CHRIS BRYCKI | Stockspot Robo Investing
CHRIS BRYCKI | Stockspot Robo Investing
According to my guest Chris Brycki, no-one can predict what economic environment we'll be in tomorrow or a year's time. So the most robust portfolio you can construct is one that will withstand lots of different environments.
“No one can predict what sort of economic environment you're going to be in tomorrow or in a year's time. And so, the most robust portfolio you can create as one that can withstand lots of different environments: are you going to be high growth-high inflation, low growth-low inflation, high growth-low inflation, et cetera. At some point over the next 10 years, you'll probably be in each of those sectors and there's going to be some asset that's doing really well and some that's not doing as well. Rather than try and guess in advance which asset that's going to be, our view is just own all of them. You'll get a much smoother ride, but you do have to accept that at any point in time, there's going to be something that's not doing well and something that's doing well.”
Stockspot has a set of principles that guides how they advise clients and invest their savings.
Time in the market beats timing the market
Market timing or picking the right stocks is almost impossible to do consistently, even for experts. What is far more important is simply being invested for a sensible amount of time across a broad range of different investments.
The less you pay, the more you get
Investing is one of the few times in life where paying less is proven to give you better results. The lower the fee you pay to the seller of investment services (your broker, agent, adviser or fund manager), the more money there is left for you.
Stick to the plan and be disciplined
A crucial part of our job as an investment adviser is to keep our clients on the right course. Investing in the right low-cost products is only part of our work because people tend to make poor decisions because of their emotions.
Rebalancing reduces risk
All sectors, assets and markets go through periods of strong relative performance followed by weak relative performance. These cycles are notoriously difficult to pick.
Avoid marketing hype
When it comes to investing, there is return, risk and cost. Everything else is just marketing. The investment industry goes to great lengths to add extra complexity and choice in order to justify higher fees.
G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. New investors often find the pathway into the share market confusing and generally overwhelming. There's so many products, services, advisors, glossy brochures and websites. My guest today believes that it doesn't have to be difficult. Hello Chris.
Thanks for coming around. Finally, we get together after all these years. Chris Brycki is the founder and CEO at robo advisor, Stockspot. Chris has over 25 years of investment experience and spent most of his early career as a portfolio manager at UBS. So tell us about those early years.
Chris (1m 13s):
Sure. Well, Phil, they were very different to what I'm doing now. I started my career really in share trading. So I, from a very young age, was very interested in the markets.
Phil (1m 22s):
We you a broker?
Chris (1m 23s):
No, never a broker. So yeah, during school I entered off in these share competitions and was more interested in the trading side rather than, you know, providing stock tips to other people. I love sort of managing that portfolio yourself, managing the risk, you know, working out what to buy and sell. And yeah, I was lucky the, sort of, early experience I got sort of trading during high school translated into, you know, what I thought was an awesome graduate job, which was working at UBS on their proprietary trading desk. A bit different to their client facing business where you're providing advice to clients, we were managing the bank's balance sheet and had the opportunity to construct portfolios and trade shares, options, all sorts of other funky instruments, ultimately to make money.
Chris (2m 6s):
So it was a great eye-opener in terms of how markets worked/
Phil (2m 8s):
Is that what they call prop trading?
Chris (2m 10s):
Yeah prop trading.
Phil (2m 11s):
They're just putting up the money and they're getting people to trade and see how they go?
Chris (2m 15s):
Yeah, exactly. I mean, it's a bit different
Phil (2m 15s):
It's a bit of a fight club for traders, is it?
Chris (2m 18s):
Well, it's a bit different to a fund where you have to raise the capital and you're sort of managing investor money. Like here, you're managing the balance sheet of a business. So you are allocated capital and you charge for that capital. And then you're measured based on the, you know, the risk adjusted returns that you're generating. It's definitely an industry that's changed a lot over the last 20 years. So after the financial crisis and the Volker Rules in the US, a lot of the US investment banks stopped doing it. And we were lucky, we were at a Swiss bank, UBS, and they kept on going for a few more years, but ultimately then they stopped in 2012 or so.
Phil (2m 51s):
Yeah. So what period was this? Did he go through the financial crisis?
Chris (2m 54s):
Yeah, so I started as a graduate just before the financial crisis. So I saw
Phil (2m 60s):
Baptism of fire
Chris (3m 0s):
Exactly. I mean, you hear, I heard great stories of some of my mentors that started back in 1987. And just before that big crash episode, I started in 2007. I got to see, as an intern, just the last bit of that boom: the big exuberance, all the big bonuses, all their share prices going up and up and up. And then my graduate experience was basically starting, you know, on the ground floor in 2008. So we had graduate training in London and we were sent over there and it was such a memorable experience because on our first day we arrived and none of the trainers were there who were all internal UBS people. And HR got up and said, "I'm sorry, like all the people we had organized for you here today can't come because Lehman's has just gone bankrupt and we need to work out what's going on in the world."
Chris (3m 48s):
And so it was a very weird grad training cause they'd already paid for all of these fancy, you know, events for us and training and, you know, restaurants and get togethers. And the world was just falling apart. And I remember on that grad training, I called my boss, you know, back in Sydney and it wasn't looking good, they were already making redundancies in Australia. And I said, "Honestly, can you let me know if I'm going to be made redundant because I'd like to travel around Europe if I am and I'm already over here. So, it would be better for me if I could just stay over here." And he honestly said, "Chris, I'm not sure it's probably 50/50 at the moment. So you've better to come back in and see." And I think I was one of the lucky ones just because I wasn't, you know, a junior and yeah, able to do a lot of the grunt work in that team.
Chris (4m 31s):
They kept me on and I was, yeah, very thankful for it.
Phil (4m 33s):
So it must've been an interesting experience. I mean, just to experience the fear close up. Has that affected the way that you think about investing?
Chris (4m 41s):
Yeah, I mean, it was fear, but also we saw it as opportunity. So when you're trading or managing a portfolio, especially a portfolio where you can actually benefit if things are falling, you're not really as fearful as just trying to understand and unpack what's going on and work out what the opportunities were. And there was all sorts of opportunities, you know, between different asset classes that were trading in a way that didn't make sense or, you know, between different industries or sectors. And so, you know, as much as the world was sort of falling apart for traders that actually had access to capital, it was actually a good time. And it feels bad to say that because the world was falling apart, but usually when there's high volatility trading businesses tend to do quite well because their whole, their whole job is to make the most of opportunities in those times.
Chris (5m 25s):
And so, yeah, it was very fast paced. You know, my job at that point in time was actually doing the arbitrage between different Australian companies listed on other markets. And by that I had to trade companies like BHP that were listed in other markets like the US and the UK, and try and trade the price between all those different countries to make a profit. And so I was getting up at like 2:00 AM and 4:00 AM, you know, in the middle of the night, trying to understand what was going on in the UK and the US and whether there was any trading opportunities and yeah. Someone that was young and very excited to see what was going on. It was, it was a really
Phil (6m 2s):
Chris (6m 2s):
Fantastic experience. You know, it was tough at the same time because yeah, the bank was letting go of lots of people. Yeah. We weren't sure if our jobs were going to stick around and, you know, there's a great scene in the big short for the listeners that have seen that movie. They'll remember where Steve Carell and his team who I think worked at the Morgan Stanley proprietary trading team that are ultimately done very well, that predicted this mortgage crisis that predicted the crash. But then they came to this realization moment that even if they had done very well, they might all just lose their jobs and see nothing from it because their risk was actually their employment risk. And we all were feeling that day-to-day, you know, we didn't know when our jobs were going to end and we were just trying to do our best like everyone else. But yeah, it was great to have the opportunity to learn about what was going on, because at the same time, all of these Aussie companies were getting recapitalized.
Chris (6m 49s):
You know, I thought it was fascinating that the property sector, the REITs sector in Australia went through an enormous recapitalization process where they had to raise a huge amount of capital because they were over leveraged. And really that REIT sector in Australia fell by close to 90%, which, you know, I think for anyone thinking of investing into real estate or REITs now probably doesn't appreciate that even an asset that seems very safe, like real estate, you know, with poorly managed leverage can actually turn into a disaster.
Phil (7m 17s):
It's always good to hear about something from an expert like this, because we've covered the concept there that the real estate investment trusts had to be capitalized because they had too much debt. Does that mean that it was just costing them too much money to pay the debt? And they were, their balance sheets were falling over and they had to get the capital from somewhere else.
Chris (7m 36s):
I mean, it was a combination. So yes, to some extent, I think a lot of them were hitting their debt covenants for their basically their rules that the people providing loans and debt to these REITs required them to meet. And if they couldn't meet them, they had to raise capital. You know, what was discovered in that period was that some of these covenants actually related to how much equity there was in the business. And so it led to a bit of a snowball effect that as the equity value kept on shrinking, it was actually causing the debt covenants to be hit, which, you know,
Phil (8m 8s):
Yeah. Directly related to the share price as well.
Chris (8m 10s):
Yeah, exactly. So you found that there were these hedge funds out there, and a lot of them in the US that identified this as an opportunity, and we're selling the share prices, knowing that the lower they went, the more the companies were getting squeezed and forced to raise capital, which was actually supporting their trade thesis. And so, yeah, I mean, you know, I think exposed a lot of structural risks in that sector that, you know, I hope now have been addressed. Yeah. Certainly no company should be in a position where their share price falling basically causes them to default on their debt, but that was happening a lot. Yeah,
Phil (8m 42s):
No, it's always good to know these kinds of insights, especially when you, as you say, people think has property as being safe.
Chris (8m 47s):
Yeah. I think property, I think is a, you know, an asset generally that's safe, but leverages the thing that makes it unsafe. And, you know, it's something that I worry about within the super industry in Australia is that, you know, a lot more money these days is getting invested into assets like real estate and infrastructure. They seem like safe assets and they are until you add a lot of cheap debt to those assets. And a lot of debt has been added over the last few years to some of the safe assets to juice up their returns because adding debt does help equity holders earn more. The problem is when the cost of servicing that debt increases, which we're likely to see over the next few years, it couldn't cause the opposite to happen. And then the equity values can fall quite drastically.
Phil (9m 27s):
Okay. Let's move on to Stockspot. What was it like starting Stockspot? When did you start it and what was the process?
Chris (9m 32s):
I mean, it was a long process. I, you know, I was going from a world of, you know, working in a financial institution that was a very large one with tens of thousands of employees to becoming a lone ranger, trying to navigate the world of starting a business
Phil (9m 45s):
And a FinTech startup as
Chris (9m 46s):
Well. Yeah. I mean, this was before FinTech was a word Phil. So I was sitting at home trying to work out where this company kind of fit in the world, but you know, so many of these other industries in the world had moved to being digital online and really created great customer experiences, but to get great investing advice, you know, it was, it was still quite archaic. You have to see an advisor and a broker go into their office. You know, there wasn't a lot of consistency in the sort of advice people were getting. And so, you know, I saw an opportunity really from a lot of the questions I was getting from friends and family on how to invest that there was a need for people to get good investment advice. And, you know, for people that aren't in finance to be able to easily manage a sensible portfolio, that was a sensible portfolio, not taking a lot of risks, you know, not gambling, actually an investment portfolio.
Chris (10m 34s):
So the first year was really me navigating the environment of how do you set up a business? You know, how do you navigate the regulatory environment, obviously financial services, highly regulated, and in starting a new business, that's not like anything that's ever been done before, because we wanted to provide personal advice to each client using a, essentially a machine. It took a lot of conversations with different people in the industry, including ASIC, the regulator. I remember flying to Melbourne a few times to explain to them what I wanted to do and ultimately try and convince them that it was a good product for consumers.
Phil (11m 7s):
Was there a model in the United States that you base this on? Or
Chris (11m 11s):
Yeah, there was, and that's what gave me probably more confidence to start the business. You know, I sort of imagined there was some sort of business opportunity to help people manage ETF portfolios. I thought ETS was such a fabulous product that no one had really heard about at the time they were very small in Australia. You know, I just looked at them and thought, this is an industry changer. This is going to change generationally, how people invest their money, but no one seems to have kind of latched on to this yet. And then I saw these businesses in the US, a lot of them still exist, like Betterment and Wealthfront and Personal Capital that had a similar idea that you could build for everyday people, you know, awesome professionally managed portfolios at a very low cost. And to me, it just seemed like a complete game changer for the industry.
Phil (11m 54s):
And it's not that long ago that this was happening and people didn't really know what ETFs, where and what part they could play in a portfolio.
Chris (12m 2s):
No, and I, and I mean, that was a very sad thing for me back in 2012 13, I think at the time the ETF industry in Australia was only about $8 billion. Yeah. Now it's over 150, so enormous growth. And, you know, the overall industry hasn't grown by very much at all. You know, I could understand why more people weren't investing in them and from working at UBS, I could see that in a lot of big organizations, you know, there were certainly a lot more financial incentive to be selling the idea of picking stocks or paying fund managers to pick stocks and really in the industry, that's where all the margin is for financial professionals. But yeah, I started reading out more around the concept of indexing, the mathematics behind indexing, and that the market is, you know, really a zero sum game.
Chris (12m 46s):
And if you are actively picking stocks, if you're a winner, we know there has to always be a loser. And it just sort of resonated with me that this was a smarter way for the masses to get their money invested and ultimately keep more of the return for themselves rather than the finance industry becoming very wealthy. You know, that wealth could be, you know, more, fairly distributed.
Phil (13m 6s):
So many fees isn't there in there in their financial advice. It's okay if you've got a lot of money, but if you haven't,
Chris (13m 11s):
Well, it's even worse. If you have a lot of money, why would you want to pay a lot of fees if you've got a lot of money? I think, yeah, there's this idea probably in a lot of areas of life, that if you pay more, you get more, you know, if you go to a high-end retail shop, certainly you can get higher quality handbag if you pay more money. Yeah. And so I think a lot of people with a lot of wealth expect that they have a lot of money. They need to go and pay a lot of money to a financial advisor and they'll get, you know, some sort of extra service or extra, you know, extra returns. It's a fallacy. I just wanted to kind of break to show that actually finances is this one industry that the more you pay, the less you get, you know, it's like the emperor is, you know, Emperor's new clothes. Like you realize very soon that there's, there's nothing there when you're paying all of this money for the, the most extravagant advice and, and it's just not necessary.
Phil (13m 57s):
So there's a lot of questions I want to ask you about the portfolios and Stockspots, investing methodology, but just tell us about Stockspot straight off now, what is it for listeners who haven't heard of yet? Yes.
Chris (14m 8s):
So Stockspot was, I mean, in Australia, the first robo-advisor, and I can explain what that is in a moment. And we help to build and manage portfolios for people to grow their wealth as it happens, those portfolios contain exchange traded funds, which I'm sure we'll talk
Phil (14m 22s):
About. And it's only, only ETFs isn't it? That it is.
Chris (14m 25s):
But I think it's a misconception that we can only invest in ETFs. Ultimately we're regulated like a financial advisor, but we only invest in ETFs because we think it's the best thing for clients. So if we thought there were some funds out there, or some stocks we should be investing in, we could do that. But there is just so much information and evidence that shows that it's not the right way to do things that we just stick to ETFs. So it's one of these misconceptions in the industry that the more simple someone's investment strategy it's sort of dumb, or it's not going to earn good returns. Our portfolios are extraordinarily simple. And yet we've been able to prove that the returns can do better than 90% of the professionals out there that people are paying a lot of fees for them. So, yeah, we managed ETF portfolios and really, for average people, we try and make it very convenient and easy so they can get on with their lives, you know, enjoy their retirement, spend more time with their kids, spend more time with their jobs rather than be glued to a computer screen, trying to work out whether they should be buying BHP or Commonwealth bank, or, you know, whether they should be investing with Magellan or Platinum.
Chris (15m 25s):
We just try and take away all the complexity and give people a good result.
Phil (15m 35s):
Part of traditional financial advice is getting a statement of advice, but you provide a statement of advice. How do you do that for basically no fees?
Chris (15m 43s):
Yeah, we do. I mean, so it was one of the differences between us and probably some of these global robo-advisors is a lot of those global providers don't actually provide personal advice to each client and it is still a self-select sort of service. And there are others in Australia that still have this more self-select portfolio service. We thought it was really important, not only to give an option of different portfolios, but actually to direct clients of which portfolio we think they should invest in. Because we think getting that right is really important. And, you know, it was a mistake I saw happening a lot is that people want to earn the highest returns, but if their investment horizon is too short, they end up taking too much risk. And then they can't, you know, withstand market turbulence and end up selling at the wrong point.
Chris (16m 27s):
And so we're pretty conservative in how we recommend portfolios. If someone tells us I'm only looking to invest for three or four years, we're not going to tell them to put 90% of their money in shares because we think that's irresponsible. And we think the chance of actually getting the result they want isn't that high. And so it's more like gambling over that time period. So we're very particular in how we recommend what people should be investing in. And as part of that, we actually provide a statement of advice, which we, and the client sign off on the benefit for the clients is that, you know, in providing advice, we are also regulated like a financial advisor. So we have to meet best interest duty, which means that we can't take commissions from products and we have to act only in the client's best interest.
Chris (17m 8s):
And I think, you know, that's something people still, even after the Royal commission, haven't got their heads around fully that, you know, it's not just financial advisors who were providing advice that was clouded by product commissions. But, you know, there's all sorts of trading platforms out there that are pushing products that they're getting commissions from. So, you know, a good example is a lot of stock brokers still are pushing hybrids on investors and it's largely because they own a big fee from selling these.
Phil (17m 36s):
I didn't, I didn't understand that that there's a fee from hybrid.
Chris (17m 39s):
Yeah. And I mean, I saw it with my parents. They'd often get their bank manager and I mean, they didn't even have a private wealth manager, but it was some bank manager always pushing the latest hybrid that their bank was selling. And you know, that bank manager didn't even understand the risks or where hybrid sat in the capital structure. They, they were just highly motivated to sell that security to my parents because they were running a big juicy fee off it. And the fee for hybrids was enormous. When you think of these things are sold as very safe, almost fixed income, like securities to earn a commission of one or one and a half percent is enormous because people are putting millions of dollars into these things. And I just thought it was wrong that people are getting pushed not only by advisors, but by brokers into certain investment strategies,
Phil (18m 22s):
Just to explain to listeners what is a hybrid,
Chris (18m 25s):
It's an unusual type of security that sort of fits somewhere between equity and debt. And it has characteristics of both, but ultimately you earn a coupon
Phil (18m 34s):
And it's usually a bank that's issuing these. Yeah,
Chris (18m 37s):
Most generally in Australia, a bank like, you know, when I first started looking at them and trading them back in 2007, you know, hybrids, there was all sorts of companies issuing, you know, the sorts of securities. They use days, it's mainly the banks
Phil (18m 49s):
And it's to raise capital, isn't it
Chris (18m 50s):
It's to raise capital in a way that for the banks, it's a good quality of capital, you know, that allows them to, you know, lend out and, and manage their balance sheet in a cost-effective way. And for investors, they look appealing because the interest rate you earn off them is certainly higher than what you get in the bank or a term deposit. But they also come with a set of risks and under certain circumstances, they convert into equity. So you turn from becoming someone that's earning like a fixed yield every year to a shareholder in Commonwealth Bank or BHP or whatever company it is, that's issuing these hybrids. And so there's definitely businesses out there that have sophisticated modelling and can understand what they're worth.
Chris (19m 31s):
But for the average person, you know, if you think bonds or shares are complex, these things take complexity to a whole new level. And it's difficult to understand whether they're valuable or not. And often the risks are misunderstood.
Phil (19m 45s):
So cruising through the website, the Stockspot website, I was interested to hear about this, this figure of in the 1970s, there were only 5,000 fund managers on the planet. Now there's a million. Is that a conservative estimate? I'm sure there might even be more than a million.
Chris (20m 0s):
Well, yeah, I would guess after the influx of new traders since 2020, and probably a lot more people considering themselves fund managers.
Phil (20m 8s):
And I think the point that you are making is that the amount of people that are actually forensically inspecting stocks means that there's so much information out there that no one has any kind of competitive advantage in picking those stocks.
Chris (20m 22s):
That's exactly right. In the seventies, it was a bit of a, you know, sort of industry. There weren't many people involved in understanding balance sheets and shares. And, you know, there was an opportunity as well because there were the smarts that were doing all the work and they tended to make the money off the retail people that didn't understand things. And, and so there was a transfer of money from the dumb money. So to speak to the smart money these days, you know, 99% of all trades that happen on share markets is just the smart money trading against the smart money. So, you know, with the analogy of poker, you're sitting at a poker table and everyone is a poker shark. And so it's very hard to make the easy dollars and ultimately luck becomes a much bigger factor.
Chris (21m 5s):
You know, every fund manager out there is very smart. They've all been very well-trained in understanding discounted cash flows and trying to understand, you know, intrinsic value. The other problem is that the share market can stay wildly overvalued or undervalued for long periods of time and may never revert to what these fund managers believe is their, you know, model based intrinsic value. So these days it's just very hard to consistently pick stocks and beat everyone else just because competition is so high.
Phil (21m 36s):
Yeah. And so many fund managers have got a theory or a strategy they depend on and that strategy might be out of fashion, like value for many years.
Chris (21m 44s):
Yeah, for sure. And yeah, I mean, every fund manager also has their own model based on their own sort of arbitrary assumptions. And I think fund managers, wrongly or overconfident in their own assumptions. And often those assumptions don't turn out to be right. Yeah. That's what I think, I mean, investing in the index is such a humble way of investing because it's basically a way of accepting. You don't know, you can't time the market, you can't pick the right shares, but ultimately the market decides in a pretty good way. Does that mean that shares don't get overvalued or undervalued? No, but the difficult thing these days is actually working out how to profit from that and shares can stay wildly overvalued or undervalued for just such a long period that there aren't many people out there that can consistently profit from it.
Phil (22m 28s):
Yep. What's the truth about diversification, because now with ETFs, you can get invested into different asset classes, but I 1don't think people understand the importance of those different asset classes. And listen, this most probably know that I geek out all the time about asset allocation, because I don't think people actually understand what these different assets mean to our portfolio. And even when they're looking at their super balance to see where their money is being deployed.
Chris (22m 52s):
Yeah. I mean maybe if we kind of go back a step to the basics of diversification, the idea of diversifying is so that you have a portfolio that provides in simple terms, smoother returns and smoother returns across different environments because different components of your portfolio are moving at different directions at different
Phil (23m 11s):
Times, they call that uncorrelated risks, don't they?
Chris (23m 14s):
Yeah. I mean, things can be correlated or uncorrelated or negatively correlated, but ultimately they're just moving in different directions and, you know, over the long run, they might all be drifting up. But over shorter periods, you know, things go in different different directions and give you a better, you know, in finance lingo, we call it quality of returns. Yeah. And so, you know, you may not own the highest return. And actually in most cases, you won't by diversifying, you know, it's one of the features of diversification that you should not earn the highest returns, but you also won't earn the lowest returns. You'll never earn the lowest returns. And actually you will get a nice blend of the different returns of different assets to give an example of our portfolios that the Aussie share market, let's say over the long run has returned somewhere between 10 and 11% per year.
Chris (23m 59s):
Our highest risk portfolio might have a nine or 10, so a little bit less, but has had half of the risk. So when the market fell 35% in early 2020, it only fell by half. So you don't have to sacrifice a lot in returns to really take a lot less risk. And I think that's really beneficial, particularly when markets are volatile, it's a lot harder to swallow and have that conversation with your partner when your portfolio is fallen 35% or your super as fallen 35%, it's a lot easier if the dip might be 10% or 15% to continue to be confidently invested. So in real person's terms, diversification is about being able to be more confidently invested, you know, in all types of market environment.
Phil (24m 41s):
And what's the place of bonds and gold in these portfolio allocations.
Chris (24m 45s):
Well, so yeah, in all of our portfolios, we have an allocation to bonds, government bonds and
Phil (24m 50s):
Gold. So just government bonds, not corporate bonds,
Chris (24m 53s):
Government and high quality corporate bonds, actually. So combination of high grade bonds, they played
Phil (24m 58s):
That's in the ETF vehicle itself, isn't it? That's
Chris (25m 0s):
Phil (25m 1s):
Because it's structured by someone else. Who's got expertise in this area.
Chris (25m 4s):
That's right. So I'm in the bond. ETF follows an index. That's been around for a long time, but you're not buying one bond because that's risky because you know, if that company goes belly up, then you lose all your money. You're spreading your money across lots of different companies, bonds, and obviously local governments and state governments and Commonwealth government, as well as the gold ETF is a little bit different. You would just own physical gold bars that are stored in a vault in London.
Phil (25m 29s):
I know I love it.
Chris (25m 30s):
So you don't get to touch the bars and you don't get to visit them, but you know, they're audited and you can know that they're there. Yeah. Look, these are two defensive assets that play similar, but I'd say also different roles. So, you know, bonds are an asset that tends to go well in a certain market environment. Usually when inflation is low and growth is low and you know, definitely over the last 30 years, it's an asset class that has done quite well as interest rates around the world have fallen, you know, in a lot of developed markets, but typically bonds will move in an opposite direction and not day-to-day, but they'll often move in an opposite direction to shares, you know, because when an economy is going well, it's usually the way that interest rates are getting increased over that period, you know, shares are usually doing all right.
Chris (26m 14s):
And then bonds aren't doing very well. And conversely, when, you know, an economy is struggling, interest rates are probably getting cut. You know, monetary policy is getting ease to make things easier for businesses and consumers and shares might be doing poorly, but bonds are doing well. So they tend to counterbalance each other, but then there's environments where bonds and shares don't counterbalance each other. And actually this last quarter, this sort of first quarter of 2022 has been a good example of that because we're now in an environment of high inflation and that high inflation is causing interest rate expectations to go up. It's actually been the worst quarter for government bonds in the last 30 years.
Phil (26m 52s):
Yeah. I never understand that, you know, interest rates go up and bonds go down, I think it's that, that inverse law or inverse rule, isn't it?
Chris (26m 58s):
Yeah. I mean the easiest way I think to think about that is that as a bond holder, you get a coupon and that coupon is fixed.
Phil (27m 5s):
Like the interest rate, isn't it, or the interest, the distribution. Yeah.
Chris (27m 8s):
If, if the prevailing interest rate in the market is going up, then those bonds become less attractive because on a relative basis, you might as well just put your money in the bank or buy a new bonds that are getting issued. And that's, what's happening at the moment over the last few months in Australia,
Phil (27m 22s):
Investors sell those bonds,
Chris (27m 24s):
Exactly sell their bonds and, and, and go and buy the other more attractive bonds or leave the money in the bank. And so over the last quarter, for instance, we've seen bonds fall something like five to 6%, which doesn't sound like a lot in the share market world, but in bond world, that is a big
Phil (27m 39s):
That's huge, isn't it?
Chris (27m 40s):
But it's because interest rate expectations over the next few years have increased by 2%, which is, you know, unheard of to expect that interest rates by the end of 2023 in Australia are going to be over 3%. I don't think many people fully understand and appreciate the impact that's going to have, but already it's having an impact on bonds, you know, shares. Haven't really gone up a lot over that period. A lot of the growth in shares already happened last year. Yeah. The Australian share markets up a little bit over this quarter, and it's definitely done better than global share markets, but they don't always counter balance each other in periods of high inflation. And that tends to be an environment where gold has done better. So gold tends to do well in an environment of low growth and high inflation and that's different to bonds or shares.
Chris (28m 26s):
And that's why that's one of the assets we keep in our portfolios, because my view is that no one can predict what sort of economic environment you're going to be in tomorrow or in a year's time. And so the most robust portfolio you can create as one that can withstand lots of different environments, you know, are you going to be high growth, high inflation, low growth, low inflation, high growth, low inflation, et cetera. You know, at some point over the next 10 years, you'll probably be in each of those sectors and there's going to be some asset that's doing really well. And some that's not doing as well. You know, rather than trying to guess in advance, which asset that's going to be. You know, our view is just, I know all of them you'll get a much smoother ride, but you do have to accept that at any point in time, there's going to be something that's not doing well, that's something that's doing well.
Chris (29m 10s):
Phil (29m 10s):
So when someone gets their statement of advice and they talk about their risk profile and what their aims are, this is how you work out, how to weight the portfolio, how much is going to be in shares, international shares, bonds, gold and so forth.
Chris (29m 24s):
Yeah, that's right. The theory is that if you can understand someone's capacity to take risk, then you can build a portfolio. That's going to give them the best expected outcome.
Phil (29m 34s):
It's about how well I can sleep at night. Isn't
Chris (29m 36s):
It? Yeah, exactly. So if someone tells you that if the market fell 10%, they're going to sell everything and never invest again. That's really good information to know.
Phil (29m 45s):
Do people really know that until it actually happened?
Chris (29m 47s):
No. And that's a great point that really like, this is really just a starting point in the education process
Phil (29m 51s):
Because it is people who've got to learn what markets are all about and long-term long-term horizon.
Chris (29m 58s):
Yeah, totally people, I think, you know, probably overestimate how assured they would feel in the market downturn. And it's actually really hard. And for people that haven't been through periods where the market's fallen 50%, which happened in 2008 or 35% at the start of 2020, you know, you might think theoretically, you'd be all right, but it has a huge emotional toll and that can lead to doing, you know, things you might not have thought you would have done. So yes, we don't take the answers. Our clients give us when they sign up as, as gospel. And certainly we see our role as educating them along the way. And you know, the last quarter has been a good example. You know, we had a great year of returns last year, but the first quarter of 2022, you know, markets have gone up and down.
Chris (30m 41s):
There's been a bit of volatility returns. Haven't really been there. You know, people that are first time, investors are understandably nervous. They're thinking, Hey, what's going on? Like, is this normal? You know, should I be selling everything? You know, the job of a good advisor is to actually educate them and reassure them and say, Hey, your goal is to buy that house in five years, time
Phil (30m 59s):
Here it is written down on your statement. You
Chris (31m 1s):
Wrote it to us, you know, have your goals changed because if your goals have changed, yes, maybe that is a reason why we might want to change your strategy. But if your goals haven't changed, then the best thing to do is to do nothing just to keep on time. Yeah. The whole tide. And it's, it's tricky because when you lose money, you know, it hurts. It hurts everyone. And, and you know, I feel it, I'm sure you feel it when your portfolio falls, it's hard not to kind of react emotionally and think that you need to do something. And the hardest thing usually to do is to do nothing.
Phil (31m 31s):
What are your thoughts on the rise of thematic ETFs? And do you think they'll ever play a part in Stockspot portfolios?
Chris (31m 37s):
So our portfolio is generally built with very vanilla index ETFs. So these are indexes that indices that follow the broad share market, the ASX 300, or, you know, the top hundred shares in the world. You know, the benefit of this sort of process of building an index is there's always companies that aren't doing well, that are getting dropped out new companies that are getting built in, and it creates this, you know, effective a portfolio. That's always containing the, you know, the biggest and best performing companies in the share market. There's a lot of theory that supports this way of investing and really a lot of the early ETFs kind of follow this style. Definitely the pendulum has swung over the last couple of years where most of the new ETFs getting issued are following more niche ideas or, or sectors or parts of the market.
Chris (32m 24s):
So rather than investing in the whole market, you might just be investing into battery companies or into a specific part of the tech sector. Now, in my mind, this is, you know, bringing ETFs a little bit back towards the world of stock picking where people are trying to predict the future, trying to think that one sector is going to do better than others. You know, unfortunately there's a lot of information that shows that one it's very difficult to do most professionals can't and most regular investors can't either. And actually you're more likely to get swept up in FOMO or getting excited by things that are in the news a lot or that you're reading about. And usually by the time something is getting written about in the newspaper, a lot is a big trend or a secular trend it's too late.
Chris (33m 8s):
And so there's some great research that's been done into these thematic ETFs, not only in Australia, but around the world that shows that when they launch, they tend to do badly for the next few years. And this makes a lot of sense because they're usually launched to satisfy the appetite of investors who are reading all these news articles and thinking, oh, I got to get onto this trend, but by the time they do, everyone already knows about the trend and therefore that information isn't valuable anymore. And we see this time and time again in Australia, you know, I remember writing some of our ETF research back in 2015. At that point, dividend ETFs were all the rage. You know, there was about half a dozen that got launched within a short period of time. And that's because it was a period where Telstra was going really well.
Chris (33m 50s):
Banks are doing well, everyone wanted dividends. And that was the peak of that trend. So for the next four or five years, dividend shares did horrendously. And the same happened over the last year or so. There's been a, you know, a huge wave of new ETFs being launched around cryptocurrency or, you know, technology trends, Asian technology giants, usually, unfortunately. And it's something that I think, you know, listeners should be aware of when there's a lot of products getting launched in a certain area. It's a bit of a red flag that that area is already hot and probably, you know, not one worth putting extra focus on in the short term. And that doesn't mean that these technology companies won't do fantastically over the long run or even the cryptocurrency companies.
Chris (34m 31s):
They absolutely can, but usually it's an indicator that they're at their peak of, of excitement in the short term. And they're probably going to go through a period of disappointment over the next few years, at least. And so, you know, what we say to clients is if you do particularly want to invest in these, thematic ETFs, try and invest in them in a way that takes advantage of this information. So rather than investing on day one when they launch and when you read about them and when these ETF issuers are bombarding you with advertising of why you should buy them, like wait a couple of years, be patient. And when no one's talking about them, that might be the right time to
Phil (35m 6s):
Buy Chris Brycki. Thank you very much for joining me today.
Chris (35m 8s):
Well, my pleasure, thanks for having me on.
Shares for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Shares for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation