laura (33m 10s):

So banks are not doing as well at that time, you know, that particular point. So I would say rather than buying something and sleeping on it, hoping that history will just play for you is not a good approach. But it's my, just my perspective, of course everyone has their own preferences. I would say that people need to keep an eye on monitoring. Look always for a for position and even If, you stay with the same set of securities look always at this combination. This, which is, we discussed the beginning how you combine this, your investments is not static, it cannot be the same today with what will be next June or July next year. Because this, for each of those investments, prices changed, went up and down.

Laura (33m 52s):

Volatility had a a role in next year or whatever frequency you want, you'll need to look and see have things changed? Is my portfolio risk now higher or lower? Is my return expectation of return now higher or lower? Does it still align with what I want to do long term? Maybe it does or maybe it doesn't. Can I make some changes, rearrange them in such way, even if I don't sell or buy anything else, I'm, you know, stick with my preferred, my loved securities, but can I combine them in different way to get a better return. So yeah, I don't believe in buying something and sleeping on it. I think people need to be a bit more active, not the opposite as well.

Laura (34m 33s):

Not to exaggerate or not to not to train

Phil (34m 35s):

Completely, not to completely to use the mathematics.

Laura (34m 38s):

Yeah, use mathematics to have a look from time to time if it's quarterly or half year or yearly and see where you are And, what you can do better from that point onwards. And here I want to make a point and probably some people will not agree with me, but there is a concept of rebalancing to original weights, which many people use in with their model portfolios and but tendency is to go back to what you calculated first time. So let's say you create a excellent portfolio now or optimal combination, everything is perfect and maybe sometime you will go and say, well they where values because of volatility have changed, I want to bring them back to the original weights, which I calculated and I don't think

Phil (35m 18s):

That's, 'cause all of those weightings will change over time, won't they? you know, some will go up, some will go down and yes, some you'll have a 10% here and yeah 5% there, so forth.

Laura (35m 27s):

Yeah. Yes. But the practice in industry, let's say it is to bring them back to original weights, And, that may not be correct in all cases. Maybe in some cases, but not every portfolio will have the same. Same because the po your position when you recalculate your optimal allocation at that time may be different from what was optimal when you calculated first time. So you need to hear when those changes happen and you notice some, you know, deviations from your targets. It's not necessarily better to go back to the targets which you had last year or half a year ago is what's best is to calculate the new

Phil (36m 2s):

The optimal The optimal

Laura (36m 3s):

Portfolio. Yeah, optimal there. Yeah. Like you are new there, you don't know about the, you say, well this in my situation now what's best now? And yeah

Phil (36m 11s):

Because it's so arbitrary, it's so arbitrary just to say I want to go back to, you know, yes. Yeah, yeah. 10 stocks, one 10th for each. Yeah.

Laura (36m 18s):

If, if those stocks were, let's say it happened that they had very low volatility, all of them, they pretty much would be in the same, you know, combination probably will be not very far from initial optimal one, but I would say that in most cases because of, especially now with all these markets going crazy, especially now what's optimal today cannot be same as optimal last year and same, you know, same optimal from next year So it always good to to recalculate.

Phil (36m 46s):

So Laura, we've been, this is all an explanation that's leading up to Diversiview. Just give us a quick overview of Diversiview. 'cause this is all of the measures that diversive you use and help you to achieve diversification and optimizing your portfolio.

Laura (37m 1s):

Yeah, so Diversiview is a portfolio analysis and optimization software. And we build it to help people do exactly what we discussed today. To assess their portfolio, first of first, you need to analyze in order to improve anything first you need to analyze and see where your portfolio is. So we'll help people calculate some portfolio health indicators like expected return, volatility, sharp ratio, better alpha, not sure if you have time to speak about those, but some indicators about how your portfolio looks now. And then we show you those potential combination that we discussed. you know, whatever potential combination exists for your set of securities, we don't suggest our securities, we're not in the business of suggesting any investments.

Laura (37m 45s):

We show you how those could combine in different ways and we show you those efficient in opposition from the efficient frontier, also the minimum risk portfolio and optimal portfolio. And you decide where you want to go If you, maybe you realize that you can have more return for the same level of risk. Maybe you realize that you have too much risk for that level of returns, then you want to decrease the risk while not changing the return. So whatever works for you. And then we help you first step, you help you calculate the allocation, the combination of weights, which will take you to that particular point that you want to be in So. It's really three steps I I call it. We first analyze when you discover other possibilities and when you do this optimization, we aim to increase your chances of good return long term and diversification comes into play.

Laura (38m 35s):

And we also help show you the granular diversification between individual investments because as I mentioned, it is important to look not just high level asset classes. You can find all lots of pie charts everywhere about different allocation industries. But it's important to look at the individual correlations because as we give some examples, you can have strong relations between securities being ETFs, sox, whatever. And all those features that we have are always the same aim to help you decide better for your own portfolio without giving financial advice. We help with technology to do all these calculations, which cannot be done by hand or in or in Excel because it's quite impossible to be honest.

Laura (39m 17s):

And because it's so difficult and so impossible to do it by hand, people sometimes just keep them and just take the decisions based on common sense. But sometime they're not as good as being based on the actual data. So Diversiview, this is the main role to help you analyze and then optimize your portfolio.

Phil (39m 37s):

So we'll put some links in the episode notes on the blog post where you can find more information about Diversiview and also a page on the Shares for Beginners website where you can look at another video that were, a couple of videos that we've put together to give you some more deeper understanding of diverse view and also a special deal for listeners to this podcast. Yes, Dr. Laura Rusu, thank you very much for joining me today.

Laura (39m 60s):

Thank you very much Phil, and I hope your listeners found this very useful and interesting and for any questions. So always welcome the questions and feedback and yeah, happy, happy investing and optimizing your portfolio.

Chloe (40m 12s):

Thanks for listening to Shares For Beginners. You can find more at Shares for Beginners dot com. If, you enjoy listening. Please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.

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