Advanced ETF portfolio construction - Ep 4: Portfolio Construction Series

0:00This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online makes sense? There's no place like Chrome. Check responses set up require compatibility and availability varies 18 plus. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job posts the boost it needs to be seen and helps reach people with the right skills, certifications, and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a $75 sponsor job credit at ND.com slash podcast. That's ND.com slash podcast, terms and conditions apply. Need a hiring hero? This is a job for Indeed Sponsored Jobs. This labor day it loves get up to 45% off

1:01select major appliances plus deals on select materials and tools to keep the job moving. Right now, you're a free to walk 20 volt max battery to pack. When you buy a selected to walk 20 volt max tool, it loves we have what you need to keep your job moving. Bell of the night 13 will supplies last selection varies by location. See loads.com for more details. So your portfolio is essentially a little sockets team. Would you go out and buy 11 of the best strikers in the world? No you wouldn't. Right, you still need midfields, goalies, always take it back. What role does it have to play and overall how is maintain functioning as a whole? What risk does it bring? What return does it bring? And then how does that play well with the rest of the team? Yeah. Welcome to episode four of our portfolio construction series. In this episode I'm going to be joined by Jess Lung, ETF portfolio manager. She is an expert in pretty much everything we're going to talk about today, which is how do you bring a portfolio together like a pro?

2:01We're going to talk about some of the theory behind it all, some of the maths. But don't worry, it's a podcast. It's not going to be a math lesson. We're going to talk about some of the concepts that we've learned so far throughout the series, like how to combine growth and income and defensive investments. And some of the core essential topics that we've talked about in episode one. With that further ado, I hope you enjoyed this episode with Jess Lung from GlobalX. Hey there, here's a quick note. This podcast contains general financial information only. That means it's not specific to you, your needs, goals or financial objectives. So don't act on the information until you've spoken to your financial planner. You'll find our full disclosure, disclaimer, and link to our financial services guide in the show notes. Jess, how you doing? I'm good, thank you for having me back. Yeah, it's so good to have you back. I think in the last episode you didn't have your glasses, but your glasses, I've changed costume as well. So it's really good. But in this episode, we are talking about advanced portfolio mechanics. So we're talking about how more sophisticated investors actually build portfolios.

3:05Yeah. Yeah, before we get into that, I really just want to get a quick sense for listeners to get a quick sense. What does an ETF portfolio manager do? So my job is to manage underlying holdings of the ETF. So let's just say, thank one of the ETFs that I manage every time you invest, which would lead to a creation. That means I'm the one that would actually go to market and buy the underlying 10 stocks. Oh, well. And then on a day-to-day basis, that would also include managing all the cash flows, copper actions, and index rebalancing as well. Okay. So it sounds pretty busy, particularly at this time of year. We're recording this just after the end of financial year. Yeah. I imagine this is a pretty busy time of year. We've seen that eight on over, yeah, practically all of our portfolios. Yeah. Well, okay. So a big part of portfolio construction and having a good portfolio that as you said in episode one, is aligned with your long-term goals, or your goals in general, is understanding risk and return.

4:05And I wanted to ask you, like nuts and bolts, what are the things that actually change the behavior of risk and return? So we kind of think of these ideas as like concepts. We're in a spreadsheet, maybe you're in a stock price chart or something. But what actually impacts those? So when we talk about portfolio, a lot of people naturally just focus on returns first because that's what you see. That's a tangible thing as you're saying in your portfolio. But what I would say is as a portfolio manager and especially as an ETF portfolio manager, I'm not a return manager, I'm a risk manager. Because the way we see it is that returns are ultimately just the output. And as PMs, we spend a lot more time focusing on the inputs and that's actually understanding the drivers of return and managing the risk. Because when it comes to investing, yes, historically, equities have delivered strong returns over the long term. But as we always say, past performance is no guarantee of future performance. Yes. And you can't control what the market does today or even tomorrow. So really, our job is to focus on the things that we can control.

5:05So as we discussed in episode one, so one of the biggest drivers of portfolio behavior is asset allocation. And as we've seen throughout the other episode, so it's really a mix of equities, growth, fixed income and your alternatives that really set the foundation of your risk and return profile. And then some more than from a metrics perspective, looking beyond just returns, some of the other things that we consider when we look at portfolios and risk is volatility. So essentially, how much your returns move around through time. And the reason that matters is because as investors, you're not just trying to maximize returns. So trying to understand how much uncertainty you have to accept in order to achieve that return. So think of it like roller coaster rides. Right. So if the destination or your return, your financial goal is your destination, the end point, how bumpy does that roller coaster ride have to be for you to get there? And that's volatility. Drawdown is another metric that we look at. So how much your portfolio falls from peak to trough?

6:06Because sometimes the hardest part of investing isn't achieving the return per se. It's really surviving the ride, right? Surviving the ups and the downs that go against you. Correlation, that's something we'll talk a lot more today, which measures your investments, how they're actually behaving differently from one another. Because trough that versification isn't just owning more things. Like we've mentioned in episode one, it's making sure that your portfolio is not dependent on one singular outcome. Yes. And then lastly, so this is where we get quite technical, but I won't get into the mass behind it is the sharp ratio. So that's something that often we use and look at. And it just looks at excess return relative to volatility. So essentially what that means is how much return did I receive for the level of risk that I took? And it's normally expressed like a number. Yeah. Like one, two or something like that. Yeah. So that means the higher the sharp ratio means the higher the excess return that you're getting for the amount of risk that you took on. So usually something with a higher sharp ratio essentially means you're getting more bang for your buck.

7:07And whereas I can less than one, not so much. Yeah. So going back to the roller coaster analogy. So your end financial goal and your return is the destination. So volatility is how bumpy the ride was and sharp ratio essentially is asking was the ride worth it. So but remember all these are just kind of industry metrics and they all can be very technical. But at the end of the day, I think really risk is personal and it goes back to what I've been consistently saying in episode one. So what is your rich profile? What is your time tolerance? And what is your investment goals? Because the best portfolio isn't necessarily the one that gives you the highest returns or the ones with the lowest risk. It's really the ones that gives you, I think, the best chance of staying invested so that you can achieve your goals over the long term. Yeah, it's, we had Glenn James from the money, money, money, podcast on our show, not longer. And he said the hardest part of investing is staying invested. Yeah. And so many people don't really think about that. But I think it's so excited about buying it something or investing in something that don't really think about the journey as much as they think about like where they are right

8:09now. So you mentioned volatility in there and I wanted to ask you a question that's kind of brought up a lot in academia, but also now in the industry, which is how do we measure risk like in investing? How do we measure risk and then do you agree with that definition? Yeah. I guess. So most common way that we measure risk is volatility and that's what we touched on earlier. And I think the main reason why we use it because in the industry, we need something that we can all rely on, other people can replicate it. And so we just say one single thing and P1 to stand it. And that thing is volatility because it's measurable. So you can calculate it, you can compare it against different portfolios, compare it against different investments. So it just gives everyone something consistent to work towards. And so let's just get all Matthew for a second. So I'll pull out the lightboard. Essentially, so volatility is calculated by the annualized standard deviation of the returns. So if someone says 20% volatility, it means that the returns tend to fluctuate within a

9:1120% range of its average, two thirds of the time. And so, and then there's also something known as tracking error, which is more, I guess, useful when you're trying to compare something against a benchmark. So tracking error is a standard deviation of the difference between the portfolio and its benchmark. So now answering the second part, do I agree with volatility as a measure? I think I can totally understand why it's being used by the industry. But then I think volatility tells you how much uncertainty or variability that historically has been in your portfolios. But then once again, two portfolios might deliver the same returns, but one might have a much bumpier ride than the other. I think like, it's actually probably the first person that's ever actually explained the math of how volatility is calculated. And most people know that if something is volatile, we kind of associate that with a bad thing. Don't we?

10:12Like, in just in life, we say, oh, that thing is volatile. All that person is volatile. Yeah. Doesn't seem like a very endearing characteristic. But some volatility is always present, right? Because it's the stock market. I see it as risk and return on kind of two sides of the same thing. There's no such thing as a free lunch for you to get some excess return or something above just putting it in your savings account. You need to take some level of risk. So without risk, there's not really excess return. And then maybe another way to think at all to answer to actually answer the second part of your question. I think the left side of my brain, the analytical with the math side, completely understands why volatility. But then the right side is at the end of the day, we're humans and we're investing and we're not a robot. So then, like you said, do we really see your portfolio going up 20% as risky? Because volatile is an absolute measure. It doesn't go up or down. Is it? Yeah. Like, go back to the question, if my portfolio went up 20% is that really a bad thing? Yeah. Probably not. So the volatility, I think we care about, as individual investors, is more actually

11:16about downside volatility. And then I also think that this volatility measure doesn't always capture the real risk that we as investors face. So going back to what the example I had in episode one, so Young Yvonne, right? So 25, she's got a lot going on and she has a long time until retirement. She probably wouldn't really care that much, not care that much. But in the long term, if a portfolio fell 20% this year, it wouldn't be the end of the world. She still has a long time to make a backup and it's just part of the investment journey. And I think what is not really spoken about enough when it comes to risk is actually being too conservative. And that's the risk that you might not actually achieve your financial goals at the end of the time period because you were too risk averse. So going back to season Susan, if she just kind of kept everything in savings, then her portfolio would not be enough to suffice her knees when she's in retirement. Yeah. I love the quote from Morgan Housel, author of Psychology of Money, he says,

12:20risk is best thought of as the chance that you don't meet your goal. I think it's a really eloquent way to put it out because when you think about it, like in Susan's case, if she's an older investor that has a limited time frame, but she needs to rely on her money. Yeah. It's very obvious risk that she doesn't invest and therefore she doesn't have nearly as much money for the rest of her life when she's just retirement. So that's pretty obvious and you can kind of think about that very tangible risk. So one, if we kind of peel back another layer, when people are building portfolios and we heard Mark talk about it in the previous episode, Billy talked about it in episode two when he talked about like more thematics and stuff, we often talk about this thing called factor investing and factors need a definition for some people to understand what they are. But I've got a couple of questions about this. So can you just explain broadly what we mean when we talk about factor investing? Yeah. So I feel like factor investing is definitely one of the things where the industry has kind of just made it a whole bunch of jargon or something like that.

13:20So like unapproachable. But really at its core, factors are just a set of characteristics that help explain what is driving the risk and return profile of set stock or your portfolio. An analogy that I like to think about it, maybe think about it like nutrition. So when you're looking at two meals, you don't just look at the total calories and assume the same, right? So you look at two meals and go, okay, they're both 500 calories, but maybe one could be made up of mainly proteins and fats. Well, if the other one was pure sugar, they're two completely different things. Yeah. So that's one way you can think about factors. So even though it's a really good analogy, I think that like now I know, I understand factor investing. I've never heard someone say that. Yeah. That's really cool. So even though they both have the same headline number of 500 calories, but they're very different in the composition and your body is probably going to respond very different to each of them. Yeah. Yeah. Such a good analogy, just like it. Well, I think you are like that. So then some of the most common factors that you might hear on the market and I'll try to simplify them as much as possible value.

14:21You probably hear that one a lot. So value is when you're looking for companies that appear cheap relative to their fundamentals. So essentially you're asking in the question, am I buying the company at a good value or for less than what I think it's worth? They statistically cheap. Yeah. Yeah. And then quality, that one is when you're looking for companies with strong fundamentals. So think things like profitability, do they have stable earnings, do they have a good balance sheet. So it's less about finding the cheapest company like you would for value, but more finding about the good quality of great businesses. Yeah. Okay. And then momentum. So this one is based on the idea, essentially following the herd is what? I like to say about momentum. So companies that keep performing well can continue to perform well because markets don't really instantly price in new information. Yeah. So these are all things that you're saying. I like the characteristics that people try to capture in the stock market or whatever they're investing is like, I'm trying to look for good value companies versus highly

15:25valued or expensive stocks. I want the cheaper ones. I want the ones that are going up. I mean, momentum versus the ones that are falling recently. Okay. What else is there? So then there is also low volatility. So essentially, like going back what I said, the rollercoaster one, ones that companies who share prices historically don't really move around that much. So it's a relatively stable ride. So that one isn't really about maximizing returns per se, but it's more about creating a smoother journey. Maybe you have a smaller risk appetite and you can't take on those big bumpy rides. So maybe low volatility is something you might consider. Yep. So this one, which I think is a really big one, especially for Aussie investors, is yield. Yes. Yeah. So yield focuses on companies returning cash to shareholders through dividends. Yeah. Yeah. That's mark speciality. Yes. Is the yield. Yeah. Yeah. Yeah. Yeah. He loves talking about income. Yeah. And it is a big one for Aussies. Like we see a lot of yield focus strategies. Is it ZYAU? Is the one I'm thinking about at the top of my head.

16:27Yeah. That's our Aussie one. Yeah. I'm really, really good performing. So one of the things then, if you look at it, like there's a lot of statistical analysis that's been done on this. And I know you've got a pretty strong side of your brain, your left side, I believe it is that that focuses on this side of thinking. There are some of these factors in people's portfolios. Like most people don't even know that they're in there. But there are some of these that have performed well for certain periods and some much longer than others. Yeah. And we all know Warren Buffett is a value investor. But broadly, the value factor and the value strategy hasn't performed as well in certain periods to say the growth factor or the quality factor. Can you maybe just talk about maybe why that's the case and how investors can understand it? Okay. So I'll try my best because this is quite a complicated. This is a whole podcast. See you next little loan episode. I feel like we could spend one whole episode just on factor investing. Yeah. The good place for us to start is something known as the factor premium.

17:30And that is essentially the additional return that investors expect again by exposing themselves to their factor. So going back to the point, or before factors are not a magic formula for outperforming the market, there is no such thing. There's simply a different source or a different characteristic of return and different factors perform differently in different environments. And factor investing actually stems a lot from academic literature, particularly from I don't know if you've heard the farmer French factor model. Yes, absolutely. So that's where it all really comes on. And that one where they expanded on traditional asset pricing models and show that market returns alone, just couldn't explain everything. That's where the concept of factors come in. So certain factors, so whether it's value, size or momentum, they all have historically helped explain differences in risk and return across companies. And that is over the long time. And there's really two big camps in academia as to why. So the first one is more, I guess, a risk-based explanation.

18:32So their idea is that factor premiums is essentially compensation for you taking on additional risks that can't be diversified away. Just because I invest in broad market ETFs, like we mentioned in ETF, in episode one, there's still factors that exist that you just can't diversify away by buying more stuff. So an example of that is smaller companies have historically delivered higher returns over long periods. But then that's also because they tend to be less established, less liquid and more vulnerable during economic downturns. So they tend to be more volatile? Yeah, exactly. So then essentially, you as an investor, if you invest in small cap companies, you are being compensated for accepting those additional risks compared to your large cap companies. Yeah, gotcha. Gotcha. So this small cap is more, I guess, more behavioural because we are humans at the end of the day. And essentially, the premise of that is that markets are made up of people and obviously we aren't always rational. We all know that. So we chase performance. We chase what's been doing well.

19:33We become too optimistic or overly pessimistic. And then we always overreact or maybe underreact depending. So then because of these behavioural biases and these lead to opportunities where then people can actually take a vantage off and that's where these factors come into play. Yeah, gotcha. It's such an interesting thing. These factors have become the bedrock of some investment firms and investors through time that have gone on to manage tens of billions of dollars or create and generate tens of billions of dollars for their end investors. They've been serious. But most people don't really talk about this. And I think it's really important for us to talk about here on this episode because it's advanced portfolio mechanics is I think this is like a big frontier for ETF investors. I think ETF investors are now starting to realise that you can have a vanilla index fund. But now what else can I do? How can I get some smart beta? Yeah, add some smart beta factors that maybe blend my portfolio in a particular way that

20:38I'm more comfortable with it for maybe I want to position my satellite in a way that hey, I think like value like these let's go into this value too because interest rates are doing something or whatever the case may be. Yeah. This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web like restoring a vintage motorcycle from a 50 page restoration block or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online makes sense? There's no place like Chrome. Chrome responses set up require compatibility and availability varies 18 plus. When you need to build up your team to handle the growing chaos at work, use indeed sponsor jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications and more. Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a $75 sponsor job credit at indeed.com slash podcast.

21:39Terms and conditions apply. Need a hiring hero? This is a job for indeed sponsor jobs. Yeah, but the really important thing I think we have to mention about a factor investing is that factors are highly cyclical and that's why to the very point of your question when you say they underperform or overperform, it's really dependent because not every investor and like what you mentioned as well has the patience or discipline to sit through years where the strategy is out of favor. Maybe that's another reason or maybe that's the third reason why these risk premiums exist because we're in patients or investors are in patients. They kind of go, okay, let me go into value one or two years. It's not working. Let me sell out and go into something else. Fact and investing isn't a replacement for market cap investing. Like you said, it's an intentional decision for you to tilt your portfolio towards different drivers of risk and return. That's why successful investing isn't really about picking the right factor. Like we've mentioned, it's really about having the conviction to stay invested for the

22:42long term. That's why it always goes back to what are your goals, what's your time frame, what's your risk appetite and that are you investing over the long term because if you are fact and investing, that's really where you see the most benefit. So the cyclicality is really important. It actually leads into this other part of portfolio management and I want to talk to you about which is things like correlation. So maybe we can talk a little bit about this but when I became a quote unquote financial professional, although I dare say I wasn't at the time, I started to learn about the study of the global financial crisis in a lot more depth and a lot of the ideas about portfolio construction really got tested in that period in financial markets and then probably in the few years that followed that as well where things behaved in ways that people didn't expect. Like a lot of the theory was here, look at this 30 years of history and this is what we expect is going to happen. But then at some point it was like, that's no longer true for this particular period of

23:46time. So my question was going to be like this and I've written it down which is how can two ETF sound different but behave the same when markets fall? Yeah. So maybe our first answer that point by saying hindsight is always 2020, right? And then a lot of the literature, academia, it's based on past returns and what they're trying to do is essentially fit a model into something so that they can explain it. But then obviously the future might not react or I have the same path as previously. So that's probably one of the biggest factors. Now going to your questions, so how can two ETFs have different but behave the same when markets fall? So really it comes back to the point that diversification isn't about making sure when something goes up, the other one goes down. It's like I said is making sure that your portfolio outcome is not dependent on one singular thing. And as always, diversification doesn't totally eliminate risk. I think that's a misconception a lot of people have as well because at the end of day,

24:49you as an investor you get rewarded for taking on risk and what diversification is trying to do is making sure you're spreading out the risk as much as possible. So going back to what we talked about earlier in terms of your asset allocation, making sure you're allocated to different assets, sectors, regions. I think one of the hardest things is that correlations are not fixed. And that's just something, it's a notion that we kind of have to let go of just because it did this in the past as a mean it's going to keep doing that in the future and especially during untested times. So such as the GFC or COVID, you know, all these brand new environments where all these, yeah, I guess inputs creating this market where we've kind of never been in uncharted territory before. So we often look at historical correlations, but then like we said, these relationships can change depending on the market environment and to your point what we saw with gold and stocks, that's probably one of the best examples that we can give. So what a stock. So stocks give you ownership in companies. So really the key drivers of that would be like your earnings growth, your profitability,

25:50productivity and economic growth, whereas gold is just a part of gold, right? It doesn't generate earnings, there's no cash flow. So drivers of that will really be your real interest rates, your inflation expectations, currency movements and essentially the demand for it as a store of value. So because they respond to different forces differently, gold and equities have tended to have a lower correlation. So that's kind of what people were expecting, because historically they didn't really move in tandem. But then there will absolutely be times when both shares and gold move in tandem or in this example, we saw both of the prices actually for and so an example would be like during liquidity sell-offs. And I think that was what happened last time. So that's when investors sometimes they're forced to sell something even though they don't want to, right? And in those environments, correlations across assets can temporarily move higher and then the keyword is temporarily because we're in uncharted waters. So this is, it's not acting how it's supposed to act.

26:51But in other environments where you have high uncertainty, concerns around inflation or even what we've seen to your political risk, gold can behave very differently. So really the difference in behavior is where that diversification benefit comes from. So what environment does this asset perform well in and then what's the difference from the rest of the portfolio? So they're the kind of characteristics that you have to think about. It's so interesting because during the GFC, in particular, we saw bonds for shares for and I'm thinking even more recently, in the recent quote-unquote, SaaS apocalypse, which is where the tech stocks fell. Gold performed really well and then also fell towards the back end of that. And I'd know because I own two of the global ETFs and I was like, oh no, they both go down at the same time and I own tech stocks. So it was a double whammy, but that actually does happen. And I guess with this, it's like you said before, is you don't just like prepare and

27:51bet on one outcome with the portfolio, that's not a good portfolio to use. It's about how do I spread my risk? How do I tie that risk that I'm willing to accept to my long-term goal? Yeah. And then the returns can steadily march from there. I did have another question which is now totally slip my brain. But I guess maybe just to close out on this correlation point, it's how things behave together and it's like if something goes up or down or they go both go up or both go down at the same time, they're more correlated. But it's, as you said, it's measured on historical returns because we can't know for sure what's going to happen in the future. It is a common language that we use as investors, but that does not necessarily mean that we're all measuring it the same over the same period or that it will continue into the future. If we take the other side of the debate or conversation, that's about the risk. But then we can add ETFs to our portfolio that improve the return. How does that happen?

28:52I guess. How and when do adding positions to a portfolio make it better? Yeah. So then first we have to go back to knowing under the hood what the ETF is actually holding. So when you want to diversify your portfolio, we're really trying to add more drivers of risk and return. So an analogy that I like to give is maybe you like, oh, if you have ten umbrellas, you have lots of umbrellas. So you might think you're diversified. But when it comes to a rainy day, all you need is really one. So then are you best suited for different environments? That's the point of diversification. And then so then going to your question of when there's adding another ETF actually improve your portfolio, I think it all goes back to what I said in episode one is that everything in your portfolio should have a role to play. More investments doesn't automatically mean a better portfolio. A lot of new investment ideas can sound really compelling in isolation. Like, oh, look at this.

29:53This was a brand new thing. It's up 100% in the last three months. Should I add it to my portfolio? So but the question really shouldn't be, is this a good investment? The question is, what does this investment do to my overall portfolio and what is the job that it has in helping me achieve my long-term goal? So then some of the questions that you can ask to help you kind of decipher that is A, does it reduce risk? So is it actually improving diversification? Improving diversification, yes. Yeah. So then if I add gold, which historically is less correlated to other things, am I essentially adding something that should behave differently in different market environments? That's kind of the question. Or am I reducing my dependency on one singular company, country or sector? So that's the first question. Does it reduce risk? Yes. And then what I mean is does it actually add a new source of return to my portfolio? So is it giving me exposure to a return driver that I didn't already have?

30:55So maybe a factor tilt or something like that? Or maybe it's a different geography, asset class or alternatives or something like that? Or lastly, am I just duplicating something that already own? So am I just buying? I'm just pretty common, I'd say, for all the people we hear. So am I just buying another umbrella? So since it's World Cup season, so maybe I'll throw in some soccer analysis there. Yes, sure. So your portfolio is essentially a little soccer team, right? So they're all working together to build your financial future to help you achieve your goals in the long term. So would you go out and buy 11 of the best strikers in the world? No, you wouldn't. No, you wouldn't, right? You still need midfields, you still need your goalies. So then when you construct your portfolio, always take it back to the point of what role does it have to play and overall, how is my team functioning as a whole to help me achieve my goals? And then that should help you answer whether by adding this ETF, whether it'll be beneficial to my portfolio or not. So it's kind of like to pull apart some of your ideas there.

31:56So it'd be like, what risk does it bring? What return does it bring? And then how does that play well with the rest of the team? Yeah. Because even if you get like the best forward in your soccer analogy and you bring them in, you might already have two good forwards. Exactly. They're going to have to play midfield. So you know, you better have any good midfielder there. Yeah. That makes sense. And I realized what I was going to say before about the risk of portfolios in general, which is that you can't diversify everything away, but you can get to a point where you've diversified a way, what we call, at least most of it, the specific risks that are associated with each individual holding. Yeah. So specific versus market risk. If anyone wants to look that up, there's a nice chart on our website that explains it as well. It's kind of like bringing that whole team together and knowing what they are bringing or subtracting from your team. Okay, I've only got a couple more questions for you. One of them is you're probably sick of talking about rebalancing because that's what you've been doing for the last week at GlobalX headquarters, thanks to the end of the financial year.

32:57But I guess a lot of people end up with a bit of a messy portfolio because you and I are talking about this right now. We're like, here's a blank piece of paper, build your portfolio like this. But then tomorrow it looks different because stuff's moved. How do you think about rebalancing and you could take that across the core and the satellite, just the core, however you want to answer it? Mm-hmm. Yeah, so rebalancing, unfortunately, it's just a downside or something that you have to continuously do when you have a portfolio. And also if then it's a one-time job, then I'll be out of a job as an ETF for a financial. So unfortunately, it is something that you have to, I guess, keep on top of because over time markets move, as a class is, like we said, they perform differently because of different correlations. And so your portfolio just naturally, it will start to drift away from what you originally designed and then maybe you've changed as an investor. So maybe your goals have changed, your priorities, your needs have changed. And once that changes, your portfolio should reflect and change with you too. So when it comes to rebalancing, always take it back to the basics, I like to say.

34:00The question you should really be trying to answer is, does the portfolio today still reflect the risk that I want to take on for where I'm currently at right now? And that will help determine whether you need to rebalance or not. So it's not about predicting what do you think which asset class will do best next. It's really coming back to that risk and reward and bringing it back in line with the strategy that you set because portfolio construction is a strategy, like we said in question one. So when you're back to answering those questions, what are your goals? What are your risk profile and time frame as of right now? And does my portfolio right now best reflect or best help me achieve what it is I need to do? Most people get stuck in the dogmas of I rebalance every quarter or I rebalance every month or every year or whatever. And then the second one is probably the better one of those. These two is I rebalance when I need to. Yeah, which could be in a year, it could be eight a month, it could be whatever.

35:03A lot of the literature on this is written in such that it's like in a zero tax environment. I don't know if you experience this when you did all of your study, but I always felt like the literature is written as if no one pays any tax, no one pays any brokerage fees, no one pays any of that stuff when those are the realities of having to manage your wealth through time. And I know we've talked about this so far in the series, but like Australia is really well known for income and the United States is really well known for growth in investing, right? But that's because primarily because of the tax rules. Yes. Because Australia favors income over reinvestment. The US favors reinvestment over income. So it's kind of like those are the rules of the game, which we don't really talk about that much. I'm actually just going to ask you one question completely off script before I get to the final one, which is the examples that I wanted to bring to the show. If we're going from advanced portfolio mechanics, this would be like the next level up. In your job, do you ever have to use things like Monte Carlo simulations or like all of

36:04those more advanced statistical modeling to determine risk and reward? So to answer that, I would say as my job, my role as a passive ETF portfolio manager is to make sure I follow the index. So that means that like you mentioned index, there's it's a frictionalist portfolio. There's no trading cost and everything. So that's why it's already hard for me as someone with real life cost, transaction cost, brokerage, custodian charges, everything to try to make sure my portfolio keeps up with the index. So in that regard, no. But then in another regard, it's actually how we come up with the index methodology. That's when we'll use a lot more, I guess, academia or mass behind it to make sure really is our strategy working the way it is. And it's a name that it's coming, spitting out of the index methodology, what we expect. Yeah, okay. That makes sense. Cool. Okay. Final question for you in today's episode and final question for today's, for the series for you as well, which is, can you just give us some examples of how having different

37:10exposures in a portfolio may change its behavior? And by behavior, I mean like risk and return. So how does, like some example ETFs thrown into the mix change the behavior? Yeah. So this one, I'll actually share a real live client request that we had. Yeah. So we had to help a client model, essentially, they were standing off with just one big core allocation of 100% VDHG. Okay. The Vanguard high growth, diversified growth. Yeah. Very popular. So I think on high level asset allocation, I think it's roughly 90% equities and 10% fixing come. And then essentially, they were considering, well, if I wanted to add some satellite positions with some thematic funds, how would that change the risk reward profile of my portfolio? Yeah. So the alternative that we came up with was, so going from 100% VDHG to 70% with 30% in satellite holdings across five of our ETFs.

38:11Okay. So we had a 6% allocation. So that would be the ones that we chose were wire, dragon, GXI, semi and AINF. Yep. Okay. I'll put links in the show notes for those, by the way. Yep, go on. And then what we found was that all the risk reward metrics improved not significantly, but definitely improved. So for example, the average return per annum jumped from, I think, closer 10% to 15%. Yeah. Okay. So this is a perfect illustration of when you put things into a portfolio, it actually, adding them compliments the existing portfolio. Yeah. So for most tens of purposes, there seems to be nothing wrong with VDHG as a core standalone

39:13position. Yeah. But it's a good illustration of how careful additions can actually improve the mix. Do you have what time horizon that was done? Because you would do that over like a measure of time. It's right if you don't. No, I don't actually. I'm really curious. Yeah. I can give it back to you. Oh. It was done from 2019. So over the past six, seven years. Okay. And the main reason it's changed to risk reward profiles as such is like we're going back to all those hidden asset, the unknown, I guess, allocations that you might have. So the main reason was that it reduced its allocation to Australia, which then reduced its allocation to financials. Yep. And then it also increased some emerging markets in it as well. Of course. Yeah. And you got like the currency exposes as well. Of course, even though VDHG inside of it has different stocks from around the world. Yeah. The overall ETF is an Australian ETF.

40:14Yeah. So having it as a portfolio level. Okay. Cool. That's kind of like a really good illustration. And it's a better way than I was thinking about it. I put it that way. To take this core portfolio, add satellites, actually de-risk the portfolio and arguably improve the return, right? Whereas most people think adding satellites is optional. It's more for like the advanced investor that's willing to take a lot more risk. But this illustrates that that's not always the case. You're not always taking more risk by doing this. Well, just this has been heaps of fun. I know we talked about the advanced stuff in this episode versus episode one of the series where we talked about the more introductory level stuff. But I dare say people would have hung with us for this. If you have hung with us, let us know in the comments. What do you think? Is there something that we should have added in? How do you think about risk and return? I'd love to know that as well. Now you can be found on all the social portals. You're on LinkedIn. We'll put a link into all that stuff as well. People want to follow you up as well. But you do do a lot of content like this and it's everyone's the better for it.

41:16So thanks for that. And as always, thanks for joining me. Thank you. Thank you for having me. And thank you for you, the listeners, sitting through all my massive content is still being here by the end. So thank you. Thanks for tuning into this RASC podcast. As a reminder, this episode contained general financial information only. It's not personalized financial advice like you get from a financial planner. So don't act on the information until you're spoken to one. And if we've mentioned things like financial products, they come with something called a product disclosure statement or PDS, and a target market determination or TMD for short. These documents are essential to read and understand before you acquire or dispose of that financial product. You'll find our full disclaimer, a link to our financial services guide and a range of free education by following the links that are available in your show notes. Thanks for tuning in to this RASC podcast. Don't forget to share this episode with a friend or family member that we can help. Close your eyes, exhale, fill your body relax, and let go of whatever you're carrying

42:27today. Well, I'm letting go of the worry that I wouldn't get my new contacts in time for this class. I got them delivered free from 1,800 contacts. Oh my gosh, they're so fast. And breathe. Oh, sorry. I almost couldn't breathe when I saw the discount they gave me on my first order. Oh, sorry. Namaste. Visit 1-800-contacts.com today to save on your first order. The Viori Core Short moves with you. With everyday versatility and classic athletic fit, it's the one short for everything your day brings. Invest in your happiness and get 20% off your first purchase at Viori.com-420. RASVORi.com-KOR-E20. Exclusions apply. Visit the website for full terms and conditions.