WEBVTT - Active vs Passive: How to Help Your Kids Invest 

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio news. Welcome to Meren Talks

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<v Speaker 1>Your Money, the personal finance edition of Marin Talks Money,

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<v Speaker 1>and these bonus podcasts we talk about the best reateitudes

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<v Speaker 1>for making the most of your money. I'm merenthums Up

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<v Speaker 1>Web and with me as ever senior reporter and Money

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<v Speaker 1>Distorted for John Staberg.

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<v Speaker 2>Hi John, Hi mel.

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<v Speaker 3>Now we are very lucky.

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<v Speaker 1>Our very kind listeners do keep sending in questions, and

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<v Speaker 1>so we have one we want to answer today, and

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<v Speaker 1>do keep sending them in.

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<v Speaker 3>The only thing I would.

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<v Speaker 1>Say about this question is it is an excellent question.

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<v Speaker 1>I don't want you to think for one second that

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<v Speaker 1>it is not an excellent question. But it'd be easier

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<v Speaker 1>for us to answer with a little more detail.

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<v Speaker 3>And you will see that as I read it out.

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<v Speaker 1>Okay, so here we go, Yeah, Maren, very much, enjoy

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<v Speaker 1>your excellent podcast.

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<v Speaker 3>Thank you very much, Robert. The letter comes from Robert.

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<v Speaker 1>As everyone knows, the more you flatter us, the more

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<v Speaker 1>likely you are to have your question answered, and that's

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<v Speaker 1>exactly the way it should be. So anyway, very much,

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<v Speaker 1>enjoy your excellent podcast. And I have a question that

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<v Speaker 1>maybe of interest to discuss It is much discussion over

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<v Speaker 1>which fund and which market to invest in, But what

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<v Speaker 1>is the actual data, say, from the last forty years

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<v Speaker 1>of picking a mixed bag of funds and ETFs and

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<v Speaker 1>investment trusts versus just putting it all on the low

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<v Speaker 1>cost Vanguard World Tracker or a combination of passive trackers.

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<v Speaker 1>Now you'll see that what I mean by a little

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<v Speaker 1>more detail, What do we mean by a mixed bag

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<v Speaker 1>of funds and ETFs and investment trust I mean we've

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<v Speaker 1>had a random mixed bag. And if you have a

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<v Speaker 1>big enough mixed bag, then in the end it's going

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<v Speaker 1>to pretty much hedge towards the performance of a tracker anyway.

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<v Speaker 1>So it's difficult to look at that and come up

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<v Speaker 1>with a with a clear answer. If you'd send something

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<v Speaker 1>in with the specific funds or a specific type of

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<v Speaker 1>fund or investment trust them, it would be easier to

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<v Speaker 1>be clear.

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<v Speaker 3>But nonetheless the question remains valid.

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<v Speaker 1>So onwards, so much discussion which fund to purchase, But

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<v Speaker 1>maybe it simply isn't necessary as fund managers only ever

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<v Speaker 1>outperform for a few years. If you could send all

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<v Speaker 1>your hate mail on that directly to John, so I

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<v Speaker 1>don't have to deal with that fund managers. Thanks very

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<v Speaker 1>much more from Robert. I'm an avid investor and I'm

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<v Speaker 1>trying to advise my children, and as their timelines are longer,

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<v Speaker 1>I want to give them good advice.

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<v Speaker 3>Thank you from Robert.

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<v Speaker 1>So it is a great question, basically saying, is there

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<v Speaker 1>any point in investing actively when you can just buy

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<v Speaker 1>passively and be done with the whole thing?

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<v Speaker 3>Now, John, what's the answer?

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<v Speaker 2>I mean, this is a really good question. Yeah, So

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<v Speaker 2>Robert was asking about the last forty years, so I

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<v Speaker 2>pulled up the Bloomberg terminal, which is very helpful for

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<v Speaker 2>these things.

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<v Speaker 3>Super helpful. Everyone should have.

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<v Speaker 2>One exactly anything about us allocation in like four points,

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<v Speaker 2>so like boins, cash, golden equities. But if you're talking

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<v Speaker 2>about a young person, yeah, and we're also talking about

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<v Speaker 2>let's just assume that your gold's going to be startic,

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<v Speaker 2>your boins are going to be broadly STATICSH, and your

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<v Speaker 2>cash would be STATICSH. So let's just focus on equities

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<v Speaker 2>for this. So if you go back to nineteen eighty seven,

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<v Speaker 2>so I couldn't quite get back to eighty six, but

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<v Speaker 2>that's like pretty much forty years. So the MSCI world index,

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<v Speaker 2>the one that includes emerging markets, and talking about Sterling terms,

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<v Speaker 2>it's returned roughly nine percent a year in sterling over

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<v Speaker 2>the last forty years, unless park inflation, because that's not

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<v Speaker 2>relevant to the discussion. We're just talking about in nominal terms.

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<v Speaker 2>That's what you would have had to have beaten with

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<v Speaker 2>a mixed portfolio that you chose yourself to beat the

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<v Speaker 2>Global Equity Index tracker. And well, so let's look at

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<v Speaker 2>a couple of good compartitors. If you bought Scottish Mortgage

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<v Speaker 2>Investment Trust in nineteen eighty nine, which is when it

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<v Speaker 2>kind of came out, you'd have done almost thirteen percent

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<v Speaker 2>a year for about eight and a half percent for

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<v Speaker 2>the tracker over that period.

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<v Speaker 3>Well though they would be clear, I have also been

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<v Speaker 3>bad times. Oh god.

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<v Speaker 1>Yeah.

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<v Speaker 2>And if you'd done if you'd bought it, I mean,

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<v Speaker 2>the best investor in the world, or you know, they

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<v Speaker 2>acknowledged the best investor in the world, Warren Buffett. If

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<v Speaker 2>you'd bought Berksher Hathaway in nineteen eighty seven, you'd have

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<v Speaker 2>my sixteen and a half percent a year, which is

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<v Speaker 2>obviously a lot more than nine percent. I mean, that's

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<v Speaker 2>pretty pretty tasty, but I think the basic problem here

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<v Speaker 2>is that there's so many other things. I mean, for

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<v Speaker 2>I don't think I think someone could conceivably have put

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<v Speaker 2>all of their equity money into Barksher Hathaway and not

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<v Speaker 2>felt uncomfortable about that in nineteen eighty seven, because one

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<v Speaker 2>Buffett already had this amazing reputation. I certainly don't think

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<v Speaker 2>any sensible investor would have put on hundred percent of

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<v Speaker 2>their equity allocation into Scottish Mortgage Trust in nineteen eighty nine.

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<v Speaker 2>I can see that might have happened when it hit big,

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<v Speaker 2>and people might have thought, oh, you know, James Anderson Etster,

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<v Speaker 2>just like you know, the best funy manager in the world,

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<v Speaker 2>I'm going to put But I don't. I don't think

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<v Speaker 2>that would be advisable, and I don't think most people

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<v Speaker 2>would have thought like so. I guess I'm making the

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<v Speaker 2>point that beaten nine percent a year through active management

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<v Speaker 2>would have been a challenge I think over the last

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<v Speaker 2>forty years, which is like to say that passav is

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<v Speaker 2>definitely going to do better over the next forty but

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<v Speaker 2>it's quite a high hoddle.

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<v Speaker 3>It certainly is.

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<v Speaker 1>And the only thing I would say about that is

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<v Speaker 1>if you're just buying one passive fund and you're buying

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<v Speaker 1>global index.

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<v Speaker 3>There's a lot going on there.

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<v Speaker 1>That we've talked about a lot of the last few

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<v Speaker 1>years is that first, you're effectively a momentum investor.

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<v Speaker 3>You didn't mean to be, but you are.

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<v Speaker 1>That's worked very well for a period of time, but

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<v Speaker 1>it won't necessarily keep working. You're also very over exposed

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<v Speaker 1>to the US, and you're very over exposed to the

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<v Speaker 1>technology sector in the US in particular. And again, maybe

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<v Speaker 1>that's fine, and it's been fine for a while. But

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<v Speaker 1>one of the things that everybody talks about on the

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<v Speaker 1>POT and John you write about it and I write

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<v Speaker 1>about is this idea that we are now in at

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<v Speaker 1>the beginning in the foothills of a great rotation away

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<v Speaker 1>from tech, probably away from the US being the biggest

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<v Speaker 1>and greatest market everywhere. Not that not that it'll stop

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<v Speaker 1>being great, but that it might stop being less great

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<v Speaker 1>relative to its competitors.

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<v Speaker 3>So it may be that.

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<v Speaker 1>That style of passive, effectively momentum investing doesn't work quite

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<v Speaker 1>as well over the next twenty thirty years as it

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<v Speaker 1>has over the previous. And the other thing say is,

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<v Speaker 1>if you're not doing that you're not being a simple,

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<v Speaker 1>one stop shot passive investor using a global index ETF

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<v Speaker 1>like that. There is no such thing as passive investing. Yes,

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<v Speaker 1>you have to choose your ETFs, you have to choose

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<v Speaker 1>your markets. You still have to do your own acid allocation.

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<v Speaker 1>And once you're doing that, you're already into the whole

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<v Speaker 1>world of active There is no such thing. Well, there

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<v Speaker 1>is a combination of passive trackers, but there's no such

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<v Speaker 1>thing as a passive combination of passive trackers.

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<v Speaker 2>Right, yeah, exactly.

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<v Speaker 1>Yeah.

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<v Speaker 3>Everything is active.

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<v Speaker 1>Everything is active, and even going fully passive is an

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<v Speaker 1>active decision to be a US tech heavy momentum investor.

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<v Speaker 1>That's been a great decision for a long time. Will

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<v Speaker 1>it's still be a great decision. And this is why

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<v Speaker 1>this question is kind of it's fairly unanswerable. It's fairly unanswerable.

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<v Speaker 1>And one thing you can do is to not go

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<v Speaker 1>into a market cap tracker where you've got more in

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<v Speaker 1>the biggest companies, so you are very much a momentum investor,

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<v Speaker 1>and to go into an equal weighted tracker and not

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<v Speaker 1>nearly so easy to get by the way, whereby you're

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<v Speaker 1>not a momentum investor.

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<v Speaker 3>Because you hold.

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<v Speaker 1>Each each constitute of the index in equal weights, a

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<v Speaker 1>different way to do passive, and it's a non momentum

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<v Speaker 1>way to do passive because your holdings are constantly being rebalanced,

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<v Speaker 1>that you are effectively a passive value investor.

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<v Speaker 2>Yeah, And I think the other thing that issues for

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<v Speaker 2>because you're absolutely about the mass allocations, say the things.

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<v Speaker 2>Because I was looking at again the Global index tracker

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<v Speaker 2>we were just talking about, So in nineteen eighty seven

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<v Speaker 2>it had about thirty percent of assassets in the US

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<v Speaker 2>and now it's sixty one percent, whereas in nineteen kind

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<v Speaker 2>of they'll delete. Nineteen eighties it had actually about forty

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<v Speaker 2>percent in Japan and now that's down just over five percent.

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<v Speaker 2>So I think one starting point if you would, if

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<v Speaker 2>we were turning around just now and saying, right, well,

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<v Speaker 2>do I want to go fully you know, fully passive?

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<v Speaker 2>I don't want to go slightly more active? You could

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<v Speaker 2>look at the allocation or the global allocation and perhaps

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<v Speaker 2>also the sector allocation that the global tracker has got

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<v Speaker 2>and then figure out how am I going to be

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<v Speaker 2>different to that? As a starting point, So what is

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<v Speaker 2>it about this? If I think I can beat this?

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<v Speaker 2>What would I do differently to the global tracker. Should

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<v Speaker 2>I have more in for example, UK stocks, you know,

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<v Speaker 2>should I have like, you know, twenty percent instead of

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<v Speaker 2>three percent? You know? Should I boost my exposure to

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<v Speaker 2>specific emergent markets, perhaps emergent markets that exclude China or

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<v Speaker 2>you know that sort of thing, And should there maybe

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<v Speaker 2>have a quarter in my portfolio in the US rather

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<v Speaker 2>than the full thing? And then again within that you

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<v Speaker 2>can turn and say that, well, which of these should

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<v Speaker 2>be equal weighted and which should be kind of momentum model,

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<v Speaker 2>you know, so market cap weighted. So I think it's

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<v Speaker 2>a useful reference point to at least know what the

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<v Speaker 2>global track it looks like.

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<v Speaker 3>Oh well, okay, okay, loss to think about that.

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<v Speaker 1>I think that's probably enough before instead of answering the question,

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<v Speaker 1>we make everybody even more confused. But I suspect this

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<v Speaker 1>is something that we'll come back to because John and

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<v Speaker 1>I talk a lot about passive investing, active investing in

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<v Speaker 1>which way you want to go and how each one

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<v Speaker 1>fits the environment around it. So more to come on that, definitely. Robert,

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<v Speaker 1>thank you so much for your question. It was a

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<v Speaker 1>great question. And other listeners please do you send in

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<v Speaker 1>your questions remember the flattery at the beginning if you

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<v Speaker 1>want them to answered. Thanks for listening to this week

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<v Speaker 1>Maren Talks to Your Money. If you like our show,

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<v Speaker 1>rate review, and subscribe wherever you listen to podcasts. Also,

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<v Speaker 1>be sure to follow me and John on ex or

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<v Speaker 1>Twitter at marinow and John Underscore Step.

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<v Speaker 3>This episode was produced by some Mesadi.

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<v Speaker 1>And Moses, and questions and comments on this show and

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<v Speaker 1>all our shows are always welcome. Our show email is

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<v Speaker 1>merin Money at Bloomberg dot net.