EP09 | Financial Fight or Flight: The risks every investor should know | The Art of Investing
Summary
Market Outlook: The podcast discusses the current state of the markets, highlighting that September is traditionally a challenging month, with no equity index hitting an all-time high, but gold reaching a new peak.
Bond Market Dynamics: There is a focus on the rising bond yields, particularly in the UK, due to excessive government issuance and insufficient buyers, leading to a "competition for capital" scenario.
Currency Implications: The potential for increased demand for US dollars is noted, as foreign investments flow into the US, impacting currency values and investment returns.
Geopolitical Risks: The podcast touches on geopolitical tensions, including trade discussions between Russia, China, and India, and the implications of US tariffs being deemed illegal.
Investment Strategies: Emphasis is placed on the importance of diversification, with a portfolio mix of equities, bonds, and commodities to manage risk and maximize returns.
Company News: The antitrust case against Google was dismissed, leading to a significant increase in Google's stock price, which also positively impacted Apple's shares.
Portfolio Performance: The model portfolio saw a 0.4% increase, driven by strong performances in commodities like gold and copper, despite some declines in equity markets.
Future Considerations: The podcast suggests caution in September, with potential opportunities to increase equity exposure if market corrections occur, while also considering the impact of currency fluctuations on investments.
Transcript
The bulls have been snorting and the bears have been growling. >> And I don't want to get political about it, but hey, why not? If you tax people more and more, growth goes down. >> All markets don't die of old age, they die of fright. And Liz Truss gave them a fright. But someone's got to buy these bonds because if you don't buy the bonds, the governments don't have enough money to invest. >> There's got to be a lot of money wanting to flow into America. And that could mean the demand for US dollars go up and the currencies they're coming from go down. >> The Yansy, you should have given them. >> Sorry, Mr. I'm sorry, but the answer you should have given it doesn't even matter what this is. Your capital is at risk. The value of your shares, ETFs, and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. [Music] Welcome to episode nine of the art of investing. Now, of course, this is the podcast brought to you by IG, the global investing platform. This week, we're looking at the risk of our model portfolio. Now, all investors can watch their portfolios go higher and higher and think that it's only blue skies ahead, but the best investors out there also know how to manage the risks and just in case there's any turbulence in the weeks ahead. We are going to go through all the important matters that you should also be looking at today. That will come after the spice market update. Well, September is upon us. the dreaded month of September, seasonally the worst month, which we've been banging on about for the last couple of months. So, it's here now. Uh, and it's already started quite interestingly. The bulls have been snorting and the bears have been growling. And for the first week in a while, we haven't had an equity index hit an all-time high, but what we have had is gold hit a new all-time high. And it smashed through the previous high at about $3,500 an ounce. And silver, close on its tails, uh, hit a 14-year high, which is great. On a less positive point, bond yields, particularly in the UK, the long bond yields, these are the ones further out, about 30 years out, actually hit a recent high as well. Higher than we've had since 1998, I think. And Liz Trust, >> and what happens when bond yields are high, >> prices go down. >> It's as if we've rehearsed it. >> CJ, what do you reckon on that? You're the bond expert. Look, I I mean, I think we'll be talking about bonds a little bit later on as well, but it's really interesting that we've come in September and everybody's s sort of sort of woken up. Perhaps they've all come back from their holidays uh in some Greek or Italian resort and suddenly thought, "Oh, what about bonds?" And they look at bonds and they say, "Do you know what? These bond yields don't look that good given this amount of supply that is coming." And people are finally seeing that this is something they're going to have to um grapple with. The the key point really is too much government issuance, not enough buyers, yields have to go higher to entice people to put money in bonds. And that's a competition for capital which is going to we think get worse. >> Right now, that's a new term we're introducing there. What What do you mean by competition for capital? Well, if you're sitting there as an asset allocator, if you're sitting there as an institutional asset allocator, but if you're sitting there at home looking at your portfolio, you're trying to decide where you put your money and where you put your money or where you think the return will be greatest. So, there's a competition for where you're going to put it. So, if everybody thinks equities are going to go up 10% a year, like my friend Mark over there, hey, >> then obviously bonds yielding 4% isn't going to be attractive. But someone's got to buy these bonds because if you don't buy the bonds, the governments don't have enough money to invest and spend on public spending and all these other things. So in the end, you'd have to get bonds to a level where people want to buy them. And that's this competition for capital. The problem with all this is you get a bit of a vicious cycle because you get higher yields means more borrowing. >> More borrowing leads to higher yields and rinse and repeat. And that's the that's where we're getting at the moment. Um, and it's starting to appear a little bit concerning, should we put it that way? >> And that's what put the the markets under pressure this week, you think, Spice? >> Well, I think so. But there was also a little uh event happened as well. There had been a number of parties been appealing against the tariffs. And in the US Court of Appeal, uh, one of those, uh, those motions was actually turned down and actually said that tariffs were illegal. Now, America's been getting about $30 billion a month now from tariffs in revenue. And clearly, if they can't get it from tariffs, the bond markets are going to have to pay for it. And that also could have added to this maybe these jitters we've seen in bond markets, particularly in the US. Also this week, we had Russia, China, and India, the leaders of those countries, get together in Beijing. Trump would have not liked that. But they're talking about trade packs and how do they avoid basically doing trade with the US in as many respects because they want to make sure their own countries and manufacturing are doing well. >> Isn't it amazing that Donald Trump has managed to combine get these people to all combine together and to get the press headlines which sort of suggest that China's trying to take on the role of being the most reliable country in the world as opposed to America. I mean it's for further conversation as we've you know talked about already about some of the risk premium that's creeping in but it does seem amazing to have got to that stage >> and the the picture of Putin Z and Kim Jong-un that really is the enemy of my enemy is my friend. >> Well the Chinese do think very long term you know and that's held them in goodstead and you know may well do again. Basically, we've had a lot of data, not particularly important data in the last week. Uh, but next week we're going to get and tomorrow, which is Friday, which is the day this podcast comes out. We got a big one again. Remember, we talked about the non-farm payrolls, which spooked the markets a little bit a couple of weeks ago, and pushed the odds of an interest rate cut in America on the 17th of September, the next Federal Reserve meeting, up to about 90%. We've got that that number again this Friday. Just to be clear, non-farm payrolls again, the higher the number, the better the economy is doing. The lower the number, the weaker the economy is. And we get the unemployment rate out at the same time, don't we? And payrolls. Payrolls is quite important for inflation. It is. But more importantly for inflation, next week we've actually got consumer inflation expectations. So it's telling you and giving an insight to what consumers are thinking about the way inflation is developing. And we also get some official numbers actually on inflation which is the consumer price index in America and we'll get them in other countries as well. But America is the one everyone's going to be looking for because that's the markets are all looking equity markets particularly are looking for now a falling sort of set of interest rates as inflation comes to a peak. One other thing I'd mention on that front. We've had very little talk this week actually about who will be the next chairman of the Federal Reserve. Now, when Trump got involved a couple of weeks ago, that did disturb markets a little bit. We knew that this guy Chris Waller, who already sits on the Federal Reserve, is the the firm favorite, and he remains a firm favorite. But an old friend of CJ's, David Severos >> from Jeff. Really? Yeah. The strategist from Jeff is now second favorite. >> Oh, wow. Wow. Yeah. >> So, he's very good. I'll tell you, he's extremely good. He's one of the most successful investors that I've ever seen operate. and his he's been very very good at calling equity bombs and how they're all going over the past few years. >> There's also been one other major event in the last sort of 24 hours and that is that the antitrust case against Google, the Americans were sort of accusing them of having a monopoly in search engines because obviously we all use Google, we do that case was thrown out uh yesterday. So, Google shares are up 9%. Apple shares, Apple get $20 billion a year from Google as payments so that Google can put their Google Chrome search engine on Apple products. They get $20 billion a year. So, Apple shares are up 3%. But most importantly, Google are up 9%. That's good for the technology companies because otherwise they'd have to start breaking these companies up and spinning out the, for example, the search engine part. And part of the reason they're doing it that is now because we're seeing a very fast growth in these other search engines like chat GBT and Perplexity and some of the others. So basically the judge ruled that because new competition is coming in actually that monopoly that Google's had for so long in search engines is not going to hold for long. The shares went up a lot. They went I said 9% is huge for one of the biggest companies in the world. we've added in a couple of risks there um on the outlook of the economy and what's happening in geopolitics. So what better week to look at the risks of our portfolio. So why don't we start with this mix of bond to equities to commodities that we touched on last week. How are you feeling about that at the moment? There's a couple of parts to that question. Um, and we'll deal with them separately, I think. First of all, bonds to equities. As experienced bond investors, we all are now given our teaching on bonds and the vision of Mark standing on the sofa here with Rich to show what the yield curve looks like. There are two real types of bonds that we should be thinking about. One are shorterdated maturity bonds. Remember these are maturity bonds that maybe only have three, four, five years to go till maturity and what's dominant for them and their performance is where are interest rates. So they they can be thought of as quai cash. They're important to think about in the portfolio. They're not really taking any risk though in having those. So let's let's forget shortdated bonds for the benefit of what we saw about now. Let's talk about longerdated bonds. So longer dated bonds are 25 year, 30-year bonds, 20-year bonds, you know, a long long time till maturity. Their returns are driven by uh a number of factors. Inflation expectations, uh amount of issuance there is, likelihood of repayment, something not going bust, and those similar types of concerns. Now, as I've been saying for a few weeks, um longerdated bond yields need to rise to reflect how where inflation is in the world and this issuance that is coming from all the main governments of the world. Um it's particularly high in the US, but it's also very high in the UK and across the whole of Europe. Japan is enormous as well. And so we have now got a situation where lots of governments are trying to borrow money and that's making this competition for capital that we just talked about start to get a little bit difficult. >> In fact, it might even come in to mop up all this spare cash on the sidelines that Mark keeps on talking about every week. >> If it gets high enough, that's exactly what will happen because people will sit there and they'll say, "Look, I can get 4% on my cash, but maybe I can get I don't know, I'm going to put I'm going to put a finger in say 8% on my long bonds. Why don't I do that? So, you know, that's why this is important. Now, you need to also remember a fact something we talked about before, which is that the US has a massive current account deficit as well as its budget deficit. Now, when I say massive current account deficit, that means that it imports far more than it exports. And therefore, what it needs to do is attract a lot of money into its markets to buy its debt. And that's got to come from overseas people. And the problem is these overseas people are starting to think that maybe China, India and others, Mark was talking about them earlier earlier are safer pairs of hands than maybe Donald Trump and what Donald Trump is saying to them. So what you see then is a is less people wanting to buy longerdated bonds from the overseas investor. So therefore the competition for capital we come back to that phrase is between where will US retail investors where will the man on the street buy bonds compared to where equities are now. >> So it's not just a competition between different asset classes but a competition between different countries who all are issuing all this debt as well. >> Overseas governments all are trying to borrow money. Whoever's the highest maybe gets their some first. whoever's last maybe suffers more. So, there's this problem out there that there's a lot of people wanting to um borrow money. There's a lot of people wanting to buy equities. There aren't a lot of people who want to buy bonds and therefore bond yields will have to go higher in order to get that uh issuance away. So, in my opinion, the pressure on long bond yields is to go higher. Higher yields mean lower prices >> and therefore I don't want to hold any longerdated bonds within my portfolio. >> Isn't it scary that the UK 30-year bond yield so go out 30 years if the government want to borrow money for 30 years in the UK they have to pay investors 5 and 3/4% 5.75%. The American government only has to pay 4.9% for 30-year money. Now that's interesting for me. What does it say about the UK? Why do you think we're we're so different in in yields that far out? >> There's two answers to that question, Mark. The first one is the US has a thing called exorbitant privilege. What that actually means is because the dollar is the reserve currency of the world and there's so much business being done in dollars. So many people have to have dollars that those dollars have to find homes from time to time. So there's more of those will stay in the US. So it means their bond yields are more protected than other governments when it comes to the yield level which they get to. So that's that's the first answer. But the second answer and I'm afraid it's an answer that we, you know, need to um be aware of and we'll be talking much more about over the next few weeks coming into the budget is we have an inflation problem here. We have too high inflation. We're not seemingly doing too much about it apart from cutting interest rates. Don't really follow that. So that's not good news. we have um a massive public sector borrowing in this country. So we have the government trying to borrow more and more money all the time and their only answer is to and I don't want to get political about it but hey why not. Um all they want to do is to tax people more and more. If you tax people more and more growth goes down, growth goes down, money coming in goes down. You need to bridge this gap. you have to put taxes up again and you keep doing this and it's a virtuous circle until something goes wrong. >> And I'm afraid we've got to the stage where people are getting a bit worried about it. It's fine for me to join in with everybody else, but that's not what this sort of podcast is. This podcast is about where do we make investment decisions. So, I want to go back to when I was a young lad, if I can remember about that far. Gosh, many years >> when I started to black and white >> when I started trading guilts because I I traded guilts for 15 years all the time. That was my one job. >> And so we had to look at the longdated end of the guilt market and say where does where do longdated UK government bonds offer value and we developed a framework. This is not an exact framework. This is just how we did it. Take it or leave it. Let's just share it with everybody. So the first thing is the first part of that framework there are three parts one what is the inflation expectation that you think for the market the second one what is the risk that that inflation is going to be achieved and the third one a more difficult concept what is the real yield you should expect on investment. So that is what is the yield over and above cash you should expect to take money out of your pocket and put it in in in uh investment because obviously I can keep it in cash I'm not taking any risk. So what's that real yield and that's normally thought about as the growth rate of the economy. So if you can get a better return on something then the growth rate of the economy is probably not a bad thing to go and do. So let's look at those three elements in their own right. First one inflation. We have an inflation target of 2%. I do not believe the MPC are actually running their inflation target of 2%. >> That's the monetary policy committee. >> And thank you Mark. That is the monetary policy committee who has set a target of two. But I mean these are the same guys who gave us 112 a year and a half ago. So let's not think that's baked in the cake. So I'm going to say I think they think that three is probably acceptable. So I'm going to say three as my inflation expectation. How far in advance do you look and try and judge inflation? It's not last month's figure, is it? >> I'm sort of thinking over the next couple of years, and we keep rolling that every month. It it doesn't come closer. It's over in the next few years. So, it's your mediumterm view of where you think inflation's going to be. And I think about 3% is probably fair. Now, when I was a young lad trading guilt, we had then the risk premium. What's the likelihood you're going to get that right? And that would vary anywhere between no risk cuz you were definitely sure it might happen or well I'm not sure what these people are going to do. Maybe I've got to have a bit of extra risk premium. And that risk premium would vary between zero and one to one and a half%. Okay. So I'm going to say quite a lot of risk premium because we've got a government in charge who want to keep borrowing more and more money then don't seem to be particularly anti-inflationary. There seems to be risks being developed. So, I'm going to go I'm remember I'm I'm going to try and be as negative as I can, as conservative as I can with this estimate of where are we going. So, 3% inflation, 1.5% risk premium. That's 4 and a half% so far. Now, risk premium is something we could do a whole show on, right? But in basic terms, it's why if you were going to lend me and Spice money, you might charge him 5%, you might charge me 10%. >> You're too kind. Yeah, it it's my interpretation given what's going on in the world today of how certain I am of anything. So, there'll be times I'm really uncertain and there are times when I'm not very uncertain. I'm pretty uncertain at the moment. All the stuff we talked about Trump, all the stuff we talked about the world situation, the populism, all the other things that are going on at the moment, I'm not as sure where things are. So, I'm going to go, you would expect me to say this if I really want to say where where am I going to buy something, I'm going to go for the the the highest I possibly can. So I'm going to go for one and a half. So 3% inflation risk premium 1 and a2 gives me 4 and a2. What's the growth rate of the economy? Now there's one for you. >> Now I would suspect that the growth rate of our economy is somewhere in the region of between 1 and a half to two maybe two and a half%. Let's let's say one half to two and a half. >> Yeah. >> Okay. >> So now I want to take I want to be as difficult as I can in terms of where am I going to fund. So I'm going to add two and a half. So I've got 4 1/2 plus 2 1/2 which is 7%. Wow. So if I want to be really really negative I say long bond yield should you get to seven. Now if I think growth is 1 and a half then that would be six. So the range for me of where bonds offer value is between six and 7% in long guilts. >> And at the moment they're at 5.7. So not too far off. >> And this week they trade up to 5.8. eight. So we're getting close to where I think we should start thinking about guys these things are going to start providing competition for capital people going to start saying well if bond yields at this level why am I buying equities why am I buying some of these other products >> I think this is a yellow card for stealing a phrase from Jerome Powell we've got to start thinking about thinking about >> yeah the Federal Reserve >> yeah so I think that's fair but there aren't many shows where people will actually say this is the range I'm looking for we have at least given a range and I would certainly be saying if we saw bond yields above six let's put a toe into the water and I'd look to be fully in my position 6 and 1 half 6 and 3/4 and closing my eyes because my experience in bonds is that just because I put a number on it doesn't mean that's where it's going to stop and it can get quite ugly and quite difficult but if you've done your homework we talked about this before if you've thought about this away from the emotion when it gets there. You don't get caught up in all the, oh, it could go to nine, it could go to 10 or whatever. You go in and you buy a position. So, I will be banging the drum when we get over 6% long guilt yields for us to think and talk about it. >> And markets being markets, we will get to 6%. You know, it's >> looking forward to it. Mark, >> I mean, the interesting thing is equities don't think that like that at all. So, equities look at the 10year sort of time horizon for bond yields. >> Okay. So in in the UK that's only 4.85% at the moment, right? So it's it's about 1% difference and in America it's about 4.2%. So even lower again. And that's when you value companies, you have to put some sort of interest rate in to discount the future cash flows back to today's share price. >> Just go over that again. Sorry. So So what am I discounting? >> So you're discounting all the future cash flows from a company in your share price. And basically the the lower the interest rate that you do that at the higher the share price will be today because it's worth you're getting all those those those cash flows. So you bring it effectively forward in your mind to get a share price today. The higher the interest rate, then the lower the current share price is today. Which is why shares prices go down when interest rates are being put up quite often and will normally ordinarily will go up when interest rates are falling as they have been doing recently and are expecting to happen in the US in the coming weeks, months. >> So that's where the equity guys look. But where the equity guys sort of miss out on is this competition for capital. So an asset allocator like Chris chairs the meeting and says bong guy goes well yields are now getting to my six six and a half% where I want to buy them and the equity guy goes well it's brilliant because actually 10 years still you know in a sensible range and therefore share prices should go up but the chairman says hang on we're going to put some money into bonds and guess where we might take it they might take it from equities >> and that's where sometimes well that is always risk as an equity investor so we have to keep an eye on what's going on 30 years out. But actually our day-to-day focus is what's happening in the very short term and in 10 years time. That's what's called the risk-free rate in for equity investors. They look at the 10ear yield. It matters to the bonds market clearly because there's a direct relationship. However, it doesn't really matter to equities un until it gets to that certain point. That's the key point. You're absolutely right, Rich. >> The bond guys look in amazement over many years. equities continue to go up even when bond yields are moving higher and don't know what the hell's going on and why is that happening and then suddenly the bonds will get to a level where these asset allocators say you know what we're now going to sell some equities and buy bonds and then it will turn we're not there we're nowhere near that sort of thing at at this particular moment because I still think remember equities we've talked before in detail but let's just rehearse slightly we're going to get lower short-term interest rates probably remember I'm talking about long-term interest I'm talking about the longer end the short term going to come down a little bit. That's gives more cash to the system. >> Yeah. >> And growth is pretty good at the moment. Earnings are pretty good. So, we're not worrying about that at this moment. I suppose where we would worry is if we and and dare I say it in a podcast, if we get to a Liz Trust moment, and when I say a Liz Trust moment, um I mean a sharp move up in yields. Mhm. >> And that's all I'm trying to say about that because one day we'll have a podcast on what happened with Liz Truss and why the market did what it did and the fault of some of the organiz institutions for not helping her out. >> Should we invite her on? >> We could, but I doubt she'd listen to us. But at the end of the day, we don't want to see a sharp move up in yields because if we see that, then that's when people start to think, oh, there is a problem here. So the steady grind we're seeing now would imply that the equity guys are going to be fine. The bond guys are just going to be um watching their yields go higher and higher. But it will get to a stage where the competition for capital means people say I'm going to buy bonds and I'm just trying to put a level at where I think we should probably start thinking of a line to start buying the long end of the guilt market. There's a great saying in equities is that bull markets do not die of old age. So all you people think, "Oh, it's going to be bad because it's just gone up a bit." It carries on and carries on. Bull markets don't die of old age. They die of fright. And Liz Truss gave them a fright. Are you interested in growing your portfolio with IG? When you invest at least £50, IG will kickstart your investing journey with a free share bundle worth up to £200. Just make your first investment into an ISA sit or a general investment account by the 30th of September. You'll also benefit from commissionfree investing as well as 4% variable interest on your cash. Other fees may apply. Terms and conditions can be found in the show notes or on ig.com/uk. Now, I think that gives us a great opportunity to move on and actually have a look at this week's performance in the portfolio because this is the risk versus reward episode. This is when we get a chance to look at this portfolio and go through and see exactly how it sits. We don't think that there's too much of a risk of our bond to equity to commodity split at the moment, but this is looking into the future, isn't it? So, how have we done this week, Spice? >> Well, it's been a good week. The portfolio since we started was up about 0.59% last week. At the end of this week, when we took the numbers, we're up 1.02. So, let's call it 1%. We've had about a 0.4% increase this week. That's been led by our exposure to commodities. Now, if you remember, we we had a big debate last week about we like gold, we like silver, but we had 20% of so of the portfolio in commodity areas. And gold has been the best performer this week, up 5.4% our gold ETF, closely followed by copper up 3.3%. And then the Black Rock World Mining Trust, which is up 1.8%. So, all in all, that's driven this extra performance this week. On the negative side, the DAX, the German stock market was down about 1.1%. The Japanese stock market, the Nikai 225 is down 1% and the Russell, which I put into the portfolio last week, is down 1%. So, not off to a great start, but overall, that's why we have a diversification of assets in our portfolio, the combination of which came together and gave us an extra 0.4% of performance this week. >> Can I say just a couple of things there? First thing, um, all decisions are joint decisions. So we don't go for it's your fault or my fault or whatever. >> But mainly the chairman's. >> Yeah. Thank you. >> Yeah. Thank you very much. Uh but the most important thing for me was when I was thinking about how the portfolio performed yesterday evening and I hadn't got the numbers in front of me. I wasn't thinking about it. Equities have gone down a little bit. I thought we'd probably have had a slightly negative week. >> Yeah. And what this shows you is how that diversification and in particular and a little expression we're going to introduce here is our split between fragile assets and antifragile assets. And when I say fragile assets and antifragile assets, I mean essentially assets that work when the system's doing fine. >> Mhm. >> And assets that work when the systems not doing well and we're starting to worry about geopolitical risk and all those some other things. >> Right. So what we found was because we had that high waiting 20% in anti-fragile assets, they moved extremely well when the temperature in the kitchen got a little bit hotter. The equities came back a little bit, but they didn't take away from that. Absolutely. So if you look at our portfolio overall, you could get a split of about 78% in what we'd call the fragile ones, the ones that suffer when the world worries about big events like geopolitics or wars or whatever it happens to be. And the the safer assets, the antifragile ones are about 22%. Now, some fall into both camps. So we've got the VANC crypto and blockchain ETF. >> Yeah, it's a tough one. >> Now you could say about twothirds of that is fragile. So they they like to go up more when the stock markets are going up, which is the biggest group of fragile assets are equities. But about onethird of that actually does well when they're not doing well. So they're the anti fragile ones. But probably the biggest anti-fragile position we have in our portfolio is 10% in gold. Nearly all of gold becomes an anti fragile. It helps you during big sort of riskoff events or sort of systematic risk that we see from time to time in equities. And the bulk of the portfolio is equities. For us, it's about 60 to 65% depending on whether you want to include Black Rockck World Mining Trust as an equity or whether you want to consider it a commodity. If you consider it an equity, then our equity position is in total about 65%. If you take Black Rockck World Mining out and put it into commodities, then we have 60% but we then have 20% in commodities rather than 15%. >> And this is really all about knowing your portfolio, isn't it? and the the risk assessment that it's very much worth doing knowing what's fragile, what's antifragile. So, what you're looking for when you are building your portfolio, you're looking for assets that aren't particularly correlated to each other, but you're quite optimistic about because if you have a number of holdings you're optimistic about, but they're not correlated together, it means they can offset and help each other when others are are suffering. And that's exactly what's happened this week. I know we're we're banging on about it a bit, but it's really quite useful to see how the benefit of diversification's helped us this week away from equities and kept the show on the road and kept us moving in the positive direction. So, we're almost like a a tour to France cycling team, aren't we? Sometimes one's better at the the hills, sometimes one better at the sprints. Not everybody's winning at the same time and all the time. It's some are better at some stages depending on how risky things are, the geopolitics, but it's having the the split that you know overall then you've you've got the safe stages um as well as the the times to be a little bit more risky. What do we actually think then going ahead into the the weeks ahead? Is there something that we'd we'd want to do here, CJ? >> Um I'm not recommending anything. Um, I we talked about bonds already and I said that we're getting closer to a level where we might want to buy some non-dated bonds, but I don't think we're there yet. I'm still looking at September being a weaker month for our risk assets, for our equities. Basically gone nowhere so far in September. You know, down a bit, up a bit. It hasn't really moved much. And therefore, um, I I would prefer us to wait a bit. In my view of the world, I still think there's a chance that we might get a bigger correction to buy in equities. uh this this month and if we see that then I think we should take advantage of it because that's been our plan all the way along the line set out your plan set out your strategy don't let emotion get in the way of it unless your view changes execute what you said and that's what I think we should do CJ not knowing for his virtues but it looks like patience might be a virtue here do you agree spice >> I do I mean last week I obviously pushed for um an increase in our equity exposure which we've got but I didn't want to sort of roll out all of our cash into equities which is my instinct by the way because I am you know respectful as I've said before of September particularly being the the normally the worst month for equities in the year. So we've got to be cognizant of that when we're making these decisions and so we have so right now I have no uh recommendation to have to change the portfolio because it's done what we wanted it to do in a very quiet maybe negative week for equities and we've actually outperformed by 0.4%. That's great. So, if we got more positive about equities and got through this period of uncertainty and we get into this interest rate cutting cycle, as I've talked about in the in in the past, at the end of September, which is when we're expecting it to happen, then I would like to see us to begin to move equity rating up towards that higher level, which we have always said would be about 75% in equities for the long term because equities give you a superior return of about 10% in total, about 6 and a half% after inflation. additional six 7% after inflation. So you want to have the bulk of your portfolio in equities. We've talked about that in in previous episodes. Uh and there's no reason to think that that's going to be any different from where we are today. >> Yeah. I I suppose the the the other thing to add where where I agree completely what Mark is saying is there's there's lots of data coming up, right? We've got the non-fold payroll numbers which um Mark talked about. Now remember they were the ones that set the trigger off for everyone going to get five rate cuts. So, if they're stronger than expected, market might have a little setback on that. I I don't think long-term set, but just a set back on that. Um the same with the inflation numbers. If the inflation come numbers come out a little bit higher because the tariffs, people start going, "Oh, I told you tariffs are inflationary. We can't cut rates." So, there'll be plenty of volatility in September. And but I just think we need to remember what our tactic is. We want to put more into exits because the fourth quarter is normally a very good quarter for equities. So, you know, let's take our time. Let's watch what happens. But um so far so good. 1% up since inception. I think it's not not bad going. That's right. Although we're on episode nine, we didn't launch the model portfolio until week four. So that's four weeks of performance and up 1%. We're on track because a reminder, our target for the year is 10%. And we're not trying to hit the lights out. We're not trying for 15 20% here. So, spot on target and we are uh we're happy with that. As CJ alludes to, we'll know so much more by this time next week and we'll take informed decisions rather than just guessing before that with a jobs number, with the inflation number, and therefore our outlook for interest rates going into the end of the year. >> A few people have said to me, if we're so convinced that we might get a correction in September, why don't we have less in equities? Well, you know, I've gone back to them and said, "Well, look, it's always sod's law that even if you get bad news, markets keep going up." Because we we could be going into a stage here where bad news is good news, ironically, for equities. Because the bad news could mean that if the economies are slowing faster than expected or unemployment is rising faster than expected that actually that means you're going to get more interest rate cuts. And probably the overriding factor for equities right at this juncture is the amount of interest rate cuts and how fast and how big they are. And that could mean that the bad news we might get could actually be seen as good news for equities. So we got to be very careful which is why we don't put everything into gold or to shortdated guilt as we've had or cash. We have to have that balance just in case we're wrong. But we're respectful that over history over 100 years September has naturally been the worst month. So hopefully we'll get the opportunity. the answer you should have given them. >> Sorry. >> Okay, just just to be clear. >> I'm sorry, but the answer you should have given I I doesn't even you've got to be able to improve in life. You've got to you got to try and learn and improve and that's and that's what I'm trying to get to here. We did say right at the start that our neutral position, the position we're going for was 75% equities and 25% other things. So the fact we've actually got 60% in equities or maybe 65 depending on how you measure it means we're actually below where we want to be in equities. So for those who say why don't you sell some we have effectively sold some. >> We're running an underweight relative to neutral >> to where we think we should be as our normal course of events. I I think sometimes o underweight overweight starts getting all you know all sort of talk of institutional fund management all that sort of stuff like so but we're running um under where we had thought our strategic position should be because of the weakness we expect in September after that nothing ch if nothing has changed we would expect to have full waiting in equities. Uh an interesting question here. Is there anything outside of what we have already talked about that you have been considering maybe at home, maybe even in your own portfolios that we we touched on silver last week a a little bit? You know, that that was a new thing we introduced. Are there any other areas of the world equity-wise? Are there any other commodities or you know what are your thoughts on other options that may come up in the following weeks >> if we believe that the US dollar will be is in in a period of potential weakness which Chris explained very well last week uh why he thinks that's the case then we have a position that benefits from that that's commodity position but another area of the world that benefits from lower weaker dollar is normally emerging markets markets like China, India, but if you invest in a an emerging market ETF, then you will get a bit of all of those sort of areas in different degrees. If we really truly believe that the dollar is going to stay weak and going to probably weaken further, then emerging markets is something we have to probably think a bit more seriously about. Now, we have an position because we've got 5% in India. So, we're not sort of we don't have anything. We don't have nothing in in emerging markets. we have 5%. And actually as a bench part of the world benchmark, it's not much more than 5% frankly the emerging markets but China would be an area I'd naturally want to think about and maybe we could do a podcast looking at India versus China and some of the pros and cons of both because obviously you've got the two biggest populations in the world. They've got between them about three billion people. Um so they're very important economies increasingly important but they're also quite important stock markets that we shouldn't ignore. >> Excellent. you you touched on uh US dollars there and the potential weakness. That takes us nicely into the first question of the week and the question comes from a viewer that said you guys spoke about GBP and US dollar in terms of one of your S&P holdings but I didn't really quite understand. Do you mind going through again exactly if I buy in GBP or I buy a US dollar asset where my risk is? CJ, do you want to have a go at at explaining that? >> Yeah. Yeah. Mark did a very good explanation last week and I'm going to just try and do it a slightly different way. If we look at the three of us and we say that I'm sitting here with money to invest, I've got £1,000 to invest. Rich is sitting in the middle. He's the currency dealer >> and Mark is sitting in New York trading in in um the Magnificent 7 or whatever he's trading in. Probably them, let's be honest. So I I say I want to buy and put the money into Mark's fund. I give the thousand quid to you, Rich, and you exchange that at a rate of 1.34 at the moment, which gives $1340 to Mark to invest in his fund. So Mark Mark has now got $1340, puts it in his fund, and runs it for me. And he runs it for two years. After that two years, I decide his fund performance isn't good enough. and I decide to sell my holding out of Mark's fund which has gone up 20%. He then sells that 20% for me and he now has $169. So I gave him $1340. >> Mhm. >> He sells it and got $169. So in dollar terms I have 20% profit. >> Excellent. >> But unfortunately I'm not a dollar investor. I'm a sterling investor. So I now need to give that money back to Rich who's still trading in U foreign exchange obviously not been that successful if he's if he's still trading after two years same thing >> and over that time uh the currency has moved up to 1.75 which is a rise of about 30%. Obviously Rachel's done a great budget and growth is very strong. Okay, it's a hypothetical unlikely scenario, let's be honest. But at 175, he exchanges the $169 at 175 and he gets back to me £919. So I gave Rich and then to Mark £1,000 and he ended up with £919. I have lost 8%. So in this situation, the local market went up 20%. The US market went up 20%. So Mark thinks he's done a great job for me by the time I've converted it back because sterling has strengthened. Yeah, I am now down 8%. So when I look at my valuation, I go, what the hell's happened here? And that's the currency piece. And it's vitally important for people, you talked earlier, Rich, about understanding what's in your portfolio, fragile assets, anti fragile, that sort of thing. It's vitally important people nowadays realize the effect of foreign exchange. And why do I say that? If I go back 10, 20 years back to my youth, maybe we'll go 40 years, but never mind. Um, most people in the UK, institutional managers, wealth managers, retail investors, they had a lot of UK equities in their portfolio and so they didn't need to worry about currency too much. But over the last certainly 10 years, people have moved away from let's invest in the UK market to let's invest in the world equity market. And not surprising, the UK equities have been terrible. World equities have done very well if driven by the US. But what that's led to is a situation now with are you're an institutional investor and you're sitting you're looking at your portfolio. Let's say you've got a 100% equity portfolio. Just make it easy. 100% equity portfolio. 70% of it is now in US equities. >> So 70% of it is dollar based. Now, if we look at what's happened this year to date, UK equities have gone up about 15%. US equities in local terms, in Mark's terms, where Mark's trading, >> yeah, >> are up 10 or 11%. But in UK terms, they're only up two. So if I'm an international investor, I'm looking, everyone's telling me how well I've done, but actually my US equities have only done two against Footsie having done 15. And that's why it's really important to look at what you've got in your portfolio. Look at those underlying investments. So that's why we've broken down our portfolio into individual bits so you can see how we're allocating to each area rather than the global equity index. And you can see how much time we're spending thinking about our currency exposure and where it needs to be. And just one final from me on there. We have a sterling benchmark. Everything we should be paying is sterling. We want to make 10%. >> We currently have 35% of our portfolio get there or there or thereabouts in dollar assets. >> Mhm. >> I think that's fine in the short term. I have a problem with that because you know we got budget coming up as we said earlier. We'll do we're going to do a pro we're going to do an episode on the budget running into the budget but it's unlikely Sterling is going to strengthen much running into that budget. It's more likely it's going to probably give a little bit back. But over time I believe the Trump factors we've talked about before and where I think we're going to get to as a country. I can be more positive on sterling versus the dollar and I will want us to reduce our dollar exposure. It doesn't mean we have to change our assets that we've got, but it means we hold them hedged back into sterling to make sure we don't have that foreign currency risk. >> And if we can just put on the portfolio again, people can see if they go down just below halfway, there's the Invesco NASDAQ 100. Now that's in dollars. Underneath that, there's the Eyesshares S&P 500 GBP hedged. Now, what have you decided to do there, CJ? When you took the decision to put us into the GBP hedged rather than such like the NASDAQ when we're in dollars, >> we're controlling our dollar exposure. If we buy the hedged version, effectively, we're not exposed to the US dollar. So, we got some dollar exposure. on NASDAQ 100 for example as you say is in dollars but the S&P 500 which is an American index is hedged back into sterling to try to limit the amount of exposure to the US dollar that we have got >> and again we go back to the thing you don't want to have all your eggs in one basket or be facing all one way just in case you're wrong because I would make an argument against Chris that if the US begins to grow as I think it's going to grow at 3 to 4% over and above inflation and inflation starts to come down and interest rates coming down and all this new build of manufacturing etc to meet AI and and all the the tariff sort of impositions there's going to be a lot of money wanting to flow into America and that could mean that people the demand for US dollars go up and the currencies they're coming from go down >> so we've got some exposure to India there we've got exposure to euros with the the DAX we've got exposure to the Japanese yen and it's just worth knowing and being aware of, isn't it? Because we certainly were back there. >> Foreign currency should be a conscious decision. It should not be just this is what we normally do. So if you've got it, you need to understand you've got it. We're sterling based investors. We look at returns in sterling. So anything you take away from sterling has got a currency risk. Now you may be happy with it or you may not. You just need to know you've got it. And that's what I'm trying to emphasize here. Now, as sterling investors and with our position in the Footsie 100, I feel like we could really do with a little bit of added expertise on the UK. What do you gents think about getting a guest on next week? Do you know from your time in the market somebody who would be regarded as an expert in the UK? Well, I'm excited to tell you that we've got a a gentleman called Charles Hall who is head of research at a company called Peele Hunt who are specialists in UK small midcap and UK equities basically as an investment bank and a corporate broker uh and a stock broker and he has been badgering the government to try and improve the conditions for investing in the UK. So, it's going to be fascinating to have him on uh and to be able to discuss with him, you know, whether he's felt he's made made any progress, whether anyone's listening in Downing Street or not, but we're going to get him in next week. Is Charles Hall. He's a great man. I worked with him back in the day back when all the banks were going bust during the credit crunch at Pame Gordon. >> I'm very excited to hear it because one of my pet subjects is how do we get more and more people buying UK equities? All I ask is we sit him over this side of the table because then we can hold things are spicy. Fantastic. We do have another question that we didn't quite get to them all last week and this is a question that we've got in and it is related to risk. So, I've maxed out my ISA. I've also got a general investment account as well. Which one should have my higher risk stock investments in it? Um, should one be more income related? Should one be more for capital growth? It's a really interesting question and I' I've racked my brains and it there's not an easy answer for it, is there? >> No, there isn't. And um you know this is this is one of these questions that um when you watch people on the TV they say I'm sorry I can't possibly answer that question uh because I haven't got enough information. And I'm afraid in this situation it is very difficult for us to answer that question because we don't know the individual's position and where they are in their life, what their aims and objectives are and all those sorts of things. But having said all that, you know, we know that an ISA is a tax-free vehicle. So if you think you can make a lot of money in something and you haven't put money in your ISA already, then you can put that um investment into a new ISA and you know you won't pay capital gains tax and you won't pay income tax on it. If you put it in your general account, you have maximum flexibility to take in and take out whenever you like, but of course you have to pay capital gains tax and income tax. The advantage of being in the general investment account is if you're wrong and you lose all your money, you got a tax loss. But presuming that wasn't why you did it in the first place. So, I'm sorry I I can't be more helpful. Clearly, if anybody's got a better answer than me, then please say it. But it's really down to individuals own positions and their own financial situation generally. Do do you like to spread your risk across whether it's an ISA, a set, a GIE, or you know, do you do you think of them differently? Unlike the good fortune of our questioner, I don't have the capacity to have investment accounts, SIPs, and ISAs. But if I had my choice and I had my time again and I went back to when I first started working, I would have built a portfolio every year in an ISA >> because that stays taxfree. This is not giving financial advice for if unless you've got a massive pension, then these ISERS is saving £20,000 a year, year in year out in a taxfree vehicle. if you did that and a lot of people don't put £20,000 into pension contributions every year. They should probably put it in an ISO and do it every year. I just that's my own personal view. Um you know that's not giving financial advice, but that would be if I had hindsight that's what I would do again. >> Excellent. Right. Well, that is us yet another week and uh no changes in the portfolio. We're going to wait and see. you'll have had the luxury of already seeing those non-farm payrolls and unemployment rates and then we've got inflation coming up next week. So, very exciting episode to look forward to, including our guest Charles Hall as well. Now, if you do have a question for us, then by all means, please send it in and we'll try to address that. The email address is >> art of investing.com. And also, if you have an ex or Twitter account and you'd like to start um something trending called #sack the chairman, then please by all means go ahead. We'll see you next week. [Music]
EP09 | Financial Fight or Flight: The risks every investor should know | The Art of Investing
Summary
Transcript
The bulls have been snorting and the bears have been growling. >> And I don't want to get political about it, but hey, why not? If you tax people more and more, growth goes down. >> All markets don't die of old age, they die of fright. And Liz Truss gave them a fright. But someone's got to buy these bonds because if you don't buy the bonds, the governments don't have enough money to invest. >> There's got to be a lot of money wanting to flow into America. And that could mean the demand for US dollars go up and the currencies they're coming from go down. >> The Yansy, you should have given them. >> Sorry, Mr. I'm sorry, but the answer you should have given it doesn't even matter what this is. Your capital is at risk. The value of your shares, ETFs, and ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. [Music] Welcome to episode nine of the art of investing. Now, of course, this is the podcast brought to you by IG, the global investing platform. This week, we're looking at the risk of our model portfolio. Now, all investors can watch their portfolios go higher and higher and think that it's only blue skies ahead, but the best investors out there also know how to manage the risks and just in case there's any turbulence in the weeks ahead. We are going to go through all the important matters that you should also be looking at today. That will come after the spice market update. Well, September is upon us. the dreaded month of September, seasonally the worst month, which we've been banging on about for the last couple of months. So, it's here now. Uh, and it's already started quite interestingly. The bulls have been snorting and the bears have been growling. And for the first week in a while, we haven't had an equity index hit an all-time high, but what we have had is gold hit a new all-time high. And it smashed through the previous high at about $3,500 an ounce. And silver, close on its tails, uh, hit a 14-year high, which is great. On a less positive point, bond yields, particularly in the UK, the long bond yields, these are the ones further out, about 30 years out, actually hit a recent high as well. Higher than we've had since 1998, I think. And Liz Trust, >> and what happens when bond yields are high, >> prices go down. >> It's as if we've rehearsed it. >> CJ, what do you reckon on that? You're the bond expert. Look, I I mean, I think we'll be talking about bonds a little bit later on as well, but it's really interesting that we've come in September and everybody's s sort of sort of woken up. Perhaps they've all come back from their holidays uh in some Greek or Italian resort and suddenly thought, "Oh, what about bonds?" And they look at bonds and they say, "Do you know what? These bond yields don't look that good given this amount of supply that is coming." And people are finally seeing that this is something they're going to have to um grapple with. The the key point really is too much government issuance, not enough buyers, yields have to go higher to entice people to put money in bonds. And that's a competition for capital which is going to we think get worse. >> Right now, that's a new term we're introducing there. What What do you mean by competition for capital? Well, if you're sitting there as an asset allocator, if you're sitting there as an institutional asset allocator, but if you're sitting there at home looking at your portfolio, you're trying to decide where you put your money and where you put your money or where you think the return will be greatest. So, there's a competition for where you're going to put it. So, if everybody thinks equities are going to go up 10% a year, like my friend Mark over there, hey, >> then obviously bonds yielding 4% isn't going to be attractive. But someone's got to buy these bonds because if you don't buy the bonds, the governments don't have enough money to invest and spend on public spending and all these other things. So in the end, you'd have to get bonds to a level where people want to buy them. And that's this competition for capital. The problem with all this is you get a bit of a vicious cycle because you get higher yields means more borrowing. >> More borrowing leads to higher yields and rinse and repeat. And that's the that's where we're getting at the moment. Um, and it's starting to appear a little bit concerning, should we put it that way? >> And that's what put the the markets under pressure this week, you think, Spice? >> Well, I think so. But there was also a little uh event happened as well. There had been a number of parties been appealing against the tariffs. And in the US Court of Appeal, uh, one of those, uh, those motions was actually turned down and actually said that tariffs were illegal. Now, America's been getting about $30 billion a month now from tariffs in revenue. And clearly, if they can't get it from tariffs, the bond markets are going to have to pay for it. And that also could have added to this maybe these jitters we've seen in bond markets, particularly in the US. Also this week, we had Russia, China, and India, the leaders of those countries, get together in Beijing. Trump would have not liked that. But they're talking about trade packs and how do they avoid basically doing trade with the US in as many respects because they want to make sure their own countries and manufacturing are doing well. >> Isn't it amazing that Donald Trump has managed to combine get these people to all combine together and to get the press headlines which sort of suggest that China's trying to take on the role of being the most reliable country in the world as opposed to America. I mean it's for further conversation as we've you know talked about already about some of the risk premium that's creeping in but it does seem amazing to have got to that stage >> and the the picture of Putin Z and Kim Jong-un that really is the enemy of my enemy is my friend. >> Well the Chinese do think very long term you know and that's held them in goodstead and you know may well do again. Basically, we've had a lot of data, not particularly important data in the last week. Uh, but next week we're going to get and tomorrow, which is Friday, which is the day this podcast comes out. We got a big one again. Remember, we talked about the non-farm payrolls, which spooked the markets a little bit a couple of weeks ago, and pushed the odds of an interest rate cut in America on the 17th of September, the next Federal Reserve meeting, up to about 90%. We've got that that number again this Friday. Just to be clear, non-farm payrolls again, the higher the number, the better the economy is doing. The lower the number, the weaker the economy is. And we get the unemployment rate out at the same time, don't we? And payrolls. Payrolls is quite important for inflation. It is. But more importantly for inflation, next week we've actually got consumer inflation expectations. So it's telling you and giving an insight to what consumers are thinking about the way inflation is developing. And we also get some official numbers actually on inflation which is the consumer price index in America and we'll get them in other countries as well. But America is the one everyone's going to be looking for because that's the markets are all looking equity markets particularly are looking for now a falling sort of set of interest rates as inflation comes to a peak. One other thing I'd mention on that front. We've had very little talk this week actually about who will be the next chairman of the Federal Reserve. Now, when Trump got involved a couple of weeks ago, that did disturb markets a little bit. We knew that this guy Chris Waller, who already sits on the Federal Reserve, is the the firm favorite, and he remains a firm favorite. But an old friend of CJ's, David Severos >> from Jeff. Really? Yeah. The strategist from Jeff is now second favorite. >> Oh, wow. Wow. Yeah. >> So, he's very good. I'll tell you, he's extremely good. He's one of the most successful investors that I've ever seen operate. and his he's been very very good at calling equity bombs and how they're all going over the past few years. >> There's also been one other major event in the last sort of 24 hours and that is that the antitrust case against Google, the Americans were sort of accusing them of having a monopoly in search engines because obviously we all use Google, we do that case was thrown out uh yesterday. So, Google shares are up 9%. Apple shares, Apple get $20 billion a year from Google as payments so that Google can put their Google Chrome search engine on Apple products. They get $20 billion a year. So, Apple shares are up 3%. But most importantly, Google are up 9%. That's good for the technology companies because otherwise they'd have to start breaking these companies up and spinning out the, for example, the search engine part. And part of the reason they're doing it that is now because we're seeing a very fast growth in these other search engines like chat GBT and Perplexity and some of the others. So basically the judge ruled that because new competition is coming in actually that monopoly that Google's had for so long in search engines is not going to hold for long. The shares went up a lot. They went I said 9% is huge for one of the biggest companies in the world. we've added in a couple of risks there um on the outlook of the economy and what's happening in geopolitics. So what better week to look at the risks of our portfolio. So why don't we start with this mix of bond to equities to commodities that we touched on last week. How are you feeling about that at the moment? There's a couple of parts to that question. Um, and we'll deal with them separately, I think. First of all, bonds to equities. As experienced bond investors, we all are now given our teaching on bonds and the vision of Mark standing on the sofa here with Rich to show what the yield curve looks like. There are two real types of bonds that we should be thinking about. One are shorterdated maturity bonds. Remember these are maturity bonds that maybe only have three, four, five years to go till maturity and what's dominant for them and their performance is where are interest rates. So they they can be thought of as quai cash. They're important to think about in the portfolio. They're not really taking any risk though in having those. So let's let's forget shortdated bonds for the benefit of what we saw about now. Let's talk about longerdated bonds. So longer dated bonds are 25 year, 30-year bonds, 20-year bonds, you know, a long long time till maturity. Their returns are driven by uh a number of factors. Inflation expectations, uh amount of issuance there is, likelihood of repayment, something not going bust, and those similar types of concerns. Now, as I've been saying for a few weeks, um longerdated bond yields need to rise to reflect how where inflation is in the world and this issuance that is coming from all the main governments of the world. Um it's particularly high in the US, but it's also very high in the UK and across the whole of Europe. Japan is enormous as well. And so we have now got a situation where lots of governments are trying to borrow money and that's making this competition for capital that we just talked about start to get a little bit difficult. >> In fact, it might even come in to mop up all this spare cash on the sidelines that Mark keeps on talking about every week. >> If it gets high enough, that's exactly what will happen because people will sit there and they'll say, "Look, I can get 4% on my cash, but maybe I can get I don't know, I'm going to put I'm going to put a finger in say 8% on my long bonds. Why don't I do that? So, you know, that's why this is important. Now, you need to also remember a fact something we talked about before, which is that the US has a massive current account deficit as well as its budget deficit. Now, when I say massive current account deficit, that means that it imports far more than it exports. And therefore, what it needs to do is attract a lot of money into its markets to buy its debt. And that's got to come from overseas people. And the problem is these overseas people are starting to think that maybe China, India and others, Mark was talking about them earlier earlier are safer pairs of hands than maybe Donald Trump and what Donald Trump is saying to them. So what you see then is a is less people wanting to buy longerdated bonds from the overseas investor. So therefore the competition for capital we come back to that phrase is between where will US retail investors where will the man on the street buy bonds compared to where equities are now. >> So it's not just a competition between different asset classes but a competition between different countries who all are issuing all this debt as well. >> Overseas governments all are trying to borrow money. Whoever's the highest maybe gets their some first. whoever's last maybe suffers more. So, there's this problem out there that there's a lot of people wanting to um borrow money. There's a lot of people wanting to buy equities. There aren't a lot of people who want to buy bonds and therefore bond yields will have to go higher in order to get that uh issuance away. So, in my opinion, the pressure on long bond yields is to go higher. Higher yields mean lower prices >> and therefore I don't want to hold any longerdated bonds within my portfolio. >> Isn't it scary that the UK 30-year bond yield so go out 30 years if the government want to borrow money for 30 years in the UK they have to pay investors 5 and 3/4% 5.75%. The American government only has to pay 4.9% for 30-year money. Now that's interesting for me. What does it say about the UK? Why do you think we're we're so different in in yields that far out? >> There's two answers to that question, Mark. The first one is the US has a thing called exorbitant privilege. What that actually means is because the dollar is the reserve currency of the world and there's so much business being done in dollars. So many people have to have dollars that those dollars have to find homes from time to time. So there's more of those will stay in the US. So it means their bond yields are more protected than other governments when it comes to the yield level which they get to. So that's that's the first answer. But the second answer and I'm afraid it's an answer that we, you know, need to um be aware of and we'll be talking much more about over the next few weeks coming into the budget is we have an inflation problem here. We have too high inflation. We're not seemingly doing too much about it apart from cutting interest rates. Don't really follow that. So that's not good news. we have um a massive public sector borrowing in this country. So we have the government trying to borrow more and more money all the time and their only answer is to and I don't want to get political about it but hey why not. Um all they want to do is to tax people more and more. If you tax people more and more growth goes down, growth goes down, money coming in goes down. You need to bridge this gap. you have to put taxes up again and you keep doing this and it's a virtuous circle until something goes wrong. >> And I'm afraid we've got to the stage where people are getting a bit worried about it. It's fine for me to join in with everybody else, but that's not what this sort of podcast is. This podcast is about where do we make investment decisions. So, I want to go back to when I was a young lad, if I can remember about that far. Gosh, many years >> when I started to black and white >> when I started trading guilts because I I traded guilts for 15 years all the time. That was my one job. >> And so we had to look at the longdated end of the guilt market and say where does where do longdated UK government bonds offer value and we developed a framework. This is not an exact framework. This is just how we did it. Take it or leave it. Let's just share it with everybody. So the first thing is the first part of that framework there are three parts one what is the inflation expectation that you think for the market the second one what is the risk that that inflation is going to be achieved and the third one a more difficult concept what is the real yield you should expect on investment. So that is what is the yield over and above cash you should expect to take money out of your pocket and put it in in in uh investment because obviously I can keep it in cash I'm not taking any risk. So what's that real yield and that's normally thought about as the growth rate of the economy. So if you can get a better return on something then the growth rate of the economy is probably not a bad thing to go and do. So let's look at those three elements in their own right. First one inflation. We have an inflation target of 2%. I do not believe the MPC are actually running their inflation target of 2%. >> That's the monetary policy committee. >> And thank you Mark. That is the monetary policy committee who has set a target of two. But I mean these are the same guys who gave us 112 a year and a half ago. So let's not think that's baked in the cake. So I'm going to say I think they think that three is probably acceptable. So I'm going to say three as my inflation expectation. How far in advance do you look and try and judge inflation? It's not last month's figure, is it? >> I'm sort of thinking over the next couple of years, and we keep rolling that every month. It it doesn't come closer. It's over in the next few years. So, it's your mediumterm view of where you think inflation's going to be. And I think about 3% is probably fair. Now, when I was a young lad trading guilt, we had then the risk premium. What's the likelihood you're going to get that right? And that would vary anywhere between no risk cuz you were definitely sure it might happen or well I'm not sure what these people are going to do. Maybe I've got to have a bit of extra risk premium. And that risk premium would vary between zero and one to one and a half%. Okay. So I'm going to say quite a lot of risk premium because we've got a government in charge who want to keep borrowing more and more money then don't seem to be particularly anti-inflationary. There seems to be risks being developed. So, I'm going to go I'm remember I'm I'm going to try and be as negative as I can, as conservative as I can with this estimate of where are we going. So, 3% inflation, 1.5% risk premium. That's 4 and a half% so far. Now, risk premium is something we could do a whole show on, right? But in basic terms, it's why if you were going to lend me and Spice money, you might charge him 5%, you might charge me 10%. >> You're too kind. Yeah, it it's my interpretation given what's going on in the world today of how certain I am of anything. So, there'll be times I'm really uncertain and there are times when I'm not very uncertain. I'm pretty uncertain at the moment. All the stuff we talked about Trump, all the stuff we talked about the world situation, the populism, all the other things that are going on at the moment, I'm not as sure where things are. So, I'm going to go, you would expect me to say this if I really want to say where where am I going to buy something, I'm going to go for the the the highest I possibly can. So I'm going to go for one and a half. So 3% inflation risk premium 1 and a2 gives me 4 and a2. What's the growth rate of the economy? Now there's one for you. >> Now I would suspect that the growth rate of our economy is somewhere in the region of between 1 and a half to two maybe two and a half%. Let's let's say one half to two and a half. >> Yeah. >> Okay. >> So now I want to take I want to be as difficult as I can in terms of where am I going to fund. So I'm going to add two and a half. So I've got 4 1/2 plus 2 1/2 which is 7%. Wow. So if I want to be really really negative I say long bond yield should you get to seven. Now if I think growth is 1 and a half then that would be six. So the range for me of where bonds offer value is between six and 7% in long guilts. >> And at the moment they're at 5.7. So not too far off. >> And this week they trade up to 5.8. eight. So we're getting close to where I think we should start thinking about guys these things are going to start providing competition for capital people going to start saying well if bond yields at this level why am I buying equities why am I buying some of these other products >> I think this is a yellow card for stealing a phrase from Jerome Powell we've got to start thinking about thinking about >> yeah the Federal Reserve >> yeah so I think that's fair but there aren't many shows where people will actually say this is the range I'm looking for we have at least given a range and I would certainly be saying if we saw bond yields above six let's put a toe into the water and I'd look to be fully in my position 6 and 1 half 6 and 3/4 and closing my eyes because my experience in bonds is that just because I put a number on it doesn't mean that's where it's going to stop and it can get quite ugly and quite difficult but if you've done your homework we talked about this before if you've thought about this away from the emotion when it gets there. You don't get caught up in all the, oh, it could go to nine, it could go to 10 or whatever. You go in and you buy a position. So, I will be banging the drum when we get over 6% long guilt yields for us to think and talk about it. >> And markets being markets, we will get to 6%. You know, it's >> looking forward to it. Mark, >> I mean, the interesting thing is equities don't think that like that at all. So, equities look at the 10year sort of time horizon for bond yields. >> Okay. So in in the UK that's only 4.85% at the moment, right? So it's it's about 1% difference and in America it's about 4.2%. So even lower again. And that's when you value companies, you have to put some sort of interest rate in to discount the future cash flows back to today's share price. >> Just go over that again. Sorry. So So what am I discounting? >> So you're discounting all the future cash flows from a company in your share price. And basically the the lower the interest rate that you do that at the higher the share price will be today because it's worth you're getting all those those those cash flows. So you bring it effectively forward in your mind to get a share price today. The higher the interest rate, then the lower the current share price is today. Which is why shares prices go down when interest rates are being put up quite often and will normally ordinarily will go up when interest rates are falling as they have been doing recently and are expecting to happen in the US in the coming weeks, months. >> So that's where the equity guys look. But where the equity guys sort of miss out on is this competition for capital. So an asset allocator like Chris chairs the meeting and says bong guy goes well yields are now getting to my six six and a half% where I want to buy them and the equity guy goes well it's brilliant because actually 10 years still you know in a sensible range and therefore share prices should go up but the chairman says hang on we're going to put some money into bonds and guess where we might take it they might take it from equities >> and that's where sometimes well that is always risk as an equity investor so we have to keep an eye on what's going on 30 years out. But actually our day-to-day focus is what's happening in the very short term and in 10 years time. That's what's called the risk-free rate in for equity investors. They look at the 10ear yield. It matters to the bonds market clearly because there's a direct relationship. However, it doesn't really matter to equities un until it gets to that certain point. That's the key point. You're absolutely right, Rich. >> The bond guys look in amazement over many years. equities continue to go up even when bond yields are moving higher and don't know what the hell's going on and why is that happening and then suddenly the bonds will get to a level where these asset allocators say you know what we're now going to sell some equities and buy bonds and then it will turn we're not there we're nowhere near that sort of thing at at this particular moment because I still think remember equities we've talked before in detail but let's just rehearse slightly we're going to get lower short-term interest rates probably remember I'm talking about long-term interest I'm talking about the longer end the short term going to come down a little bit. That's gives more cash to the system. >> Yeah. >> And growth is pretty good at the moment. Earnings are pretty good. So, we're not worrying about that at this moment. I suppose where we would worry is if we and and dare I say it in a podcast, if we get to a Liz Trust moment, and when I say a Liz Trust moment, um I mean a sharp move up in yields. Mhm. >> And that's all I'm trying to say about that because one day we'll have a podcast on what happened with Liz Truss and why the market did what it did and the fault of some of the organiz institutions for not helping her out. >> Should we invite her on? >> We could, but I doubt she'd listen to us. But at the end of the day, we don't want to see a sharp move up in yields because if we see that, then that's when people start to think, oh, there is a problem here. So the steady grind we're seeing now would imply that the equity guys are going to be fine. The bond guys are just going to be um watching their yields go higher and higher. But it will get to a stage where the competition for capital means people say I'm going to buy bonds and I'm just trying to put a level at where I think we should probably start thinking of a line to start buying the long end of the guilt market. There's a great saying in equities is that bull markets do not die of old age. So all you people think, "Oh, it's going to be bad because it's just gone up a bit." It carries on and carries on. Bull markets don't die of old age. They die of fright. And Liz Truss gave them a fright. Are you interested in growing your portfolio with IG? When you invest at least £50, IG will kickstart your investing journey with a free share bundle worth up to £200. Just make your first investment into an ISA sit or a general investment account by the 30th of September. You'll also benefit from commissionfree investing as well as 4% variable interest on your cash. Other fees may apply. Terms and conditions can be found in the show notes or on ig.com/uk. Now, I think that gives us a great opportunity to move on and actually have a look at this week's performance in the portfolio because this is the risk versus reward episode. This is when we get a chance to look at this portfolio and go through and see exactly how it sits. We don't think that there's too much of a risk of our bond to equity to commodity split at the moment, but this is looking into the future, isn't it? So, how have we done this week, Spice? >> Well, it's been a good week. The portfolio since we started was up about 0.59% last week. At the end of this week, when we took the numbers, we're up 1.02. So, let's call it 1%. We've had about a 0.4% increase this week. That's been led by our exposure to commodities. Now, if you remember, we we had a big debate last week about we like gold, we like silver, but we had 20% of so of the portfolio in commodity areas. And gold has been the best performer this week, up 5.4% our gold ETF, closely followed by copper up 3.3%. And then the Black Rock World Mining Trust, which is up 1.8%. So, all in all, that's driven this extra performance this week. On the negative side, the DAX, the German stock market was down about 1.1%. The Japanese stock market, the Nikai 225 is down 1% and the Russell, which I put into the portfolio last week, is down 1%. So, not off to a great start, but overall, that's why we have a diversification of assets in our portfolio, the combination of which came together and gave us an extra 0.4% of performance this week. >> Can I say just a couple of things there? First thing, um, all decisions are joint decisions. So we don't go for it's your fault or my fault or whatever. >> But mainly the chairman's. >> Yeah. Thank you. >> Yeah. Thank you very much. Uh but the most important thing for me was when I was thinking about how the portfolio performed yesterday evening and I hadn't got the numbers in front of me. I wasn't thinking about it. Equities have gone down a little bit. I thought we'd probably have had a slightly negative week. >> Yeah. And what this shows you is how that diversification and in particular and a little expression we're going to introduce here is our split between fragile assets and antifragile assets. And when I say fragile assets and antifragile assets, I mean essentially assets that work when the system's doing fine. >> Mhm. >> And assets that work when the systems not doing well and we're starting to worry about geopolitical risk and all those some other things. >> Right. So what we found was because we had that high waiting 20% in anti-fragile assets, they moved extremely well when the temperature in the kitchen got a little bit hotter. The equities came back a little bit, but they didn't take away from that. Absolutely. So if you look at our portfolio overall, you could get a split of about 78% in what we'd call the fragile ones, the ones that suffer when the world worries about big events like geopolitics or wars or whatever it happens to be. And the the safer assets, the antifragile ones are about 22%. Now, some fall into both camps. So we've got the VANC crypto and blockchain ETF. >> Yeah, it's a tough one. >> Now you could say about twothirds of that is fragile. So they they like to go up more when the stock markets are going up, which is the biggest group of fragile assets are equities. But about onethird of that actually does well when they're not doing well. So they're the anti fragile ones. But probably the biggest anti-fragile position we have in our portfolio is 10% in gold. Nearly all of gold becomes an anti fragile. It helps you during big sort of riskoff events or sort of systematic risk that we see from time to time in equities. And the bulk of the portfolio is equities. For us, it's about 60 to 65% depending on whether you want to include Black Rockck World Mining Trust as an equity or whether you want to consider it a commodity. If you consider it an equity, then our equity position is in total about 65%. If you take Black Rockck World Mining out and put it into commodities, then we have 60% but we then have 20% in commodities rather than 15%. >> And this is really all about knowing your portfolio, isn't it? and the the risk assessment that it's very much worth doing knowing what's fragile, what's antifragile. So, what you're looking for when you are building your portfolio, you're looking for assets that aren't particularly correlated to each other, but you're quite optimistic about because if you have a number of holdings you're optimistic about, but they're not correlated together, it means they can offset and help each other when others are are suffering. And that's exactly what's happened this week. I know we're we're banging on about it a bit, but it's really quite useful to see how the benefit of diversification's helped us this week away from equities and kept the show on the road and kept us moving in the positive direction. So, we're almost like a a tour to France cycling team, aren't we? Sometimes one's better at the the hills, sometimes one better at the sprints. Not everybody's winning at the same time and all the time. It's some are better at some stages depending on how risky things are, the geopolitics, but it's having the the split that you know overall then you've you've got the safe stages um as well as the the times to be a little bit more risky. What do we actually think then going ahead into the the weeks ahead? Is there something that we'd we'd want to do here, CJ? >> Um I'm not recommending anything. Um, I we talked about bonds already and I said that we're getting closer to a level where we might want to buy some non-dated bonds, but I don't think we're there yet. I'm still looking at September being a weaker month for our risk assets, for our equities. Basically gone nowhere so far in September. You know, down a bit, up a bit. It hasn't really moved much. And therefore, um, I I would prefer us to wait a bit. In my view of the world, I still think there's a chance that we might get a bigger correction to buy in equities. uh this this month and if we see that then I think we should take advantage of it because that's been our plan all the way along the line set out your plan set out your strategy don't let emotion get in the way of it unless your view changes execute what you said and that's what I think we should do CJ not knowing for his virtues but it looks like patience might be a virtue here do you agree spice >> I do I mean last week I obviously pushed for um an increase in our equity exposure which we've got but I didn't want to sort of roll out all of our cash into equities which is my instinct by the way because I am you know respectful as I've said before of September particularly being the the normally the worst month for equities in the year. So we've got to be cognizant of that when we're making these decisions and so we have so right now I have no uh recommendation to have to change the portfolio because it's done what we wanted it to do in a very quiet maybe negative week for equities and we've actually outperformed by 0.4%. That's great. So, if we got more positive about equities and got through this period of uncertainty and we get into this interest rate cutting cycle, as I've talked about in the in in the past, at the end of September, which is when we're expecting it to happen, then I would like to see us to begin to move equity rating up towards that higher level, which we have always said would be about 75% in equities for the long term because equities give you a superior return of about 10% in total, about 6 and a half% after inflation. additional six 7% after inflation. So you want to have the bulk of your portfolio in equities. We've talked about that in in previous episodes. Uh and there's no reason to think that that's going to be any different from where we are today. >> Yeah. I I suppose the the the other thing to add where where I agree completely what Mark is saying is there's there's lots of data coming up, right? We've got the non-fold payroll numbers which um Mark talked about. Now remember they were the ones that set the trigger off for everyone going to get five rate cuts. So, if they're stronger than expected, market might have a little setback on that. I I don't think long-term set, but just a set back on that. Um the same with the inflation numbers. If the inflation come numbers come out a little bit higher because the tariffs, people start going, "Oh, I told you tariffs are inflationary. We can't cut rates." So, there'll be plenty of volatility in September. And but I just think we need to remember what our tactic is. We want to put more into exits because the fourth quarter is normally a very good quarter for equities. So, you know, let's take our time. Let's watch what happens. But um so far so good. 1% up since inception. I think it's not not bad going. That's right. Although we're on episode nine, we didn't launch the model portfolio until week four. So that's four weeks of performance and up 1%. We're on track because a reminder, our target for the year is 10%. And we're not trying to hit the lights out. We're not trying for 15 20% here. So, spot on target and we are uh we're happy with that. As CJ alludes to, we'll know so much more by this time next week and we'll take informed decisions rather than just guessing before that with a jobs number, with the inflation number, and therefore our outlook for interest rates going into the end of the year. >> A few people have said to me, if we're so convinced that we might get a correction in September, why don't we have less in equities? Well, you know, I've gone back to them and said, "Well, look, it's always sod's law that even if you get bad news, markets keep going up." Because we we could be going into a stage here where bad news is good news, ironically, for equities. Because the bad news could mean that if the economies are slowing faster than expected or unemployment is rising faster than expected that actually that means you're going to get more interest rate cuts. And probably the overriding factor for equities right at this juncture is the amount of interest rate cuts and how fast and how big they are. And that could mean that the bad news we might get could actually be seen as good news for equities. So we got to be very careful which is why we don't put everything into gold or to shortdated guilt as we've had or cash. We have to have that balance just in case we're wrong. But we're respectful that over history over 100 years September has naturally been the worst month. So hopefully we'll get the opportunity. the answer you should have given them. >> Sorry. >> Okay, just just to be clear. >> I'm sorry, but the answer you should have given I I doesn't even you've got to be able to improve in life. You've got to you got to try and learn and improve and that's and that's what I'm trying to get to here. We did say right at the start that our neutral position, the position we're going for was 75% equities and 25% other things. So the fact we've actually got 60% in equities or maybe 65 depending on how you measure it means we're actually below where we want to be in equities. So for those who say why don't you sell some we have effectively sold some. >> We're running an underweight relative to neutral >> to where we think we should be as our normal course of events. I I think sometimes o underweight overweight starts getting all you know all sort of talk of institutional fund management all that sort of stuff like so but we're running um under where we had thought our strategic position should be because of the weakness we expect in September after that nothing ch if nothing has changed we would expect to have full waiting in equities. Uh an interesting question here. Is there anything outside of what we have already talked about that you have been considering maybe at home, maybe even in your own portfolios that we we touched on silver last week a a little bit? You know, that that was a new thing we introduced. Are there any other areas of the world equity-wise? Are there any other commodities or you know what are your thoughts on other options that may come up in the following weeks >> if we believe that the US dollar will be is in in a period of potential weakness which Chris explained very well last week uh why he thinks that's the case then we have a position that benefits from that that's commodity position but another area of the world that benefits from lower weaker dollar is normally emerging markets markets like China, India, but if you invest in a an emerging market ETF, then you will get a bit of all of those sort of areas in different degrees. If we really truly believe that the dollar is going to stay weak and going to probably weaken further, then emerging markets is something we have to probably think a bit more seriously about. Now, we have an position because we've got 5% in India. So, we're not sort of we don't have anything. We don't have nothing in in emerging markets. we have 5%. And actually as a bench part of the world benchmark, it's not much more than 5% frankly the emerging markets but China would be an area I'd naturally want to think about and maybe we could do a podcast looking at India versus China and some of the pros and cons of both because obviously you've got the two biggest populations in the world. They've got between them about three billion people. Um so they're very important economies increasingly important but they're also quite important stock markets that we shouldn't ignore. >> Excellent. you you touched on uh US dollars there and the potential weakness. That takes us nicely into the first question of the week and the question comes from a viewer that said you guys spoke about GBP and US dollar in terms of one of your S&P holdings but I didn't really quite understand. Do you mind going through again exactly if I buy in GBP or I buy a US dollar asset where my risk is? CJ, do you want to have a go at at explaining that? >> Yeah. Yeah. Mark did a very good explanation last week and I'm going to just try and do it a slightly different way. If we look at the three of us and we say that I'm sitting here with money to invest, I've got £1,000 to invest. Rich is sitting in the middle. He's the currency dealer >> and Mark is sitting in New York trading in in um the Magnificent 7 or whatever he's trading in. Probably them, let's be honest. So I I say I want to buy and put the money into Mark's fund. I give the thousand quid to you, Rich, and you exchange that at a rate of 1.34 at the moment, which gives $1340 to Mark to invest in his fund. So Mark Mark has now got $1340, puts it in his fund, and runs it for me. And he runs it for two years. After that two years, I decide his fund performance isn't good enough. and I decide to sell my holding out of Mark's fund which has gone up 20%. He then sells that 20% for me and he now has $169. So I gave him $1340. >> Mhm. >> He sells it and got $169. So in dollar terms I have 20% profit. >> Excellent. >> But unfortunately I'm not a dollar investor. I'm a sterling investor. So I now need to give that money back to Rich who's still trading in U foreign exchange obviously not been that successful if he's if he's still trading after two years same thing >> and over that time uh the currency has moved up to 1.75 which is a rise of about 30%. Obviously Rachel's done a great budget and growth is very strong. Okay, it's a hypothetical unlikely scenario, let's be honest. But at 175, he exchanges the $169 at 175 and he gets back to me £919. So I gave Rich and then to Mark £1,000 and he ended up with £919. I have lost 8%. So in this situation, the local market went up 20%. The US market went up 20%. So Mark thinks he's done a great job for me by the time I've converted it back because sterling has strengthened. Yeah, I am now down 8%. So when I look at my valuation, I go, what the hell's happened here? And that's the currency piece. And it's vitally important for people, you talked earlier, Rich, about understanding what's in your portfolio, fragile assets, anti fragile, that sort of thing. It's vitally important people nowadays realize the effect of foreign exchange. And why do I say that? If I go back 10, 20 years back to my youth, maybe we'll go 40 years, but never mind. Um, most people in the UK, institutional managers, wealth managers, retail investors, they had a lot of UK equities in their portfolio and so they didn't need to worry about currency too much. But over the last certainly 10 years, people have moved away from let's invest in the UK market to let's invest in the world equity market. And not surprising, the UK equities have been terrible. World equities have done very well if driven by the US. But what that's led to is a situation now with are you're an institutional investor and you're sitting you're looking at your portfolio. Let's say you've got a 100% equity portfolio. Just make it easy. 100% equity portfolio. 70% of it is now in US equities. >> So 70% of it is dollar based. Now, if we look at what's happened this year to date, UK equities have gone up about 15%. US equities in local terms, in Mark's terms, where Mark's trading, >> yeah, >> are up 10 or 11%. But in UK terms, they're only up two. So if I'm an international investor, I'm looking, everyone's telling me how well I've done, but actually my US equities have only done two against Footsie having done 15. And that's why it's really important to look at what you've got in your portfolio. Look at those underlying investments. So that's why we've broken down our portfolio into individual bits so you can see how we're allocating to each area rather than the global equity index. And you can see how much time we're spending thinking about our currency exposure and where it needs to be. And just one final from me on there. We have a sterling benchmark. Everything we should be paying is sterling. We want to make 10%. >> We currently have 35% of our portfolio get there or there or thereabouts in dollar assets. >> Mhm. >> I think that's fine in the short term. I have a problem with that because you know we got budget coming up as we said earlier. We'll do we're going to do a pro we're going to do an episode on the budget running into the budget but it's unlikely Sterling is going to strengthen much running into that budget. It's more likely it's going to probably give a little bit back. But over time I believe the Trump factors we've talked about before and where I think we're going to get to as a country. I can be more positive on sterling versus the dollar and I will want us to reduce our dollar exposure. It doesn't mean we have to change our assets that we've got, but it means we hold them hedged back into sterling to make sure we don't have that foreign currency risk. >> And if we can just put on the portfolio again, people can see if they go down just below halfway, there's the Invesco NASDAQ 100. Now that's in dollars. Underneath that, there's the Eyesshares S&P 500 GBP hedged. Now, what have you decided to do there, CJ? When you took the decision to put us into the GBP hedged rather than such like the NASDAQ when we're in dollars, >> we're controlling our dollar exposure. If we buy the hedged version, effectively, we're not exposed to the US dollar. So, we got some dollar exposure. on NASDAQ 100 for example as you say is in dollars but the S&P 500 which is an American index is hedged back into sterling to try to limit the amount of exposure to the US dollar that we have got >> and again we go back to the thing you don't want to have all your eggs in one basket or be facing all one way just in case you're wrong because I would make an argument against Chris that if the US begins to grow as I think it's going to grow at 3 to 4% over and above inflation and inflation starts to come down and interest rates coming down and all this new build of manufacturing etc to meet AI and and all the the tariff sort of impositions there's going to be a lot of money wanting to flow into America and that could mean that people the demand for US dollars go up and the currencies they're coming from go down >> so we've got some exposure to India there we've got exposure to euros with the the DAX we've got exposure to the Japanese yen and it's just worth knowing and being aware of, isn't it? Because we certainly were back there. >> Foreign currency should be a conscious decision. It should not be just this is what we normally do. So if you've got it, you need to understand you've got it. We're sterling based investors. We look at returns in sterling. So anything you take away from sterling has got a currency risk. Now you may be happy with it or you may not. You just need to know you've got it. And that's what I'm trying to emphasize here. Now, as sterling investors and with our position in the Footsie 100, I feel like we could really do with a little bit of added expertise on the UK. What do you gents think about getting a guest on next week? Do you know from your time in the market somebody who would be regarded as an expert in the UK? Well, I'm excited to tell you that we've got a a gentleman called Charles Hall who is head of research at a company called Peele Hunt who are specialists in UK small midcap and UK equities basically as an investment bank and a corporate broker uh and a stock broker and he has been badgering the government to try and improve the conditions for investing in the UK. So, it's going to be fascinating to have him on uh and to be able to discuss with him, you know, whether he's felt he's made made any progress, whether anyone's listening in Downing Street or not, but we're going to get him in next week. Is Charles Hall. He's a great man. I worked with him back in the day back when all the banks were going bust during the credit crunch at Pame Gordon. >> I'm very excited to hear it because one of my pet subjects is how do we get more and more people buying UK equities? All I ask is we sit him over this side of the table because then we can hold things are spicy. Fantastic. We do have another question that we didn't quite get to them all last week and this is a question that we've got in and it is related to risk. So, I've maxed out my ISA. I've also got a general investment account as well. Which one should have my higher risk stock investments in it? Um, should one be more income related? Should one be more for capital growth? It's a really interesting question and I' I've racked my brains and it there's not an easy answer for it, is there? >> No, there isn't. And um you know this is this is one of these questions that um when you watch people on the TV they say I'm sorry I can't possibly answer that question uh because I haven't got enough information. And I'm afraid in this situation it is very difficult for us to answer that question because we don't know the individual's position and where they are in their life, what their aims and objectives are and all those sorts of things. But having said all that, you know, we know that an ISA is a tax-free vehicle. So if you think you can make a lot of money in something and you haven't put money in your ISA already, then you can put that um investment into a new ISA and you know you won't pay capital gains tax and you won't pay income tax on it. If you put it in your general account, you have maximum flexibility to take in and take out whenever you like, but of course you have to pay capital gains tax and income tax. The advantage of being in the general investment account is if you're wrong and you lose all your money, you got a tax loss. But presuming that wasn't why you did it in the first place. So, I'm sorry I I can't be more helpful. Clearly, if anybody's got a better answer than me, then please say it. But it's really down to individuals own positions and their own financial situation generally. Do do you like to spread your risk across whether it's an ISA, a set, a GIE, or you know, do you do you think of them differently? Unlike the good fortune of our questioner, I don't have the capacity to have investment accounts, SIPs, and ISAs. But if I had my choice and I had my time again and I went back to when I first started working, I would have built a portfolio every year in an ISA >> because that stays taxfree. This is not giving financial advice for if unless you've got a massive pension, then these ISERS is saving £20,000 a year, year in year out in a taxfree vehicle. if you did that and a lot of people don't put £20,000 into pension contributions every year. They should probably put it in an ISO and do it every year. I just that's my own personal view. Um you know that's not giving financial advice, but that would be if I had hindsight that's what I would do again. >> Excellent. Right. Well, that is us yet another week and uh no changes in the portfolio. We're going to wait and see. you'll have had the luxury of already seeing those non-farm payrolls and unemployment rates and then we've got inflation coming up next week. So, very exciting episode to look forward to, including our guest Charles Hall as well. Now, if you do have a question for us, then by all means, please send it in and we'll try to address that. The email address is >> art of investing.com. And also, if you have an ex or Twitter account and you'd like to start um something trending called #sack the chairman, then please by all means go ahead. We'll see you next week. [Music]