Diversification is a popular concept when it comes to investing, but what does it actually involve? Milford Financial Adviser Bruce O’Leary breaks it down to Ryan Bridge.

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Bridge talks Business: 15 April 2025
Episode Transcript

Ryan Bridge
Kia ora and welcome to Episode 29 of Bridge talks Business with Milford. Today we’re talking risk versus reward. In order to get the reward of course you have to take a bit of risk, but there’s a sliding scale to this and you can diversify your portfolio to insulate you from some of that risk. So, what types of assets can you invest in? What sorts of assets does Milford invest in for you? We’ll look at that, but first here’s your top five business bits from the past seven days.

1. Trump’s tariff pause – the 90-day freeze was the big story over the past week of course. China was hit hard, US shares retracted some of the gains that they made, investors once bitten twice shy.
2. US inflation data was softer than expected, allaying fears that companies might hike their prices ahead of Liberation Day.
3. Turmoil in equity and bond markets last week, with extreme moves in both directions and shares whilst bond markets and the US dollar were both notably weaker. Although share markets broadly recovered last week it appears that global investors are continuing to shun US assets.
4. The Reserve Bank cut the OCR a quarter of a percent here in New Zealand, very much as expected. The statement didn’t give a lot away but arguably the Reserve Bank still has plenty of room to ease, given inflation is in target and there’s a growing risk to growth.
5. All eyes remain fixed on the White House this week, for more announcements from Trump. We’ll also get some retail sales data revealing whether consumers’ front-loaded purchases ahead of the tariffs, plus US companies start reporting quarterly earnings. Don’t expect a lot of certainty from companies when they’re giving guidance on the outlook into the future.

So, one of the things we’ve been talking a lot about over the last couple of weeks here on the podcast is volatility in the stock market. One of the things that investors do to help protect against that volatility in one particular market is diversify investments across a whole range of different asset types and across a whole different bunch of countries as well. So, what we’re going to do today is talk to Bruce O’Leary who’s a Financial Adviser here at Milford about how you can do that, what can you do to diversify your portfolio and help mitigate some of the fluctuations that you see in the stock market. Just a reminder this segment is informational only and should not be considered financial advice.

Bruce, welcome to the podcast. Good to have you here. We’re going to talk today about diversification, we’re going to talk a lot about risk. First of all, when we talk about risk, what do we mean?

Bruce O’Leary
Well, risk in financial markets terms, we think about it as volatility and there’s actually a statistical measure for volatility. So, you can get an 8% return from an investment, which can actually be a very different experience to getting an 8% return from a different investment. So, what we do, we measure not just the return of an investment where we’re investing in, but we measure the volatility taken to get that return. Because if you have something that gives you twice the volatility, that’s actually taking twice the risk to get that same return. So, in a risk-adjusted sense, you’d be much better off buying the investment that has half the volatility to give you the same outcome, and it’s a far better investment experience for people.

Ryan Bridge
How do you determine or how do you work out which is more volatile or what the volatility might be?

Bruce O’Leary
Well, it’s actually a statistical measure and I don’t want to get too complicated with that, but it’s to do with standard deviation of returns over time. We do measure that in terms of our funds and our funds’ performance versus the returns that they’ve achieved. We also measure it in terms of some of the assets we’re buying. So, some of the lower risk assets, they’re going to have far lower volatility but the lower you go generally, the lower your returns as well. So, you do need to accept some volatility and some risk to get higher than cash returns.

Ryan Bridge
Do you think we as investors really understand or appreciate risk, and the volatility that goes into it?

Bruce O’Leary
I think there’s some understanding of risk. People perceive shares as risky but there are a lot of other risky asset classes too. Often there’s an emotional attachment to an investment. People sometimes say I own that stock, I bought it at $10, there’s no way I can sell it at $8, but actually if the outlooks change, it might be worth $4. So, it’s a very risky investment for people. Often people have a family member say oh my brother’s investing in this company, I should invest in that, it’s a private startup company. Well, that’s got a very, very different risk profile to something that’s a listed company with very predictable cash flows, liquidity. If our view changes on a stock we can sell a listed company. You can’t sell a private company that you might have invest in. I think in New Zealand too, there’s been a little bit of a misunderstanding of risk in the property markets at times too. People have a real faith in bricks and mortar, but then for the last few years property has actually been under a bit of pressure and I think some people might have overextended themselves, carrying too much debt, and they’re carrying more risk in the property market than what they thought they would be.

Ryan Bridge
We do have a love affair with property. We do. I mean if it’s a nice house you just want to keep it too.

Bruce O’Leary
We do.

Ryan Bridge
We do. I mean if it’s a nice house you just want to keep it too.

Bruce O’Leary
Well, that’s right – and that’s that emotional attachment. One of the keys to investing is to try and remove the emotion from your investing.

Ryan Bridge
So, let’s talk about diversification and the different asset types that you can purchase, and that Milford is involved with as well.

Bruce O’Leary
Sure, so at the very low end is cash. Now, we’re not going to fill up portfolios with cash because it is the lowest risk asset class and it’ll give you the lowest return over time – but it can certainly help cushion falls in markets at times. The next asset class I’d look at is what we call bonds and fixed income. So, that does have some variability in returns. We can buy bonds right now, yielding us five, five and a half percent, but we do have to value them each day and they do move around more than what cash does. But you get paid that premium to hold it as well. Then we’ve got property shares, which are one notch up in terms of risk, but they’ll pay a reasonably reliable dividend yield. And then we have shares – but there’s a big variety of shares too. So, you know these are shares in the US, the UK, Europe, New Zealand, Australia and there’s also a big variety in the kinds of stocks we can buy. If you buy a utility company which pays you a reliable dividend yield with reliable cash flows, that can be very different to buying a high growth technology company which might move around a lot – and we’ve certainly seen some of that in recent times.

Ryan Bridge
Yeah we have. So, what are you meant to do? Are you meant to pick a little bit from each asset class or should you pick some in this market and some in the US, some in Europe? What does diversification actually look like?

Bruce O’Leary
I think it’s a combination of all of that. So, you know diversifying across different regions – even though it’s all in shares – is a very good form of diversification. New Zealand might be in a recession but the US is very strong – and that was the case in 2024 because we had very different consumer outcomes from the interest rate hikes that had gone on the year before. So, therefore you had a higher growth in one economy than the other. But also that doesn’t completely bring down your risk because you’re still exposed to shares which are going to be more volatile than if you add in some fixed income and bonds, which are way less volatile than what shares are, and if you add in a little bit of cash at times as well.

Ryan Bridge
Let’s talk about the bonds because obviously it’s been the big story of the last week. It’s arguably what turned Trump around on the tariffs. So, explain to me why when the stock market’s a bit topsy-turvy people go to bonds?

Bruce O’Leary
It is what they call a flight to safety at times but often one of the key reasons why a stock market will be topsy-turvy is because it’s worried about economic growth. Economic growth shrinking at its extreme – is it a recession? So, negative economic growth. Why would shares go down in that environment? Because it’s a tough backdrop for companies to grow their earnings, to generate their revenue, and so bonds, on the other hand, what’s a central bank going to be doing if it’s worried about a recession? History says it’ll probably be cutting interest rates or certainly the market will start pricing in the cutting of interest rates, so that boosts the value of your bonds. Bonds are a little bit more complicated to explain, but if you think about it simplistically it’s a little bit like a term deposit but we can sell it. If I’m locked in at five and a half percent, and the prevailing interest rates start going down, someone will pay me more than a dollar for that bond because they’ve still got another three or four years to go at five and a half percent – so that’s what boosts the value of those bonds during times of economic uncertainty.

Ryan Bridge
Has diversification worked or has it worked so far this year for example?

Bruce O’Leary
Yeah, certainly in the first quarter of 2025 it did. And interestingly in the March quarter, it was the things that had given you the highest returns last year which gave you the weakest return so far this year – and that was the US market, some of the big US technology stocks which performed very strongly last year. And so, diversification into other markets worked. We had some stock exposure in the UK and Europe which were positive. New Zealand was pretty soft in the first quarter of this year because some of the big companies had some profit warnings there. Australia was a bit weak, but bonds as you mentioned before, bonds gave you that sort of reverse kicker. They were quite positive as the anticipation of lower rates came into the into the marketplace.

Ryan Bridge
I know you mentioned that bonds have been pretty steady. You know there are some rules I guess, that are always true, but in 2022 maybe wasn’t the case.

Bruce O’Leary
No. In 2022, it was one of the worst years for what we call a balanced asset allocation. Worse than sort of over 40 or 50 years, and the reason was we had some of the most aggressive interest rate hikes in over 40 years. So that was the Federal Reserve, the Reserve Bank of New Zealand – almost every central bank around the world said I’ve got one goal and my goal is to squash inflation. I don’t care what happens to the economy. So, that’s very unusual for a central bank to say that. Normally they care what happens to the economy, but inflation was at extremes, and it was part of a Covid hangover.

Ryan Bridge
Yeah, well we certainly felt that didn’t we?

Bruce O’Leary
We certainly did.

Ryan Bridge
It felt like they were squashing inflation at any cost.

Bruce O’Leary
Yeah, and they have squashed inflation which is why interest rates are now coming down again.

Ryan Bridge
So, I guess for people who might be new to investing or who are unfamiliar with some of this stuff, what’s Milford’s approach to diversifying if you’re in a different fund types? If you’re in a balanced fund, or if you’re an aggressive fund – would you have more exposure in an aggressive fund to one particular type of asset, or how does it work?

Bruce O’Leary
Yeah, the more aggressive our fund, the more exposure it’s going to have to shares for sure – and that’s going to depend on a client’s risk tolerance, age and stage in life. There are lots of factors that feed into that, but the more exposure you can withstand in shares the higher your return will be over time. But there’s what they call a loss aversion bias, and what we do by diversifying for people is reduce the risk and the magnitude of those losses at times. What you’ve got to remember is that in the last seven years the US share markets had four 20% pullbacks, and a lot of clients can’t withstand a 20% pullback. They start monetising a loss in their head. People say, oh yes you made me 10% last year, you just lost me a hundred thousand dollars. So, they put a far more heavier weighting on a loss than they do on a gain. For us to help cushion that for investors, it makes for a far better investment experience. So, for most people some form of diversification is going to help their investment journey.

Ryan Bridge
You must get a lot of questions from friends and family or whatever, particularly at a time like this and everything is so volatile. What are your words of wisdom? What do you tell people to get through something like this?

Bruce O’Leary
I actually find it’s pretty helpful to step back. You’ll be reading headlines on CNBC or the New Zealand Herald, or wherever you read them, and it’ll often be an element of clickbait to say Dow Jones falls 1000 points and things like that. But if you actually step back and look inside your portfolio and say, hey I own a little bit of Contact Energy, I own a little bit of Microsoft, I own some bonds in Australia that are paying me five and a half percent a year. All of these companies are going to be around in five years. So often just taking a step back and thinking about it at an individual asset level can give you a bit more comfort.

Ryan Bridge
Great advice Bruce, thank you very much.

Bruce O’Leary
Thanks Ryan.

Ryan Bridge
That was Bruce O’Leary, a Financial Adviser here at Milford. Thank you very much for listening to the podcast. Don’t forget to share this with your friends and family, someone who’s interested in investing. Don’t forget you can always like, follow and subscribe this podcast wherever you like to listen.

We’re going to take a break next week. Hope you enjoy your long Easter weekend and ANZAC weekend if you’re getting one. We’ll see you the week after that.

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