Episode 4: Your Questions On Rebalancing, Investment Gurus, And Ready-Made Portfolios Answered

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2:47Welcome to our final episode of the Portfolio Reset, our special Merrin Talks Money series on how to get your money to do more. I'm Merrin Somerset-Webb, editor-at-large for Bloomberg UK Money and author of the weekly Merrin Talks Money newsletter. And I'm John Stevik, senior reporter at Bloomberg and author of the daily Money Distilled newsletter. Brilliant. John, we've had a lot of good feedback, haven't we? this was a lot of fun to do, made us both think quite a lot and turns out it's made other people think of it too. Yeah, thanks very much for all your questions. It's, apart from anything else, it's excellent for both of our egos.

3:23I'm not sure. Does my ego need building? I don't know. Yours might, although you're the award winning one round here, so maybe not. Who can know? Anyway, we've got quite a lot of questions in and we are going to have a good go at answering quite a few of them. Some similar questions, of course, so we're going to try and cover quite a lot in the next 25 minutes or so. Our first question comes from Cone. Interesting question, actually, because he says this is not so much about reset, but more a question about how do I even convince a friend to start investing in the first place, knowing that there's always an excuse, like valuations are too high.

3:58I don't know what value stocks are right now. Everything's about a crash, AI disaster. There's always a reason not to. Now, the background here is that this friend got£100 ,000 inheritance. Go friend. He got it about six years ago and he's left it in a savings account for the last six years. He says he understands the risk of losing money to inflation and that's just fine. So how do we persuade this guy to invest? I mean, the obvious answer, John, is just show him the numbers, right? Yeah, I mean, show him the numbers. Obviously listen to our great podcast series first, But yeah, I mean, to have been in cash over the last six years in particular has been catastrophic from the point of view of inflation.

4:43I mean, there is no way on earth that he managed to find an interest rate that would keep up with that, even if he is being sensible enough to somehow keep it in the most tax efficient manner possible, which to be absolutely honest, I doubt he's even doing that by the sounds of it. So show him the numbers we talked about at the beginning of the first pod in this series, showing the difference between the returns from a cash deposit account and investing. And obviously, one of the things we talk about is how the next 10 years are not the same as the last 10 years. So you can't assume you're going to get those returns.

5:19But nonetheless, the record of investing is that over most timeframes, it easily beats the savings count. Fair? Yeah, absolutely. And I think the other interesting thing is it's not as if this person sounds as if they have a good reason not to invest. Like clearly their time horizon was long enough whenever they inherited the money. But also he's actually coming up with excuses like he's basically coming up with timing the market excuses. and even if that's something that's freaking him out then he should feed the money into the market if he's really, really unable to take the leap and put the whole 100k in then he should just say okay, I'm going to put in a certain amount every month or every three months or whatever but he's got to get started because otherwise it is just going to get eroded away Yeah.

6:15And you can start easy, can't you? You can start easy and say, I don't know, UK dividend payers. So you're still getting that income. You're still getting the feel, but you've got the chance of capital growth and you're not buying things that are too expensive at the same time. I was thinking that, you know, if this was my friend, I would also go a little philosophical. I would frame it as this duty to capitalism, duty to his unborn children, duty to himself and his future standards of living. I think that's fair. That is a good way to do it. I think if you show them the arithmetic first, and then if you can convince them of the moral case, then that's even better.

6:50The moral case. There is a moral case to using your money productively. Right. We don't want to go too far down that road, but there you go. There's lots of ways to do this. Lots of ways. Right. Second question. Now, this is a really interesting one, John, and I don't know your views on this already, so it's going to be interesting. It's from Michael. What is your view on using a SIP provider's own ready-made funds as a long-term investment solution? So providers such as AJ Bell offer diversified multi-asset portfolios that appear to solve two problems at once, diversification and asset allocation.

7:25So for investors who don't want to continually decide where to invest, it seemed like a fairly simple set of figure approach. Choose a risk level and let the pros manage the portfolio. Now, I know there are concerns. This is Michael's voice again. I know there are concerns about providers promoting their own products, but is that always a bad thing? They also have a vested interest in achieving decent outcomes for clients and protecting their reputation. So are these ready-made funds genuinely a sensible option or are investors usually better off contracting their own portfolios from individual funds or ETFs?

7:56Thank you, Michael. Well, thank you, Michael. Right, John, do you want to have a badge of that? I know what I think, but let's see what you think. that honest view is invest in what you want but you need to know what's in it and so the first thing I would say about the multi-asset portfolios is you need to you just need to know what is in them I just don't think you can turn around and say okay I'm going to look at the number say you know the risk number between 1 and 7 or 1 and 10 I'm going to go for number 7 and I'm just going to assume that that's right for me whatever happens you still need to know okay well what have they used to make it up how much of that money is in bonds, how much of it is in stocks, how much of it is in US stocks, because it's probably going to be some kind of S &P 500 tracker with bells and whistles attached, depending on the risk appetite.

8:44I think the other big issue is you need to understand what is their goal and what are their assumptions about your goals? Because certainly with, and probably not so much with these, but with the pension that you've got from your workplace, then there's a good chance that it's going to be lifestyled according to your age and so they're going to make changes to the portfolio around the kind of risk appetite the older you get the more bonds you're going to end up buying and maybe that's not what you want to do so fundamentally i don't have a strong view on these ready-made solutions i think though you need well you need to look at the cost but b you really know you need to know what's in it it doesn't absolve you of making the active decision to actually understand what you're investing in Yeah.

9:30And I will add to that, John said, I have had a quick skim through the ready-made portfolios offered by the big platforms. And on the face of it, they're absolutely fine. But they all suffer from the very thing that we've been talking about. They have a variety of different, you know, you've got the passive ones and you've got ones that are sort of managed, active, i.e. they have supposedly have active fund managers in them. And even the ones that supposedly manage still have lots of passive. in one of the sets of portfolios I looked at. It was very, very ESG focused, but that wasn't necessarily advertised in the name.

10:04And in a lot of them, there were different funds that had kind of similar holdings, again, because it's all very biased at the moment towards tech. That concentration that we've been talking about comes through in all these portfolios by default. So while on the face of it, it's a perfectly reasonable idea, as you say, you really have to go and drill down into all these because you may find that if you choose a portfolio that is reasonably high risk or even middling risk, you again end up with a momentum-driven tech portfolio as discussed over and over in the series we've been doing. So yes, look very carefully.

10:42There's one key message from the whole of that series, thinking about it, is you need to know what you own. It's kind of your responsibility to know where your money is going. You don't necessarily have to be the person who is doing that. You don't have to be buying your own stocks or even buying your own ETFs. But you better know where the people who you employ to do that are putting it. Because your future... We are getting philosophical, aren't we? Right. Next one. I like this one. I like this one. This is an excellent question, and we probably should have addressed it ourselves. So a lot of these questions are showing up at our inadequacies.

11:17Apologies, everybody. Right. This one comes from Paul, who's really enjoyed our recent three-part series on investing. Thank you, Paul. We appreciate that. And his question is this, how often should I rebalance my portfolio? And as a follow-up question, is there an ideal time of the year that is better than others or times when I should avoid rebalancing? Well, I think we'll just go straight up no to the first bit. There's no best time of year for doing anything, I don't think. And the answer to how often should I rebalance my portfolio, John, I'm interested to hear what you would say on this, but my answer would be not very often at all.

11:55Maybe once a year, maybe if something dramatic happens and your allocations get significantly out of whack, equities go up 30 % and bonds don't go anywhere and you wanted a 60-40, not that we particularly approve of that. But let's say that what you wanted and equities went up a lot and bonds did not, then you may want to rebalance immediately. But generally speaking, the more you rebalance, the more you're going to be hit with trading costs, the more of your time it takes. And of course, the more you lose that thing that can often really work with you until it doesn't, which is momentum. So you lose the momentum, which can be great for your returns and you get lots of trading costs and you do admin, et cetera.

12:35So I'm not convinced that you should do this very often. I suppose there's tax as well, isn't there? There's tax if you're constantly moving around, you're going to get a bit of tax drag. So maybe once a year? Or create these ranges and do it when it gets out of whack? I think that's it. It's like, keep it to, certainly no more than once every six months. And do the rebalancing. As in, you know, if it's just a fraction of a percent away, then, you know, maybe don't worry about it. But if it is, you know, kind of like three, four, five percent away from where you want it to be, depending on what your original allocation was then that's the kind of time when they should be looking to shift it and certainly as far as the time of year goes the only thing I'd say there potentially is possibly around about the same time as you are looking at tax just because if you are rebalancing there may end up being things like capital gains tax involved that sort of stuff but that's more keeping all your admin in one dollop rather than actually there's no reason to rebalance at that specific time Yeah, I suppose the other thing to say is that we talk about rebalancing as though it's, you know, a sell and a buy, but it doesn't necessarily have to be because, of course, I think most people listening will be adding money all the time.

13:53Right. So when you when you come to add money into your portfolio, you can just then look and see if you're out of whack on your on your allocation and simply put your new allocation into the underweight area. so you know you don't have to make this very hard this can be really straightforward it doesn't have to involve a sell and a buy it can just be a carefully managed buy right yeah just redirecting money to the portfolio in which you feel short um i mean that that that will be the easiest way for most people certainly if you are you know in the accumulation phase still if you're still putting money in okay so that's very straightforward but the key thing to remember is the biggest killer of investment returns always and everywhere is transaction charges and fees so keep those at a minimum well actually and the other thing about rebalancing and not doing it too often is the psychological thing because there's that famous story about the dentist that checks his portfolio once a year and he's happy but he checks it every day and he's miserable because it's kind of you know and they're the same portfolio so i think that's what was worth remembering as well that you know, you should be sensibly responsible about knowing what's in your portfolio.

15:05But on a day to day, even month to month basis, you do not need to be able to kind of quote off the top of your head what its exact value is, or, you know, how much is invested in gold versus equities versus bonds.

15:20This is the Bloomberg Tech Minute brought to you by Chachi PT. I'm Carol Masser. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees. with the company looking for people with raw, innate intelligence.

15:57A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices. But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, must be willing to work extended hours and weekends as needed. One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time.

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19:08and yet straight to the point. Thank you, Ali. Please keep listening. So here's his question. With so much noise in the marketplace and so many opinions on what to do and how to invest, I would like your opinion on how you would balance the advice from some of the investing greats and apply them to today's market. Do you believe they are still relevant and all relatable? And if so, if you had new cash to invest, would you take their advice? And if so, whose? I think this is drifting slightly from the original purpose of this podcast series, but I'm up for it. First, Ben Graham, father of value investing.

19:40Do you believe his metrics are still relevant and deserve a place in the investor's toolkit today? Next, Warren Buffett. Of course, Graham was Buffett's original, well, he's a starting point. Yeah, a teacher, starting point, mentor, whatever. And he's also, Buffett famously said he wants his widow to put all his money into trackers. So here we are. Here we are disagreeing with Warren Buffett. Sorry, Warren. Third, Peter Lynch, who in addition to his by what you know advice was also an advocate for always being in the market, no matter what you thought about the level. Okay, John, what do you think?

20:12All these three investment greats, are they just out of date? I mean, this is a really interesting question. The first thing I'd say about Ben Graham is... That was so politician-y. This is such an interesting question. Now you said, you know, fluff and fudge while you try and think of the answer. No, no, no. I'm trying to avoid fluff. I actually think Ben Graham is out of date I think the principles that he talks about and if you actually, I remember struggling through his book and being immensely disappointed actually because it really was from back in the day and you know you should say buy cheap stuff, there's not a lot that's actually relevant in there to today's kind of like investor and actually Warren Buffett is quite a good example of this because he kind of moved away from doing the Ben Graham thing which is basically trying to find stocks that were practically on the verge of going bust but were still worth more than they were and also a lot of that was about the value of their tangible assets and that's become a much less important proportion of the market now so I do think Ben Graham is, you know, value investing is still important But I don't think Ben Graham is the most relevant kind of text on that these days.

21:34Sure. But I mean, the idea of value investing remains. And just because the last 30 years have all been about, you know, valuations going berserk and it being impossible to buy something unless it's intrinsic value doesn't mean there won't be another time in the future. And the idea that if you buy stuff cheap, you've got a moat, this is all OK. Yeah, but promise you, don't need to read a book that's literally got whole tables worth of the dividends on railway stocks. You don't have to read the book. No one's going to read the book. Well, we've got AI for that. Exactly. So I think the concept of value investing is great, but Ben Graham himself is not someone I would spend an awful lot of your time on.

22:13If you're a new investor right now, I just wouldn't worry too much about him as an individual. All right, Warren? Well, I mean, Warren's saying that he wants his widow to put all his money and trackers, at the end of the day, that is what we've been saying not to do. Well, I think to be fair, he wrote his will, didn't he, in the early 2010s sometime, I'm not entirely sure where, but let's say, I don't know, 2012, 2013, something like that. And if so, that was brilliant advice. I wonder if he'd write his will in the same way now. Yeah, I think that's a good question. I mean, I wonder what he thinks of the levels of concentration, because at the end of the although he's generally a bull of America.

22:55I mean, quite right. That's been brilliant. But you can be a bull of America without being a bull of the American stock market, can't you? Exactly. So, yeah, I think you're right. I would wonder what you would do now. I mean, actually, why wouldn't you just put it in Barclay Hathaway? I suppose. If you believed in him, yeah. And why would he not put his wife's money in there anyway? And I guess the other thing to say is that Buffett was never really a value-value investor. was he? No. You know, it isn't quite what we're talking about. He was about buying good businesses at a reasonable price. Yeah, he's kind of a quality investor really, isn't he?

23:31Yeah, quality at a fair price sort of thing and talking about businesses as opposed to stocks themselves. So, he was never quite a value investor. Does quality investing still have a future? Hope so. Hope so. I think it's just that's more a style thing that's kind of been out of fashion. I think one thing I will say about Warren Buffett is reading his stuff and putting aside the fact that obviously he's overexposed and he's got that kind of folksy manner that can be kind of equally aggravating. So irritating. But what he says about businesses and what he says about thinking about stocks as a business is a very, I think it's a really useful set of things for investors to understand and also it does make you think about what actually is the difference between buying a whole business and buying shares in a business because that matters in some context too.

24:21You know, he has got a lot more clout than you do, but that comes across from, you know, what he's talking about. And yeah, you should think like a business owner, but you aren't always going to be a business owner, whereas Buffett obviously was. I went to Omaha once, you know, John? Yeah, I remember he came back and wrote this vicious editor's letter about how it's really boring. It was so boring! Me and the other British journalists are on the pub by lunchtime. Sorry, the bar by lunchtime. We couldn't take it. We simply couldn't take the folksiness and all that. It was too much for us. Onwards.

25:02Peter Lynch, the third one, who is in addition to his buy what you know advice, was also an advocate for always being in the market, no matter what you thought about the level. And when I was looking at that, I was thinking, do you know anything anymore? You know, that whole idea of you can go into a shop and see what people are buying, see what shops are full, Dunkin' Donuts, all that. I think that was one of his, wasn't it? Go into those places, you can, oh, look, my wife's going shopping, et cetera. How can you possibly tell? Most shopping is online. Does anyone outside tech really understand tech anymore?

25:32Does anyone outside global supply lines really understand global supply lines anymore? This is a very, very, very complicated world. So, and by what you know, by what you've done your best to understand, I would say is as good as you could get there. Yeah. I mean, I think One Up on Wall Street is a great book. It's really readable. And again, I think reading about these things at least makes you think and grapple with the concepts they're coming up with. And you're right. I don't think by and large that in the sense that, oh, I like sandwiches from Marks and Spencer's. I should buy Mark's Spencer shares.

26:07I don't think that works and I don't think that's ever really what Lynch meant. But if you work in an industry or you do have some sort of understanding of a sector in a way that a normal person wouldn't or doesn't have time to, then it's possible that you might have an edge or you might be able to see, actually I know that whenever this happens, particularly if you're working in a cyclical industry, whenever everyone's talking like this and everyone's saying this and this supplier's doing that and that kind of thing maybe like ship broken or something like that you probably would have some sort of knowledge base that would help you with investing if you want to be an active investor but I'm still very very hard obviously because professionals struggle with this all the time as far as being in the market I basically agree with them I think there's very few times when it's sensible to go 100 % to cash because for every one time you get it right, there's going to be 10 times you get it wrong.

27:12Just remember to follow the advice of the first three pods in this series and be careful about your concentration. If you were staying in the market, know what you own when you're in. Right, onwards. I guess the answer there is that John and I approve of value investing, but possibly some bits of all those three gurus approaches are slightly out of date. Onwards. Now, we have another one from, this one's from Ling. He really enjoys listening to our podcast. That's nice. Thank you, Ling. On your portfolio reset number one, you mentioned how S &P 500 is the best investment for the past 10 years.

27:45And you'll quote, these numbers tell you what worked over the last time. They did not tell you it was going to work over the next 10. Yep, that is the core message. The question then is how do you price in the cost of reducing the risk by diversifying when the value is only determined in the future? Okay, so what is basically happening here is that Ling is getting stressed about the idea of diversifying from the S &P 500 and then finding out that the S &P 500 goes up, up, up. Say the S &P 500 goes up another 10 times, but this diversified portfolio only goes up five times. Then should I feel bad that I missed out on, he had 10 ,000 pounds in the beginning.

28:24Should I feel bad that I missed out on£50 ,000 of the potential gain if I didn't diversify? Or do I see the£50 ,000 simply as the cost of reducing my risk? Similarly, if the S &P drops by a whole from the 10-year period and my diversified portfolio drops by only a quarter, then should I see the differential there as the value of the insurance? I think the answer there is just yes. Yes. I mean, if we could tell the future, if we had any idea what was going to happen, then we wouldn't have to pay for insurance. And that's what we're doing here. Diversification is the price of reducing your risk.

28:59And you may end up with lower returns as a result. You may not, but of course you may. It's about reducing your risk levels. And so, yes, you're right. You shouldn't see that first£50 ,000 as a loss. You should see it as the cost of reducing your risk. And the same with the extra£2 ,500 you have because your diverse portfolio portfolio felt less than the S &P. You shouldn't see that as a particular brilliance. Again, it's your insurance paying off. Is that fair, John? Anything to add? I think that's fair. But I think the other thing I remember about diversification, the whole point is you're reducing your risk, but your risk-adjusted return is higher than it otherwise would be.

29:39That's where the whole free-launch Harry Markowitz thing comes from. Because otherwise, technically speaking, or sorry, theoretically speaking, there wouldn't be any point in diversifying because it's all the same risk reward the point is you diversify and it means that you do make a lower return but relative to the risk you're taking it's actually a higher return so all of this kind of like thinking about well because you could say this way and you could basically say well if i put 100 of my money in bitcoin and it goes to the moon should i feel bad should i be comparing my actual portfolio to 100 bitcoin or 100 in the video because you could go 100 % anything and you could make a lot more money or lose a lot more money in the diversified portfolio.

30:22So I think that's the other thing, like maybe just think about what your benchmark should actually be and although the S &P 500 feels like a natural benchmark, that's only because it has gone up so much over the last 10 years. But yeah, so risk adjusted returns and you diversify so that you aren't pinned to one outcome. Same as that. Going back to the question about rebalancing, the point there is the same. You don't rebalance to enhance your actual returns. You rebalance to reduce your risk levels. That's it. Exactly. Okay. Can't predict the future. No. Right. This is the last question. And again, it's an interesting one.

31:08I listened to the first two episodes of your portfolio reset series with the greatest of interest. Thank you, Mike. We prefer it when you say that you really enjoyed it, that it was brilliant, but we'll take greatest of interest. We take that, we'll take it. So he's glad that more people are realizing this and that we are spreading the message. He says that he has been trying to alert investors to this fact for a long time. I think Mike must be a professional. But he's found it all to be something that investors do not even want to acknowledge, given the strength of the Magnificent Seven. And for professionals, the career risk that it would entail to deviate significantly from the index.

31:43Very fair point. So as you asked listing questions, we were. Here it is. Do investors realize that to get truly adequate diversification, they need to return to active investing? I suspect that Mike is an active fund manager. I don't know. That last episode teased diversification will be the solution. But I don't think that most investors realize that even if they diversify beyond the S &P 500, which of course is the most concentrated it's ever been, they're still very heavily exposed to many of the same AI themes driving the US exceptionalism trade. If it's emerging markets, foreign developed markets, the indices are often stocked with the same themes and the largest market cap companies are exposed.

32:24The AI frenzy and its resulting spending impacted many other industries, construction, generation, materials, and many others. It's very hard for investors to avoid. True, we were talking when we joined just the other day about data centers going up in the US and someone was telling you about one data center in Texas that has over 9 ,000 workers on it every day, which of course, if you wanted to buy a house nearby means you'd have some trouble finding someone to help you out. Of course, it impacts everything. So in our view, again, Mike is clearly an active investor. Investor preference for passive investing has led to a situation where active investing and strategies that don't look like the index is basically the only way to diversify.

33:04I appreciate your explanation of these topics. I think that is more of a statement than a question, Mike, actually. And it's a statement with which I broadly agree. Yeah, I think makes a good point there. I mean, to be fair, I think that if you wanted to get passive exposure to a lot of these more obscure areas, you probably still could. I know you could buy an equal weighted S &P 500 index, for example, would obviously give you lots of exposure to the smallest companies as well as the largest ones. And there's also passive things that track basically anything. Yeah, and back to dividend stocks, you can get an ETF tracking UK FTSE 100 dividend payers or something like that, which I suspect would diversify you quite a lot.

33:50Yeah, but overall, I think if you are, that's almost like active investing yourself. So the point, I guess, is you need to move away from the same old, same old. and I think that yeah active funds definitely come into that okay well that's it I think John what was the last one those were good questions they were great questions do you think sometimes I wonder if our listeners aren't cleverer than us bookies yeah I'm sure they are that's the that's the wonderful thing about having such quality listeners and if they're professional investors they should be exactly right listen you can still send more questions in you can send in any thoughts you have, we will answer questions in future episodes of The Ordinary Pod.

34:36And if you have any ideas for a future series, you can send those along too. We've really enjoyed making that one and we are going to plan another one. If there's things you want us to talk about, just let us know. And thank you very much for listening to this listeners question episode of our investment series. The email address, by the way, if you want to send in questions and comments is merinmoneyatbloomberg.net. And as always, if you like the podcast, as clearly the people who sent in the questions do, share it with a few friends and leave us a review wherever you listen. This episode was produced by Sam Asadi, Moses Andam, and Jennifer Seeley.

35:14Blake Maples does our sound design. Amy Keene is our executive producer for Talk Podcasts, and Cherub Brumley is our head of podcasts.

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36:06Hey, it's Alec Baldwin. This season on my podcast, Here's the Thing, I talk to actor Stephen Root. I'm a people watcher. You see that guy going down the drain and go, yeah, I can use that. And Open Igloo co-founder Alia Mohammed. I love staying on top of what is going on in our city, what is on renters' minds, and taking all of that knowledge to build a platform that hopefully is going to make New York City better in the long run. Listen to Here's the Thing on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. Here at Bloomberg, we spend all week talking about markets and the economy.

36:43And on Fridays, we help you make sense of what it all means for your money. Bloomberg Money is our weekly look at the forces shaping your financial life. We explore personal finance, investing, and retirement with leading economists, strategists, and wealth managers. Join me, Scarlett Fu. And me, Tom Keen, for smart conversations that help you make better financial decisions. Subscribe to Bloomberg Money on Apple, Spotify, or wherever you listen.