Income Investors: Last Chance To Lock In Higher Interest Rates? | Nucleus Investment Insights

Hello, welcome to another edition of Nucleus Investment Insights. We've gone today focused on income and given, I guess, what's happening in terms of the RBA and wanting to just sort of run through some of the key issues that are facing income investors with the current setup. So, I'm trying to highlight, so, I'm sorry, just making sure I've got a few technical issues here at this end. So, one of the key things I wanted to pick up on today was just everything you're gonna hear today is general advice in nature, nothing of this is personal advice. If you do want personal advice, make sure you register on our site and you can grab it from there. I'm just not 100% sure whether I've got slides coming through. I must admit, I don't think I do at the moment. So, let me just jump through and I'll start talking through some of the main points and see if we can work out what's happened with those slides while that's going. Okay, so, the key thing we're trying to, we wanna run through is that we had sort of 10 years plus of where anyone investing for income had a really tough time. And now we've had a few sort of couple of years in the sunshine and it's about saying, well, we are looking at rates being cut at the moment and the question is whether there's a way that we can, you can sort of head that off and you can make sure that what you're showing is, so, what you're, you make sure that you are protected from any of that downside. Actually, let me just pause for one second just while I sort these slides out. Actually, let me, I think the best bit might be, let me play ahead and I'll talk through what we've got and I guess it's a podcast for everyone, I guess today. So, one of the, so, what I did wanna run through is the different capital structures. So, we've got a whole bunch of different things we can go through is cash bonds, international shares, Aussie shares, inflationary bonds. Yeah, how do you sort of lock in these rates? What happens with inflationary bonds? What levels of income do you need in order to be able to sort of survive, I guess, and be able to sort of go forward without needing to sort of cash in on any of the, without sort of cash in any of your capital. Yeah, what happens in terms of international stocks and things like that and where can we get to, where can we find safety within these? And then let's have a look at some of the, a few of the alternative assets as well you have a chance for. So, first of all, there's this idea that we've got, so, there's the RBA rate. That's the one everyone sort of focuses in on the sort of 3.85. We are looking at the current RBA rate. And then the question is, where do we see that going forward? And what are the issues in terms of that? So, there's a pricing that gets done in terms of the ASX where what happens is based on where things trade you can sort of work out what the probabilities are in terms of what the market is expecting in terms of rate cuts. Now this can change a lot, but at the moment what's happening is it's 3.85 but it's expected to go down to around about three over the next year or so. I've got a chart just up showing at the moment the different options there in terms of how that's going to, how that plays out. So, the question people is, is, first of all, these rate curves can be dramatically wrong. They can like flip around. It looks like that might look what it is. And then all of a sudden you get a government comes in and decides it's going to cut taxes, big spending agenda, and inflation is going to take off. And so therefore that just completely reverses. And the other side is what we saw through much of the sort of 2010s was that we saw this expectation that yeah, there were a few rate cuts and then the economy would pick up and everything would be fine and then what would happen is that wouldn't actually go, wouldn't actually happen. And so then the rates would just go down lower and lower and lower. And so, yeah, so a couple of rate cuts sort of cut in sort of expected at the moment, but there's always the possibility that that sort of gets away from it. And if you go into a deeper economic problems, then you're sort of stuck with that. So that's sort of what most things are sort of based off. And then we sort of talk about saying, well, what are the different types of yields we can get? So there's sort of the at-call bank deposits you can get about whenever you want. And it's surprisingly, there's a surprisingly wide range of yields you can get from that. Then you sort of get into term deposits with banks. You can get into sort of government bonds from your own country, foreign government bonds, semi-government bonds, which are the state agencies. So you're like New South Wales state government or the Victorian state government issuing out their bonds. You've got the whole bunch of different alternative types of assets. So there's lots of private credit out there at the moment and there's lots of other sort of things, mortgage-backed securities, all these other types of factors you can go to. Then you get the corporate bonds from investment grade to sort of junk. And then there's these hybrids and real estate investment trusts and equity. So all these different types of yield, all very different. And they all have pros and cons on what you can get from each. And so I wanted to sort of run through where the current levels are and sort of what you can expect from these going forward. So first of all, there's this idea about capital versus income and just thinking about the tax and the structure which you're doing this in. So if you're an income investor and you're on the top tax, top, top marginal tax rate, you're giving a half foot away, straight away. If you're an income investor and you've got this within your super fund, it's getting taxed at 15%. If you're in pension phase, it's getting taxed at 0%. If you are a high-incoming owner and you have a partner who isn't earning any money and you put it in their name, then the tax rate might be zero or very low as well. So getting that structure right on income is really, really important because it can, well, half your returns if you've got it wrong. And so, yeah, so that's one thing around that and that whole tax part. In terms of capital versus income, it sort of varies between different instruments, but a lot of the sort of government bond type instruments you can get out there, you'll often find the capital return and might actually get treated as income return as well. So I buy a bond for $99, which is gonna expire in two years' time. I get my 4% per annum, I pay that as a dividend on that. And in two years' time, that pay me back the $100. Now, the $4 each year is clearly income and I'm paying tax on that. When I get my extra dollar back and I sell that bond, quite often what will happen is that will get treated as an income return, not as a capital return. Or, you know, even if I sell the bond throughout the period, you know, that can happen. Now, there's pros and cons to that. So there are times where you can sell your bonds and actually make an income loss on them and sort of pick up, there's some tax benefits from doing that, obviously. But yeah, that whole, you know, how's that being treated is really important for the structure you've got. It is also worth noting that, you know, I've got sort of a chart up of, I think, it's about 100 odd years, sorry, 120 years of returns. And I haven't, I've had this for the latest ones, but, you know, this will be even worse when you look at it for another few years. But just showing that, you know, your returns you're getting on equities in just about every market, actually, sorry, in every market is far above what you're gonna get in bonds and then bills tracks even further behind that. And so the difference really between bonds and bills is the bonds are where you're taking a bet on some of the longer term. Like, yeah, generally pushing it out, I'm getting five to 10 year bonds and I'm taking up some, basically, some what they call duration risks. So I'm actually, it's not at call. So the benefit of having, you know, the cash at call effectively is in sort of the bills and so you get a much lower return on that over time. So tactically, there's definitely times to be in bonds and bills and things like that. But, you know, over that long period of time, you're eventually gonna lose out in those assets. So yeah, so let's jump straight to the cash side of it. So what is the, so we look at just the Aussie bank deposit rates. Now, this is all from the RBA. And again, this is, to keep in mind as well, this is the advertised rates, which are much worse, sorry, much better than the actual rates paid. And so what does that, what do I mean by that is that banks rely on the fact that people are lazy and that they will be attracted to some sort of rate that will eventually disappear and they can't be bothered to change it, or you'll just deposit money into your savings, into your transaction account, which is probably paying no interest, rather than moving it into a savings account where it is earning interest. And the other thing is, there is a plethora of platforms out there, which are investment platforms. And they, you know, ranging anything from, you know, places like NetWealth or Hub24 or Premium or A&P, you know, all these different quarries, all these different places often have these cash management accounts. And the interest rates on those cash management accounts can be terrible. So I've got this chart up sort of showing how it ran, how that sort of been over time. And if you look at sort of, you know, back in the 80s, all these things gave you pretty similar returns. And then eventually those cash, you know, banks worked out that, hey, these cash management accounts are a good thing. We can just not pay anywhere near as much interest and give lots of sort of, yeah, they're often much more flexible in terms of what you can do with them in terms of moving money in and out and around. But, you know, the banks use that to just screw you on interest rates. So, you know, on cash management accounts, you're sort of getting, you know, 1% issue, if you're lucky at the moment. That sort of then jumps up to savings accounts, your traditional savings accounts where you're sort of getting, you know, you're probably getting under 2%. If you're into some of the bonus savings types accounts, you can be doing a lot better than that. That's sort of sitting right at the top. Often though, that might be because there's terms and conditions around that that end up meaning that people don't often get that full rate. But certainly the headline rate, if you meet all the terms and conditions can be the most attractive out there. So that's that. And then you have the various term deposit rates. And you can just see on this chart right at the end there, where all these are starting to come down now as rates being cut. And those, you know, let's say that three-year rate on term deposits is, yeah, well below that 4% level. You know, obviously there's exceptions to this and you can get better things out there and different banks and all that. But this is sort of the overall picture of the market about the returns that you can get on these at the moment. So the question is, if we're going back down to sort of similar levels to we saw, you know, right throughout the 2010s, where you're like, you know, two to 3% on these banks, you know, how do you protect yourself in terms of that? Okay, so let's jump next to bonds. Now, bonds effectively, just to give the quick 101 behind it, is effectively you pay for it now, you get this stream of cash flows. I've got this one here, we're paying whatever it is, eight and a half grand now. We're going to get back $10,000 in six years time. And we're going to get that $400 paid every year until we finally get all that money back. So that's our bond paid out over that timeframe. And I think that the way, probably the best way I find for most people to think about it is, it's a term deposit that you can sell. So you've locked in your interest rate. You know, if you do that with a bank, you say, yep, I'm going to take out a five year term deposit. And then after three years, you decide, actually, I really need that money for something else, or stocks have fallen and I want to put it into stocks, they're probably going to charge you some sort of break fee on that and might get rid of some of your, strip out some of the interest that they might've paid you. Whereas with a bond, you can actually go and sell that bond and there's no break fee on it. You might make capital gain, you might make capital loss, and depending upon what happens. But typically you want bonds because when markets do suffer, you go into economic problems and then stock markets fall, then you have a chance to sell some of your bonds, which typically will have gone up a little bit and then buy into stocks using that price. So a bunch of different issues with bonds though. And so I wanted to talk through some of these factors is the question is, whether you own your bonds outright or whether you own them in a fund or some direct index type fund like we have. So there can be a big difference in these, particularly if you want to live off the income. So if you're buying the bonds directly or buying it through someone like Nucleus where you get the individual lines of bonds themselves, what happens is you own that bond, you get to pay the distribution and at the end of it, you get your money. If you buy a bond fund, that's not necessarily the case. While the bond fund might own all the same securities that say we own in a direct index sort of bond ladder, they will have some other tax stuff going on and people buying in and selling out. And it might mean that while they might've got a 4% yield during the year, they actually don't pay it out to people. They might only pay out one or 2% or zero sometimes because of other issues going on within that fund. And so you can always sell some of it, like you are getting that return, so to speak, within the fund, but it might not be, you might be surprised at the yields you're getting on some of these because they don't always match. And yeah, so definitely an issue whether you're buying. What is a bond ladder? Well, effectively, it's just a bunch of bonds we're going to buy. So one of them will have, so let's say you jumped into a bond ladder that we sell, is that you just get, say, a dozen bonds, one of them expiring in a year, another one in two years, three, four, going out to sort of 15 or 20 years. And then it might jump out once, might be every year for the first few years. And then as you get later out, it might be every second year or something like that. And so, and as these expire, effectively what we do is, when it expires, we take the money from that as it expires and just stick it back on the end of the, go out and buy a longer term one. And so very simple in terms of those. It does mean you get to lock in your income and you lock in those higher yields. And then you can also take that and you can say, well, let's say I want to cut out all the short-term bonds so that I just got a portfolio of long-term or vice versa, I just want the portfolio of short-term bonds. So, yeah, so you can do that within the screens and the tilts in order to be able to say, yes, I actually want to, give me a bond ladder, but actually get rid of all the short-term ones because I just want the long-term ones and I just want to lock in those higher interest rates. Or you can go to, yeah, or you can go to more safe. So I spoke a little bit about some of those tax implications and things like that, but it's also worth, even when you're buying the direct bonds, you need to think about the income and income versus capital as well, depending on what you want to do with this. Like a lot of people are just like, well, I guess there's a, even though the effect is sort of pretty similar between saying, I have a bond fund, I'll get my income coming out of it and I'll use that to live or do whatever versus just selling some of those bonds and then using that money to do it. Different bonds, different lines of the bonds have really different yields. And so I'll use a live example is, we're talking about the seven to eight year range for the bonds. There's in Australia, there's two you can buy at the moment. One of them is the May 2032 bond. So you buy that today for $84. You're going to get back, so let's just say I'm buying one bond for $84. In seven years time, I'm going to get back $100 on that. In the meantime, it's only going to pay me $1.25 a year. So I'm sort of getting a yield of about 1.5% on that bond. So buy that, get $1.25 every year and the bond will go up because every year it's getting closer and closer. Today, it's seven years before I get my $100. Next year, it'll only be six years, five years, et cetera. And so the bond will go up by about two, 2.5% every year until we get that end point. And so the cashflow profile is very different to say if I bought, I went one year further out and I bought an April 2023 bond. Now that would cost me $104 to buy today. And then when I cash it in, I'll only get $100. So I'm going to lose $4 over that timeframe, but I'm actually going to get $4.50 per year. So I'm getting this sort of four and a bit percent yield in terms of what I'm getting out of that bond. And then the bond is going down by 0.4% per year. And so I still end up getting that 4%. So either way, you're getting around about 4%. One way I'm getting sort of 1.5% per year and the bond going up by about 2.5% per year. The other way I'm actually getting 4.5% or 4.4% or something like that, and then losing 0.4% every year. And so, yeah, net effect is from a big picture perspective, no difference between really between the two in terms of the outcome. But if you want that money because you're like, yes, I'm going to live off the dividend stream, then obviously it's very different proposition. And the other thing is from a tax perspective, if you were in a, say you're on a high tax bracket, you might look at that bond and say, you might look at the one that's only paying at 1.5% per year and say, yeah, actually, you know what? That's good because I'll defer my tax. I don't have to pay that tax until I actually sell the bond or redeem it in seven or eight years time. And so that, I'll worry about that tax when I get there. And so, yeah, it's a very different outcome for it. And also to put that in perspective, actually, I'm sorry, I'll jump to an inflation link one as well. Let me talk about that after I've explained what inflation and bonds are, that might be a bit easier. So just put what can you get in bonds at the moment. So this is sort of as at this morning, if you wanted to get a one year bond, you get about three and a half percent on that, which is sort of roughly, it's a little bit below, I think what you probably find in some of the term deposits, basically as a term deposits, you've got a little bit of extra bank risk in there as well. But once you start going out, if you wanted to lock yourself in for the next 20 years, you can get a 5% return on that or 30 years, or near enough to a 5% return if you're happy to lock in for those longer term rates. So yeah, that's probably the simplest way if someone's saying, look, I've got these cash deposits, I really wanna make four and a half percent per annum, I'm happy to make that or 5% per annum, I'm happy to make that return and just leave it, forget about it. You can lock yourself away for 20 or 30 years and you're getting that 5% return on your bonds. The next one is in this inflation links bonds. And so these are a bit different in that effectively what happens is, you buy it on day one, then you get these coupon payments, which are the interest, but the interest goes up every year. So it's not the same in terms of saying, I get a, yeah, I'm not sort of, whereas a normal bond is like, I've spent that $84 I spoke about, or let's do the other one, I spent my $100, I'm getting a 4% return on that, or $4 in dividends. And that $4 is locked in for the next, whatever time period, the next 10, 15 years. And so, and I don't have to worry, the dollar amount is not changing. The difference in inflation and bonds is that dollar amount is going up every year at the rate of inflation. Secondly, the value of my bond is going up every year at the rate of inflation. So sounds great. And actually, if these things are priced at the right levels, you know, this is, they're fantastic securities to jump into, but it's a question about, you know, how much you pay for them and what you're actually getting. So if I went back to where we're looking today, is, so if you went an inflation-linked 25-year bond, that'd give you about 1.4%. And then that's going up at the rate of inflation. The other thing with that bond at the moment is it's, yeah, it's base value is like way above its current value. So you're buying it for sort of, I haven't brought the stats with me, sorry. You're buying it for sort of, I think sort of 80 odd dollars, and it's worth like 125 already, plus whatever inflation you get. And so it's sort of, there's a reasonable amount of capital gain in those bonds that you're gonna see over time. So great way to protect your income. To making sure that that's, that you're maintaining purchasing power. It's just, you're not getting a very big yield on it. And for a large part, you know, a lot of that gain, as you can see from this chart, you know, a lot of that gain is coming from that jump in the value of this thing over time. But, you know, I think there's obviously, and I'll run into this later, as a retirement strategy, you're having some of these where you're like, look, if that's enough to fund your retirement and you know that you're gonna pass on, you know, whatever the value you put into that is not being eaten away by inflation. Because that's the problem with, say, you buy a 30 year bond and you're like, yeah, I've thrown a million dollars into it. I'm gonna live off the, you know, I'm gonna get 5% return. I'm gonna live off that $50,000 every year and I'll be fine. Well, the $50,000 doesn't change for the next 30 years. And at the end of 30 years, you still only got a million dollars, which is your, you know, what you invest in. Whereas if you went the other way with these inflationary bonds and stuck a million dollars into that, okay, now I'm only getting like $15,000 a year. But that's growing, that $15,000 is growing at the rate of inflation. So it'll keep up with, over the next 30 years, it'll keep up with, or should hopefully keep up with, with changes in costs of everything I'm doing. Plus, when I get to the end of it, I've no longer got a million dollars. I've now got a million dollars compounded for any inflation that we've had in the meantime. So yeah, much safer in terms of your purchasing power and everything like that, but you just get a much worse yield. So yeah, you got to sort of play off those pros and those cons. Right, so next, what I wanted to do was, so the next thing I wanted to discuss then is getting into some of the more esoteric types of bonds you can get. So now what we're looking at is the different structures. So you get beyond government bonds and you start taking some risk in terms of getting into corporate bonds. Now these can be really different in terms of it. And it's worth just sort of noting the different types. So there's this idea of at the top of this pile is senior secured debt. So this is the stuff that is effectively mortgaged. So if something goes wrong with the company, whoever has this can usually step in and say, well, not only do I have rights to the assets of the company, I've also secured it versus something the company owns. And so effectively there's a mortgage over it, whatever it is, maybe it's property or it's over some of the factories or assets that they have. And so yes, it's the safest you can get there. At the next stage, you get the unsecured debt and then you get these convertible debentures. And so in those ones, you're getting a yield based on a legal obligation for them to pay you. But sometimes things like those convertible debentures, you might end up with shares or you might end up finding that they can not pay you for a few periods as well as they make it back to you later and things like that. Whereas the top level ones tend to be a lot more, they've got to make payments or they've got to default. And then as you get down to the next, the preferred shares and the shares, now it's just a promise that we'll pay you dividends. There's no sort of legal obligation or a much, much weaker legal obligation in terms of getting that. So once you start looking at these corporate debt though, as well, there's a whole host of other things you got to worry about. So there's this idea of maturity. So corporate debt will be, well, the fixed rate, at least, what will happen is maybe it lasts for two years, maybe it lasts for five years. They tend to be a fair bit shorter, but there's a timeframe where these things are going to expire and they're going to need to buy them back, give the money back to people and then go and issue some dividends. So that's sort of an ongoing feature of these. And as part of that, look, governments do have to issue bonds as well, but they issue them for much longer periods. But the other thing as well is that there's a fee to this. And so when people are issuing government bonds, they don't have to pay very much. So the fees to issue those are very, very small. But as you get into corporates, depending upon how risky the corporate is, you're effectively, the corporates are, there's brokers and middlemen sort of taking these cuts every time of what's going into these capital rates. So, yeah, that sort of reduces the returns that are sort of had out there. Next, this idea between fixed and floating. So there are, especially in Australia, there's a lot of ones that are just floating rates and a lot of that sort of backed into those hybrid ideas. You can get the inflation linked ones. This idea of covenants, so I spoke a little bit about things that they can do so that people mortgages over certain things. There's the covenants of basically how strict does a company have to be in terms of. So, but in some parts, they can be quite strict in terms of saying when people are buying these bonds, it's like, well, no, you're not allowed to, you're not allowed to make this some acquisition or you're not because you're gonna take on too much debt. And we've already got, if I'm a bond holder in the company and I've already got debt, you don't need to pay me. And then you go out, decide to go out and buy some massive company and spend all this extra debt. All of a sudden you're in shaky position. Well, covenants are the things that might protect me from that happening. And I think that the big picture on covenants is they're getting less and less over time. Well, so they go through cycles, covenants go through cycles. And at the moment we're in a cycle where there's not a lot of covenants and there's a lot of people writing, particularly the private debt type ones. There's a lot of private debt that are writing what's called covenant light sort of loans where there's actually, the company's gonna just do pretty much whatever they want. And there's not, there's much less protection for people sort of sitting below this. Then we've got this idea of seniority. I showed you that graph and then there's some tax effects, particularly Australian ones. You can have things where you are, where they might be trying to pay out some of the franking credits or things like that. And that will change the effect for investors as to how much benefit you're getting from it. There's also one, so say in the US, there's particular classes of bonds that might actually local government type bonds where they might be actually tax free in terms of the returns you might get on them. But there's lots of different beaches, I guess, where I'm getting to with these bonds. Where's the pricing of them? So what I'm showing here is a spread. Now what I'm showing a spread is basically the best way to think about corporate bonds is there's a price for a government bond and then there's price you pay above that for a corporate bond. Now I've shown the spreads for what's called a triple B. Now this is a relatively risky, but not, but investment grade company. So it's not the best of the best. And so basically on these ones at the moment, you can get about 1% more than what you can get for than buying a government bond, an equivalent government bond. Now, as you can see for this graph, you know, that sort of goes, that goes through waves. And, you know, that's between one and 2% has been where it's sort of been for the last few years. You know, if you look back over time, you know, at worst cases in credit prices and Great Depressions and stuff like that, you know, you might be able to get 5% above the government bonds, pretty typical to be somewhere between one and two, but you know, there's certainly, you know, two and a half, it's probably, two to two and a half is, well, sorry, two is probably the longer term average. So it's pretty, I'd say that the most frequent range for this is somewhere between one and three, that you get on these types of bonds. And so where are we at the moment? Well, we're right at the bottom end of that range. You rarely get less than 1% spread on these. So, you know, there's, yes, you're going to get 1% better by buying these corporate bonds, but you know, that's, from a valuation perspective, it's not much of a margin that you're getting. And you're then running the risk that, yeah, these companies can go broke. And there's a whole group of other companies, other versions you can get of these. This is just the investment grade one. So the A's and the B's and stuff like that are, well, sorry, so the A's will all sit, and the triple A's will all sit better than this. So somewhere between zero and 1%, you know, you can expect to find all the good companies. What is interesting is some of the, when you start looking at this, you know, we look at these as good gauge for risk. So the next one is the one showing up here is what's called the junk bonds. So these are below investment grade. So the ones that ratings agencies have said aren't worth, yeah, aren't, well, there's a much higher likelihood they're going to go broke. So I've just sort of shown the last 10 years of that. So in 2016, which was not a, you know, it was, you certainly had slowdown, but it wasn't so terrible. You got sort of yields on these things, sort of eight or 9% higher than what you get in the rest of the market. As you can see, we're very much at the bottom of this range still. It's sort of 3% here, which is largely as low as we've been. We did have that brief flip up, so around liberation day number one, where these things all of a sudden went from 3% up to almost 5%. And these are a little bit self-fulfilling in a way in that these are the companies that are struggling to raise debt. And so when these yields spike up, this can actually help cause a crisis. So what happens is people get worried about these companies not being able to afford their debt and worried about them falling over. And so the yields spike up, which means that next time one of these companies goes to refinance its mortgage or refinance its debt, it's got to pay a lot more for the loans. And so, and then that might actually be enough to put it into bankruptcy. So if it was paying the normal rate, it might be fine, but because these things spike up. So I guess what I'm trying to get to here though, is it's just that same message that actually, there's just not a lot of return in these things, not a lot of return above bonds, but the extra risk you're taking. And relative to history, we're right at the bottom of that range, and which sort of feels strange insofar as, look, there's a lot of risks out there today. Maybe everything will be fine, but Trump could very easily make a miscalculation with some of these tariffs, or US can end up in recession or all these different things that could go wrong. And to have sort of no sort of margin of error in these bonds, to me, certainly seems risky to be taking too much of a bet on these at the moment. And the final category, which is sort of a similar category that I just wanted to go is, this is distressed debt. So these are the companies that are either already have a problem or are really, really close to falling over. So these ones, you can see that in the 2008 crisis, you can get 35% return above the bank bill rates on this. So you're basically saying, yes, as long as this thing survives, I'm going to do great, but if it doesn't survive, I'm just not going to make the money on it. And just noting, I guess that these, they're not right at the bottom of the recent range, but they're certainly in that same part where it's, if you're getting say, seven or 8% above government bond yield, so you might be getting like 12%, which sounds great, but this is a company which is a pretty reasonable likelihood it's going to fall over. And so, yeah, you buy one of those things and you're getting a 12% return. If it doesn't fall over, happy days, but if it does fall over, you're going to lose a significant part of your capital on this. Okay, so that's our corporate bonds. A few alternatives out there, I just want to sort of highlight that these are, and I'm going to pop up, I actually didn't have time to get the numbers I wanted to for these, but I will show some of this on there. I just want to highlight though, so we've got what we call mortgage-backed securities. So that is becoming a significant market again. This was one of the ones that, these are the ones that blew up in the financial crisis. Having said that, the risks around them are much different now to what they were. And so there are some sort of interesting yields you can get within those, and it's certainly worth considering as an asset class, you know, when it gets to levels that are reasonable and depending upon how concerned you are about the housing markets and loans, what loans work there. Private credit is, this is the one though, I would, at least before you get into that, have a pretty serious look at what you're getting into. So the issue with private credit, but there's a whole bunch of issues with private credit. One is, it's a bit like hedge funds in that there's some hedge funds, the word hedge fund, you know, there's some hedge funds out there that are really, really not risky at all. And there's other ones out there that have just got crazy levels of risk. And so, you know, the word hedge fund is, it's hard to tell how much risk you're getting. And that's the same with private credit. Like there's private credit out there, which is investing in, you know, effectively second mortgages, and, you know, they've done a lot of due diligence and they've spread out and they've got all these, you know, there's a whole bunch of factors go into it. And actually the risk is pretty reasonable and, you know, they're paying reasonable returns. And then there's private credit out there, which is effectively, you know, investing in distressed debt or mates of the founder or whatever it is that's, and I think that it's the private credit market, you know, these things always go through cycles and, you know, credit is definitely one area where it goes through the parts where people who have seen and experienced and learnt from those who do the, who've been through genuine cycles. And then they're the ones putting on covenants and they're the ones making sure that, yeah, we're protected, if things go wrong, what's the protection, what are we doing? And a lot of the sort of more junior ones who might've been around for 10 years or so, but have never, haven't actually seen a cycle of these. And they're the ones that will often make all the same mistakes that people have made in the past. And so my worry with private credit is, especially there's a lot of new private credit funds out there is just what they're, I've got no idea what they're doing. And you probably don't either. And reading the prospectus and knowing what their processes are, you're just not gonna know whether you've got somebody who is genuine out there about the processes and strict and actually genuinely doing it. Everyone knows the right words to say, but, you know, knowing who is actually doing it and who's not. And often you won't find out until the tide does go out and you find out actually this person was lending money to, well, we just had First Guardian, First Guardian and Shield or whatever, who were effectively just making, you know, telling people they were doing one thing, but actually out making risky loans to really good assets as well. And the other thing with these private credit ones are, these are not liquid securities. So they'll be pitched as liquid securities and in good markets they are. You know, people are more than happy to buy when nothing's going wrong. The problem is just when things go wrong, what you can often find is these things will have at least a few things, a few bonds with troubles. And so if you want to get your money back, it might take, you know, for some cases, if things go radically wrong, you might be talking years to go through courts and all that sort of stuff and work out how much you're getting paid back on these. But, you know, even on some of the more normal ones, you know, there's usually lockups and, you know, it's not, they're not quite the same as other things. It's very different to it or it's not. That's a huge understatement. You know, an act called bank account, I want the money, I can get the money. You know, a government bond, even though it might be a 10-year bond, I want the money, I can sell the bond and I can get it, you know. You know, term deposit, even with a bank, I know I can break the term deposit if I want, yeah, there'll be some sort of penalty for it, but I can still break it and get the money when I need it. Some of these private credit ones, you might think you're getting something similar, but you're not. It's just something where, you know, I want the money, but they're just like bad luck, it's all been locked up, you know, get in line and wait for whatever legal case is going on to work out or whatever's going on to work out how long it is till you get your money. Okay, so that's your alternatives. The other main alternative we see in Australia is hybrids. So they've got this similar thing as well, where these are largely floating rate instruments. I've just got this, this is a report, the blue line's the one to focus on, which is the margin you're getting above this bank bill swap rate. And at the moment, that's right at the bottom of the range where it's been for the last, you know, more than a decade. So you're talking about, yeah, 3.7% above. So the yields themselves are pretty good. So you're looking at this going, okay, I'm getting 3.8 plus I'm getting 3.7 on top of that, you know, I'm talking about 7% plus yields, you know, 8% that you can get on these things. So yes, so from a yield perspective, look very attractive. There's just so many issues that go around that. And that's why they're being phased out. So one is the yield you can get today is basically at the bottom of the range, where it's been in the past few decades. So you're just really not getting much return for the risk you're taking. Why they're being phased out from next year is because regulators basically took the view that initially that yeah, banks can issue these things. They're sort of like, they're right at the bottom of the scale when things go wrong, right at the bottom of the capital structure except for equity. So when things go wrong, these things end up being treated like equity. When things go right, all you do is you get a debt return. So basically the joke is that it's, you know, it's all the upside of debt, which is none and all the downside of equity, which is, you know, lots. And so basically there was a bit of an education. They tried to do education and all that type of stuff. And eventually they said, look, people can't work it out. They, you know, 8% yield sounds fantastic that people just pick it up and take it. And they don't understand the risk that they can lose. Yeah, they can lose a lot. As we saw, you know, not that long ago with Credit Suisse internationally. So we haven't had sort of big profile or any major big profile blow ups in Australia, but it's just a recognition that regulators have had is that, you know, we tried education for a decade and it just didn't work. And so now we've just got to say, okay, let's just get rid of these things because people are taking the risk without understanding the returns. And at the moment hybrids, so the thing with hybrids is they are a floating rate though. So if interest rates get cut, they will get cut as well. So you saw, if you take that back to that 21, 22 period where you can see this green line, which is the bank bill swap rate, which is what these things are priced off, goes to zero. And then you're getting a spread of two and a half to 3% above that. So you're basically getting a 3% return on your hybrid. And so, and that comes through quickly. Like, whereas I buy a government bond, say we spoke about that 20 year or 30 year bond where you can get a 5% return on that. You buy that today, interest rates fall to 0%. I don't care. I'm still getting that $5, that 5% return. Like that is coming through for the next 20, 30 years. That's locked in. These hybrid is not the case. So you might pick up an 8% yield today and you get paid that for a half a year and then you're getting paid a 7% return. And next thing you know, you have your problems in the sector and the yields start blowing out. Now I'm getting a, yeah, 4% return. So yeah, hybrids, interesting, but, and the yields, the headline yields look attractive, but yeah, you're taking a lot of risk at this point in the cycle. And you basically got to, yeah, basically have a view that there's nothing's, nothing's going to go wrong with companies that you're concerned about over the time frame. And I'm sorry, the other risk is sometimes there's some, like they are going to get bought back. Sometimes there's some risks around that just in terms of what, how they get bought back and at what rate, how that happens. So yeah, there's sort of, there's a little bit more buyable there, who knows. Right, the other thing I wanted to then focus on is stock yields. So Australia's yields are much higher than the rest of the world. So if you took a world, you get about 1.8% return at the moment across everything. In Australia, it's more like three and a half. And there's some banking credits as well that get thrown into the Australian one. Once you take into account buybacks, that sort of goes away a lot. So there's this part where, look, money is actually coming out a lot of these, especially the US companies. You basically, the deal you're getting with a lot of US companies is, versus an Australian company, which is paying out a similar, might be paying out a similar amount. In Australia, it's like, okay, we're going to give you back 4%. You bought this thing for $100. We're going to give you back $4 every year, growing at some rate. And we're going to pay that all out as a dividend. And, well, you might get three and a half of it as a dividend and the rest of it is a tax credit as a bank credit. So you end up with 4%. Whereas the US companies quite often saying, you know what, I'll give you 1% back. So I'll give you a dollar back every year and that'll grow it above inflation probably. And look at that. But I'm going to give you another $3. I'm going to give you 3% more of the company that you own because they're going to buy back all 3% of the other shareholders. And so every year you're going to own 3% more of this company. And so the company is going to be worth 3% more. And so, you know, in a big picture sense, you know, especially from a tax perspective, doing it the American way, it often ends up far better because you don't have to pay those capital gains. You just own every year own 3% more of the company because they've been bought out. And so my stock price goes up 3% more than what it would have otherwise done. And I don't pay tax on that until I sell it. The other thing I do want to highlight though, is that when you go sector by sector around, that's what I'm showing at the moment is equity yields on the world versus Australia, is that you often find the yields are pretty good in a lot of these other global sectors. They're actually not that different. And where I'm getting to with this is a lot of what you get out of Australia is really just sector-based. So in Australia, you get lots of resources, which that's under the material sector here. You get a reasonable amount of energy, which you can see there, and you get lots of financials, heaps more financials than what you get globally. And so, yes, you get a higher yield in Australia, but actually most of the higher yield is just because of the sectors you've chosen. And so, yeah, so if you sort of went through, you know, a lot of these other ones and said, okay, well, actually I'm going to pick out and say global real estate, I might end up with a higher yield if I'm buying global real estate rather than Australian real estate. You know, I'm buying, if I'm buying healthcare, you know, healthcare stocks globally, I'm getting a higher yield in Australia. I'm buying, you know, whatever it is, consumer staples or financials is actually not that different. Well, sorry, it's a little bit different, but it's not dramatically different that you're getting. It's just a question of how much you're going to buy internationally versus Australia. So, yeah, so there's definitely a sector weighting issue. And yeah, we run a few income sort of focus portfolios that just give you high yields on these as well. So that's one part. The other part then is, oh, sorry, the other thing I wanted to sort of talk about is saying, well, so based on these yields, if you wanted to have like an infinite portfolio in the sense that you want to live off whatever's coming off your portfolio, and you want the rest of the capital to grow. So you just don't want to, you don't want to dip into that capital at all. What's your, you know, what would it look like as a retirement strategy? And so I've got the, up on here is a comfortable retirement strategy. This is based on the AFSA numbers for a single or for a couple. Now, the lowest risk where you can do this is through inflation-linked bonds. So you can say, yep, I'm just going to lock myself into inflation-linked bonds. You're going to need the most amount of money for it. So as a single, you need about three and a half million. As a couple, you need about 5 million. But you can stick that in inflation-linked bonds. You'll make that the dollars that AFSA says you need for a comfortable retirement. And you can forget about it, you know, that they've locked into a government inflation-linked and the capital is going up and you're getting your income you need and off you go. If you then step down and said, well, what if I just wanted an all-international share portfolio? Now you need about 2.9 million for a single and about 4.1 for a couple. We'll put you in that same spot. You live off the dividends of an international portfolio. And chances are it's going to perform better in terms of capital. And so your capital is going to be going up at a greater rate. If you're happy just to stick that all in Australia, you need about 1.6 for a single and 2.2 million for a couple. Invested in the portfolio, you take your dividends and yeah, I've got slightly more concerns over that one just in terms of a sector concentration and all these other things. But yeah, that's the sort of levels you need. And if you said, well, look, let's take a 60-40 portfolio where I've got 60% equities and 40% cash and bonds, you sort of need roughly those same numbers to then say, you live off that, you never need to dip into your savings because your income is giving you what you want. So yeah, I think those numbers are worth thinking about in terms of if it's something you're targeting and I guess understanding where the levels are that you can sort of lock in. The levels for below that, it then drops off quite quickly. So that might sound scary to a lot of people in terms of, oh, do I need that? I really need that much money to have a comfortable portfolio and what are the downsides? On the other side is, okay, you can start eating into your savings, obviously. So this is like an infinite, you're just living off, you're not dipping into capital. Once you start dipping into your capital, that sort of cushions it and so you need a lot less money in order to sort of hit those targets. And if you're worried about, and the other thing is, once you start dipping too much below this is there's also pensions, government pensions and things like that tipping at the other side. So while these numbers might seem high for some, is that there are lots of safety nets that sort of sit below that. Right, so hopefully that gives you a bit of an overview of where we're sitting with the income portfolios, what you sort of need in terms of those and I guess where you can look to for yield. I think the thing for me is, from an investment point of view, what we're looking at is, if you are concerned about those interest rates falling and you've got income components that you need, then locking in some of the bonds is well worth looking at. If you don't need the capital, you just wanna lock in that return, then inflation and bonds I think are attractive and there's some other, there's certainly a lot of tax implications that we sort of ran through, but yeah, very much I would be pointing people towards, looking at some of the bond portfolios and steering away from having massive amounts of private credit or massive amounts of government, sorry, corporate bonds at the moment, the returns just relative to how they've been in history just really aren't that high relative to the risk that you're taking. So yes, I'd be certainly going for a safer type of portfolio at that end and maybe mixing in some equities if you're concerned about adding some extra risk and return into the portfolio. Thanks everyone for listening. Just a reminder, we're on every Thursday, 12.30. If you've got any questions, pop them in the chat and look forward to seeing everyone again next week. Thanks.