Mark LaMonica: Hi, I'm Mark LaMonica, and I'm here with Tim Murphy, and we're going to talk about asset allocation.

So, Tim, at a high level, a lot of investors want to jump into security selection and maybe don't know the value of asset allocation. So, why don't we start there? Why should people care about this?

Tim Murphy: Sure. I mean, as you said, picking stocks, trying to pick the latest and greatest idea is certainly the sexy way to approach things. But in terms of most being able to achieve your end, long-term investment goals, your asset allocation over time tends to be the biggest driver of those both return and also risk outcomes along the way. And so, having an appropriate framework within which you set your timeframes, set your tolerance for risk to help understand what goals you need to meet to then have an asset allocation structure that best meets those dual goals along the way is really important. And certainly, many studies have shown that asset allocation and getting the right asset allocation is a far bigger driver of your end return outcomes over time than individual security selection tends to be. And so, being able to marry up the right approach to different asset classes in order to do that is really important. And so, part of that will be equities, part of that might be some more conservative assets like bonds or cash. It all depends on your own individual circumstances and needs.

LaMonica: Okay. So, how should I think about this? A lot of guidance that you get, including what we give people, has very broad asset classes. So, it would say, you should allocate X amount to international equities. But there's a lot underneath that, right? There's lots of different countries, there are different sectors, there's different styles of investing. So, how should I think about things a level down when I'm building that portfolio?

Murphy: Yeah, sure. Lots of things to think about, as you said. And I guess, part of that answer depends on how you're going about getting that exposure. If you're trying to choose your own stocks internationally, then there's certainly a big task to be able to do that to get appropriate diversification both across name, country, sector as you alluded to. If you're using ETFs or managed funds where, by definition, you're automatically getting more of that diversification, that's certainly a good starting point, and that's certainly what would encourage most investors to think about as a starting point for their position to such asset classes.

Then it really comes down to individual preference and understanding. So, if you're investing globally, do you hedge the currency or not is sort of an interesting consideration, particularly given how volatile the Aussie dollar tends to be over time. One of the fascinating things and benefits of being an Aussie investor is that somewhat counterintuitively having currency risk actually reduces the overall risk of your portfolio because the procyclical nature of the Aussie dollar means it's tended to go down when you've had sell-offs in the equity markets. And we've seen that consistently in the last couple of years. We saw it very materially back in the GFC. So, having currency exposure, particularly to the U.S. dollar, has tended to provide somewhat of a cushion and anchor in those periods. So, thinking about currencies is one thing, and it's very important.

Also, emerging markets is a very topical discussion. Certainly, with what's going on in Russia and some of the issues we're seeing in China and a lot of these countries, China in particular, makes up a big part of the emerging markets universe. But certainly, there's lots of economic growth happening in emerging markets, but there's a lot more risk that comes in investing with some of these countries. So, something like emerging markets is probably something you think about more if you have a longer time horizon, higher return seeking but greater stomach for the risk that comes along with that along the way.

And then, when we think about countries and sectors, again, being diversified is important; not being overly concentrated any one area is crucial. I think particularly if you tried to get too cute in recent years, the comfortable, somewhat easy trade might have been to just focus on U.S. mega cap technology companies, right? And up until November 2021, you would have looked like a hero. But sitting here today, as we know, you feel kind of foolish and you would have lost a lot of money if that's what you've been doing. And so, obviously, you want to pick investments that have broad exposures to themes like that, but also making sure that you're getting broad diversification across other sectors and areas as well. And that's where certainly things like ETFs and managed funds can be a great way to do that when you're investing internationally in particular.

LaMonica: Okay, great. So, you talked about why asset allocation is important, marrying it up with your goals, your risk tolerance, et cetera. You talked about sort of how you would think about asset classes. If I've done that as an investor, if I've set my asset allocation that I think will help me achieve my goals. I figured out sort of how I'm going to invest underneath that. Would I deviate from that? So, maybe like in industry speak, you'd have strategic or long-term asset allocation. Would I ever take a tactical decision and change that around based on sort of what I saw was happening in markets?

Murphy: Some people like to do that, and it certainly can be tempting, right? The idea that you might be not comfortable with where markets are heading and wanting to take some risk off the table or vice versa, thinking there are some assets that are really attractive, I should pile into them right now. That can be very tempting to do. Most of the behavioral evidence over time shows that when people do that, typically they do it at the wrong time and end up achieving suboptimal outcomes with their portfolios.

The best example of this in recent years has been the onset of COVID. If you think back to March 2020, there's lots of panic filling the world. None of us knew what was happening, what was likely to – what our lives were going to look like. We were all going into lockdown, like this was not something any of us have experienced before. Rightly, there was lots of fear and scare. Lots of people we saw in their super funds in particular switched their money to cash. So, they might have invested in growth assets, a lot of them either went to cash and/or, given what happened with the government, pull out its scheme at that point, people were able to even take cash out of the system in certain circumstances. That was the absolute worst thing we could possibly have done, because if you did that, you missed what we now know was one of the greatest bull markets of all time that took off from late March of that year. So, people's ability while it can be tempting to make those sort of calls, most behavioral evidence over time suggests that that is value destructive, not value additive to your portfolio.

So, we certainly encourage most investors to set a long-term strategic plan. Certainly, reevaluate it from time to time. But once you've got that plan in place, stick to that, use your cash flows to rebalance where you can. Market movement, obviously, from time to time can get you away from where your asset allocation could or should be, certainly using ongoing cash flows to rebalance, that can be a great way of getting back on plan and staying on track to help you meet your long-term goals.

LaMonica: Okay, great. Well, thanks, Tim. Really appreciate it.

Murphy: Thanks, Mark.