The Benefits of Diversifying Your Asset Portfolio

Bryce: [00:01:09] Welcome to Get Started Investing feed in this podcast, we cover all the basics that you need to start your investing journey. Are you joining us for the very first time, though? Is this the very start of your investing journey? Well, before you dive into this episode, our fate is designed to go from the very beginning. So we strongly recommend that you scroll up and start from episode one. However, if you're feeling brave and just want to dive in, then don't let us stop you. Here at Get Started Investing feed. We unpack all the jargon and the confusing bits here, your investing stories with the goal of making investing less intimidating. And along the way, we want to have a good time. My name is Bryce and as always, I'm joined by my Equity Mate Ren. How are you going? [00:01:47][37.9]

Alec: [00:01:47] I'm very good, Bryce. Episode two of our discussion of assets. [00:01:51][4.0]

Bryce: [00:01:52] Back to asset class. [00:01:53][0.4]

Alec: [00:01:53] We're back in school and we're going to asset class. How many times am I going to make that? [00:01:57][4.2]

Bryce: [00:01:58] I'm not sure. But it's over. [00:02:00][2.7]

Alec: [00:02:01] No, no, no, no, no. I will ride this joke into the ground. So episode one of assets we talked about, like what do we mean when we're discussing asset classes and touched on some major asset classes, equities, cash, commodities, debt, which are known as bonds, property and then alternatives? Some of your favourites, cryptocurrency, future art, cars, wine. There's a lot of assets out there. And in the next two episodes, we really want to say, all right, well, the options, that's the menu of things to pick from as an investor. What do they want to actually do? Like this episode's all going to be like, why would I buy them? What are they what characteristics do they have? What risks do they have? We've got a bit of a game looks similar to the Who am I? We played a few episodes ago and then we're going to put it all together in the in the next episode and say, all right, those those are the menu options. I understand their characteristics now and like why I would buy them now. How do I put them together in a portfolio? So we're not there yet, but that's where we're heading. [00:03:05][63.6]

Bryce: [00:03:05] Yes. So let's rock and roll. We spoke about, as you said, the different asset classes. And the good news is that you can buy almost all of them, if not all of them, through the stock market. You can get access to all of them through the stock market. So we're going to catch our conversation in that. So we're going to have a look at the characteristics of some of these assets and then, yeah, as rents and we've got a bit of a game. So let's kick off and define some key terms around the different types of assets and how you might cost them to go. [00:03:39][34.3]

Alec: [00:03:40] Yeah, so for people who are new to the stock market jargon, welcome. You've come to the right place. We're going to help you understand it because we hate jargon. One of our three official policies here at Equity Mates, you'll often see assets grouped by key characteristics and you might hear terms like growth assets, defensive assets, cyclical assets. And so we're going to we're going to go through some of them, talk about what we mean when you when you hear those terms like what is a growth asset mean? What does that do? You talk about some of the examples and then some of the risks that you need to be aware of with each of these different asset classes. So let's start with the the sexy one. Let's start at the top. Let's start at the one that a lot of young people are very much enjoying at the moment, which is growth. Yes. [00:04:26][46.6]

Bryce: [00:04:27] So, yeah, you do enjoy growth when you're young. [00:04:29][2.1]

Alec: [00:04:30] You do. You do. Yeah. That's the kind of level of comedy you can expect here at Equity Mates and Get Started Investing feed. But what are what do we mean when like if I say I want to invest in growth assets, what am I talking about? [00:04:45][15.0]

Bryce: [00:04:45] You want to invest in assets that are going to appreciate your capital over a period of time. I mean, of course, when you're investing, that's in part what you're trying to achieve. But a growth asset is an asset that you can put your capital in and you want that to outside grow substantially and quicker than perhaps other assets over a shorter period of time or a long period of time. [00:05:08][22.8]

Alec: [00:05:08] Appreciate your capital. Over time, you've become what you use. You've set out to fire it. What do you mean? Is that is that jargon? It's bordering on job. [00:05:17][8.5]

Bryce: [00:05:17] I appreciate your capital over time. Okay, make your money grow capital. Bring your money that you put in. Appreciate means go out. Yeah. [00:05:27][10.4]

Alec: [00:05:28] Yeah. So make your money go up. [00:05:29][1.3]

Bryce: [00:05:29] Yeah. Make your money go up. I would say at a faster rate than if you were to put it in other asset classes. [00:05:35][5.7]

Alec: [00:05:36] Yeah. Yeah. Make you make you more money [00:05:39][3.1]

Bryce: [00:05:39] making more money. Yes. [00:05:40][0.9]

Alec: [00:05:42] So when we're talking about making more money, there are probably two key ways that these things can make you more money. The first way is people are willing to pay more for them in the future. And that's if you think about art as an example, has been an incredible growth asset because billionaires just are willing to keep paying more for the same thing over and over again. Cryptocurrency has been an incredible growth asset. One Bitcoin has just rocketed up in value, and so for people that held it, it's been a real growth driver. It's been worth a lot more money because other people are willing to pay more in future. And then the second way that something can grow and make more money for you is it actually the thing that you own changes and grows. And we think of companies in this way, you know, they take the you know, they set out. They go and hire the smartest people. They create new products. They find ways to enter new markets. They market their products to sell more of them all to make more profit, and they actually grow. So that's that's sort of the growth driver of growth assets. Yeah. Said growth a lot. Their growth. [00:06:50][68.9]

Bryce: [00:06:51] There's no better example of a growth asset than stocks. Equities. That is probably the key, the key asset to think about when it comes to to growth assets. [00:07:00][8.8]

Alec: [00:07:00] This is the example that I always trot out, but I love it so much. So I'm going to try it out again. When Amazon listed in 1997, it was an online bookseller with about two hundred and fifty employees doing a couple of million dollars in sales. It if you just owned that asset, the amount of shares that you owned didn't have to change. But what you owned changed massively. Now it's not nearly worth nearly a trillion dollars. It's not just a bookseller, it's an everything sell. It does billions of dollars in revenue and employs over a million people that the thing you owned actually grew. [00:07:35][34.9]

Bryce: [00:07:36] Mm hmm. Let's chat about risk, though, because with growth comes risk. And you need to think about, I guess, the risk when it comes to comparing growth assets against a defensive cyclical. So there's no, I guess, doubt that when you're looking at a growth asset, it does come with greater volatility risk. And when I say volatility, the risk that you're the price over a short period of time is going to fluctuate more or go up and down more than, say, cash, for example, which would be a lower known growth asset. Yes. [00:08:13][37.5]

Alec: [00:08:14] So so two two key risks to be aware of. One is the volatility that you speaking of, you know, like the stock market in 2000 and 2001 during the tech bubble or like the GFC in 2008, 2009 or during Covid, like the price of these things can fall a lot, which, you know, they recover well and often they recover, but it can move around a lot, which is a risk. And then the second risk is that the thing that you actually own can be some worthless like you can lose your money because a company goes bankrupt or a cryptocurrency is turned out to be a scam or, you know, art suddenly becomes less valuable or something like that. And, you know, it's been heaps of examples where investors have lost money in individual companies. I lost a whole bunch of money on Slater and Gordon. Dick Smith recently went through twenty sixteen, went bust H.R.H. insurance back in the day like companies go bust. Yeah. So that's, that's the risk. Yeah. [00:09:19][65.5]

Bryce: [00:09:20] So then we move to the opposite end of growth, which is defensive assets. You may have heard that term before. If not, we will define it right now. And a defensive asset is one that is not going to be providing as much capital growth. And when I say capital growth, I mean growth on the money that you put in. But it will provide, I guess, a more stable, steady income stream in most situations. And that's why people use defensive assets to compliment sometimes their portfolio. You're not going to have as much risk as Ren just spoke about when it comes to losing money. Yes, there is certainly that risk, is there, but it's not going to be as volatile as potentially a growth asset. And generally, you would buy into a growth asset to get an income stream rather than to see the money that you put in grow over a period of time. So some examples would include cash, fixed interest. And when we say fixed interest, we mentioned bonds in the last episode are a couple of examples. [00:10:32][71.3]

Alec: [00:10:32] Yeah, you're not always going to get an income stream if you own cash that's incredibly defensive or if you own gold, that's incredibly defensive, but you're not not really going to get an income stream. But you're right. And even like some would say, property has defensive characteristics. [00:10:50][17.3]

Bryce: [00:10:51] You can sit on both sides of the fence. [00:10:52][1.7]

Alec: [00:10:53] Yeah. And the risk here, it's a lot less likely. Nothing in life is certain. You're not guaranteed to not lose money. But it's a lot it's a lot less likely that you will lose money, but you won't make as much money. Yeah, it is. Very slow growing or it pays out a pretty small income stream. Yeah, and so growth and defensive assets, when you think about them, don't think about them, is like two buckets and everything fits in them. Think of it like a spectrum. And, you know, people will talk about things like going up the risk curve and that's going from more defensive assets to more growth assets. You take more risk and generally you get more potential growth as a result. And so, like, if you think about it like a spectrum on one end, the most offensive, what would you say most defensive is? Gosh, government insured bank accounts. Yeah. Yeah. And cash. You're not going to make money or you're going to make major interest rates from the bank, but you're not going to lose it like and will park the whole inflation compensation. But cash is super defensive. And then you have like government bonds probably next because it's highly unlikely that a government defaults and can't pay back its debt. As you move to riskier and more growth focussed assets, you start hitting things like property and then higher up the risk of. But the growth curve as well. You have things like the share market where you have more of a chance that you might lose some money, but you have more of a chance to make some money as well. [00:12:27][94.6]

Bryce: [00:12:28] Absolutely. So those are probably the two main asset, I guess, examples or types the way that you can. Buckett assets that you come across. There is another one, and that is a cyclical asset. We mentioned what cyclical was in the last episode, so we won't rehash that. But probably the asset type that fits within these is commodities. [00:12:51][23.7]

Alec: [00:12:52] Yeah, yeah. [00:12:53][0.6]

Bryce: [00:12:54] And these are, as we said, assets that go through a cycle of price fluctuation. Yeah. And you can you can if you know what you're doing. I think that's the key point here is that you can buy in and out of these assets if you can understand how they're, I guess, price cycle works. [00:13:12][17.9]

Alec: [00:13:13] You know, like people if you're following the news, you might or if you watched the federal budget recently, you might have heard that iron ore is going through a crazy price run at the moment. And, you know, at some point that that price will come back down. Similarly, if you remember during Covid peak, Covid the oil price or one of the major oil prices went negative and now it's come back up. These prices go up and down and up and down. And investors, if they decide to specialise in that and really focus on those industries and those commodities, a lot of times can make a lot of money picking the cycle. But it's not something that you just hold for 40 years and shut your eyes. No, no. If you're going to own a cyclical asset like a commodity index. So like if you invest in the oil price, like an oil price ETF or you invest in a company that is related to those industries like oil drill or a mining company or something like that, you have to you can't just think I'm going to hold it and shut my eyes for 40 years. [00:14:18][65.0]

Bryce: [00:14:19] Yeah, and that's a good segue way to thinking about the characteristics of some of these assets when it comes to how long you want to hold these assets for. You know, not all assets are designed to be held for 40 years. As Ren mentioned, you might not want to hold a barrel of oil for 40 years because the way that price fluctuates and, you know, you have no idea how that's going to pan out, whereas you could probably make a more confident assumption that holding stocks or a property for 40 years is more of an appropriate way to think about that asset class. [00:14:53][34.2]

Alec: [00:14:55] Every asset can be a short or a long term asset because you can just hold it for however long you want. Like no one's forcing you to sell it. But it's just about like it's about the understanding, the characteristics of the of the asset and understanding if it makes sense to to hold it for a short period of time or a long period of time. I can't really think of anything other than commodities like a barrel of oil or something like that, that you would be like you should only be short term with it, maybe cash. It's like you shouldn't be thinking I'm going to pay cash for 40 years. It should be I'm going to park cash for a couple of years maybe and wait for the right time. But you don't want to you don't want to have that sitting in your bank account for decades. [00:15:38][43.0]

Bryce: [00:15:38] No, but for example, if you're looking at debt, a lot of that is a lot shorter term. Right point than if you [00:15:44][5.6]

Alec: [00:15:44] want to explain why. [00:15:45][0.6]

Bryce: [00:15:46] So as we've said that you can go out and invest in bonds which are, I guess, an IOU, or you're essentially loaning to either the government or large corporations, and then they agree to repay that loan over a period of time with interest. And that's that's the main point there, is that it's over a fixed period of time. So you go you go in. Knowing that this is a five year repayment from the Australian government and at the end of the five years, you'll get your money back and some interest, additional interest. So that's obviously a lot shorter than if you were to buy Amazon for 40 years. [00:16:20][34.0]

Alec: [00:16:21] Great point. So one thing that I think people often get tripped up with on this whole conversation around different assets, is there a difference between me buying Amazon stock and Amazon bonds? [00:16:36][14.8]

Bryce: [00:16:37] Yes. [00:16:37][0.0]

Alec: [00:16:38] Can do a lot. Right. [00:16:39][0.7]

Bryce: [00:16:40] So if you were to buy Amazon bonds, you're as we've mentioned before, you're actually buying or investing in the debt of Amazon. And that has nothing to do with the performance of the stock or the company. They're just saying we need we need to borrow some money and we're willing to pay five percent for that. And we're willing to pay that over five years. And you can use that as a way to some cash and get some income stream. Whereas if you're buying the stock of Amazon, you're actually backing in the performance of the company, in the growth of the company. And and as a result, that's traded on the stock market and you're going to see a capital return, but you're not guaranteed interest repayment from Amazon and you're not guaranteed that you will get your money back. [00:17:23][42.9]

Alec: [00:17:24] So Amazon can take you if they if you buy an Amazon bond, they can take your money, can make their business 100 times bigger, can be throwing cash at their shareholders. But you as a bondholder, you don't get anything more. Yeah. [00:17:38][14.4]

Bryce: [00:17:38] You just get your money back and a bit of interest. [00:17:39][1.2]

Alec: [00:17:40] But similarly, if they take your money and they burn it all and it turns out Jeff Bezos just wants to go to space and they don't actually invest it wisely. As an Amazon shareholder, you could lose a lot of value. But a bondholder, you'll likely get paid back. Yeah, you'll definitely you'll get paid back before shareholders say anything. [00:17:59][18.8]

Bryce: [00:17:59] So before we move to a bit of a game that he's going to talk through, I guess some persona's that might be buying a particular asset classes.[00:18:06][7.0]

Bryce: [00:19:22] Ren well, we did a bit of it. Who am I when we did the episodes on investing styles, we might continue with that theme and play a bit of a game. I am a dot, dot, dot. Yes. And talk about how there are different stages in life and moments of investing that you have to think about different asset classes. [00:19:40][17.3]

Alec: [00:19:40] Yeah. Now this game is going to be deliberately general if you want specifics, goes back to a financial adviser. But there's certain assets that make sense for certain people at certain stages of their life. So with that caveat in mind and everyone keeping in mind that we're going to be general here, let's talk about some different personas and what assets make sense for them. So let's start with well, I mean, you've just turned 30, so you're not quite this anymore. But let's put you put yourself back in your 20s, in your 20s shoes. Um, I am a young person, so that makes sense for me. Growth. Next up next question, Bryce a one word, Solecki growth answers. [00:20:30][50.0]

Bryce: [00:20:31] You're young. You have time on your side. You want to put your money into the market and hopefully not need that money for a long period of time. You want that money to appreciate or go up in value. And the best way to be doing that is with assets that are going to grow. You're not necessarily concerned about getting an income off those assets at this stage in life. Maybe later on you want your assets to be generating an income. But right now, young time onside give me a growth asset [00:20:57][26.0]

Alec: [00:20:59] with the whole income point. People often wonder, like because, you know, this is the whole compounding thing that you're talking about there, like a lit by growth assets. Let them compound over time. How does like effect if you do on a stock that pays you a big dividend? Is that something you should be avoiding as a young person? [00:21:15][16.2]

Bryce: [00:21:16] No, there's nothing wrong with having an asset that pays a great dividend. My only suggestion would be that you reinvest that dividend back into the stocks that you're that you're buying or have a dividend reinvestment plan so that you're not actually taking that money out and spending it on a restaurant or whatever it may be, because the value of those dividends reinvested back in the business over a long period of time is going to be incredibly important. [00:21:39][23.0]

Alec: [00:21:39] That's still compounding. Like as long as you're reinvesting it, if you're getting the if the share price is going up, all you're reinvesting your dividends. Either way, it's compounding. It's just if you do a Bryce Leskie and take the dividends and buy new shoes that you a compound done that [00:21:52][12.9]

Bryce: [00:21:54] next one Ren. I am nearing retirement. What sort of assets will I be thinking about. [00:21:58][3.9]

Alec: [00:21:58] So you would be thinking about. I'm going to need to rely on this money soon. And so you wouldn't want to take the risk with growth assets or you'd want to, you would want to shift towards defensive assets and retirement can be long those days you retire at sixty. What's the average age like eighty something these days. That's 20 odd years you got to live. So you want to you want defensive assets that will pay you an income. And so you're looking at things like bonds, you're looking at property, you're looking at bluechip, like you're looking at stocks that are safer. Now obviously they're still riskier, but companies like, you know, Woolworths, they're not going anywhere. They pay a strong dividend. They can fund your retirement income. You're not you're not thinking cash. Well, you'll have more cash, but cash won't pay you income. Gold won't pay your income. Cryptocurrency won't pay your income. So, yeah, as as I'm nearing retirement, I'm thinking about how am I going to cover myself for the next 20 years. I don't want to lose money, but I need to get paid some money. Nice. All right. This one is probably so you're probably thinking like this. You're nearly at that family formation, house buying stage of life. No, I am saving for a big purchase. [00:23:19][81.0]

Bryce: [00:23:20] If you're saving, you don't want to lose money, obviously. So you want to be looking for assets that really are going to protect, protect that as you save for your big purchase. So really, you're thinking about cash. You know, as I said, the government guarantees most banks, I think [00:23:37][16.8]

Alec: [00:23:38] most of the major banks up to two hundred fifty thousand dollars. Yeah. [00:23:41][2.8]

Bryce: [00:23:41] So, look, you might you might want to take the risk and put it in some assets that are going to to grow and give you some income. But realistically, you're taking a risk there that you you might lose some of the money that you're trying to save. So if if you are saving for a big purchase, I'd just be copping the low interest in your bank and putting as much money in as fast as possible so you can buy whatever it is and get back into some growth assets, [00:24:07][25.9]

Alec: [00:24:08] which sucks to hear. And especially Australians looking at house prices. They're like, I need the growth from the share market to get to that point. But you've just got to remember that it could set you back as much as you think it's going to accelerate your progress. It. Could also derail your progress and I mean, like if you don't have a time limit and you're willing to cut being derailed for the chance that you can be accelerated, like, then that's something that you can consider personally. But as a general rule, slow and steady wins the race and saving for big purchases is boring. But you'll get there eventually. [00:24:43][34.8]

Bryce: [00:24:44] So to close out fine movement. What would I be doing? Financial independence. Retire early. [00:24:50][6.6]

Alec: [00:24:51] Well, according to you, I'd be eating beans exactly as well as eating beans. I would be thinking if I wanted to retire as fast as possible, I need to think about growth as quickly as possible. And then once I get close to my fire, no, I want to pivot. But the pivot is a really hard thing. And I think a lot of people our age look at fire and think I've got to get to my fire number and it's maybe one million, two million and then I can retire. But if you retire at 40, you've got another 40 years to live. And so that balance between defensive and growth then becomes a real challenge for the next 40 years, because you've got to keep up with inflation, you've got to keep growing. But you've also got to pay yourself an income because you've retired early, but in the early stages of fire, it's growth and it's hard growth. Yeah, and I think everyone in the fine movement buys Vanguard's Vade AHJ classic classic. But yeah, the fire number for me is the easy part. It's a it's a number that you're chasing the asset allocation after that you've really got to think about. All right, last one, what assets how should I think about assets if I have no idea what I'm doing in the stock market? [00:26:06][74.6]

Bryce: [00:26:07] How should you think about it? [00:26:08][1.0]

Alec: [00:26:09] You know, not even in the stock market. So no idea what I'm doing. [00:26:11][2.6]

Bryce: [00:26:11] My money where you want to be thinking about the level of risk that you're prepared to take. What are your goals that you're working that you want to work towards? You know, if you're working towards a big purchase and you want to buy a house, then you need to think more appropriately about protecting your money. If you are thinking that you want to put your money to work over the long term, then that will lead you down a path. So if you have no idea, firstly, do some reading, listen to a bunch of podcasts, speak to a financial adviser, but don't just start spraying and praying. Make sure you have a clear, I guess, goal and objective and then that will help help you understand what types of assets you might want to be investing in get started. I think, you know, don't just don't spray and pray, but get started. [00:26:55][43.9]

Alec: [00:26:56] The worst thing you can do is just blindly make decisions without knowing what you're doing. The actual worst thing you can do is to just leave all your money in cash for all of your working life and never actually get started. Yes. So life as bad as each other. [00:27:14][17.8]

Bryce: [00:27:14] Yes, but we'll leave it there. Next asset class in the final of this series, we're going to be having a look at a little bit about superannuation. You can't forget that and also how to build a portfolio of different asset types through the stock market. Of course, we're not going to tell you how to build a property portfolio. That's not what we're about. But we'll give you an example of how you can get access to all of these assets through the stock market and build a bit of a portfolio. [00:27:42][28.0]

Alec: [00:27:43] So we'll talk about property, though, like if people own a house, they have to think about that in terms of their portfolio mix. Yeah, we'll touch on it. Yeah. That's my commitment to the Equity Mates listeners to touch on it. For all of you to own a house must be nice and we'll touch on that. Yes. [00:27:58][14.9]

Bryce: [00:27:59] So we'll leave it there. We'll pick it up next week. [00:28:00][1.6]

Speaker 3: [00:28:01] Get Started Investing feed is a product of Equity Mates media. All information in this podcast is for education and entertainment purposes only. It is not intended as a substitute for professional finance, legal or tax advice. The hosts of Get Started Investing feed are not financial professionals and are not aware of your personal financial circumstances. Before making any financial decisions, you should read the product disclosure statement and if necessary, consult a licenced financial professional. Do not take financial advice from a podcast. For more information, head to the disclaimer page on Equity Mates website where you can find the ASIC resources and find a registered financial professional near you. In the spirit of reconciliation, Equity Mates media and the hosts of Get Started Investing feed acknowledge the traditional custodians of country throughout Australia and their connexions to land, sea and community. We pay our respects to their elders past and present, and extend that respect to all Aboriginal and Torres Strait Islander people today. [00:28:01][0.0]

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