The Purposeful Investor

Dusting off the Crystal Ball to Understand Investing in 2026

• Aden Wilkins & David Andrew • Season 3 • Episode 1

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Markets never move in straight lines and 2025 proved it once again. The first year of President Trump Mk II was always going to be interesting!

As we look to 2026, we dust off the crystal ball for a conversation about markets and investing. David Andrew and Nick Mengola join Aden to look back at markets in 2025 and look to the major trends to understand what might be in store for 2026.

AI sits centre stage for 2026. We explore capex surges, competitive shifts between OpenAI and Google, and how to hold measured exposure without betting the farm on AI. 

We discuss the returns of markets and market dimensions of large, value, small and profitability.

If you’re looking for a calm, evidence-led plan for a volatile year ahead, here's your road map: diversify across regions and factors, own enough high-quality bonds, rebalance, and be a prepared (rational) optimist. 

Share with a friend who needs a steadier strategy and leave a review to tell us how you’re positioning for 2026.

Show notes: 

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The Purposeful Investor Podcast is a public service provided for Australian investors wanting to make smart decisions with their money, avoid costly mistakes, look after the people they care about, and, have a great life!

We draw on over 30 years of experience from David Andrew and the Capital Partners team.

For more information on Capital Partners' award winning team, visit capital-partners.com.au.

Have a question? Email us ask@capital-partners.com.au.

This episode provides general advice only. We do not consider your personal circumstances when we share this information. Always refer to your financial adviser for advice about your personal circumstances.

Capital Partners Consulting Pty Ltd AFSL 227148 trading as Capital Partners Private Wealth Advisers ABN 27 086 670 788.

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SPEAKER_00:

Hello and welcome to the Purposeful Investor Podcast. I'm your host, Aidan Wilkins. Join us as we delve into what it takes to make smart financial decisions, provide for the people you care about, and uncover what it means to be living your best life. Follow and subscribe so you never miss an episode. Thanks for joining us on another episode of the Purposeful Investor Podcast. We are back in the studio for 2026, and we thought, what better way to do that than to dust off the crystal ball that's sitting in the corner here and take a look at what we think is in store for markets, the world, and just broadly around everything. What does 2026 have in store for us? To join me in this discussion, I've got Capital Partners founder, David Andrew. David, welcome to the podcast. Thanks, Aiden. And our investment coordinator, Nick Mengola. Nick, welcome to the studio. Thanks for having me, Aiden. As our listeners know, we start off the podcast with our little win of the week. So, Nick, why don't you start us off? What was your little win that you can reflect back on?

SPEAKER_03:

I'm gonna go really little, but I've recently started tracking my sleep scores and I got a hundred the other day. A hundred sleep score, I'm very happy with it.

SPEAKER_00:

What does a hundred mean?

SPEAKER_03:

Uh it's the perfect sleep.

SPEAKER_01:

So you're good at sleeping. I'm great at it. When are you gonna start working on some other stuff? After my next sleep. How do you track your sleep score? How does that work?

SPEAKER_03:

Uh Apple Watch. Most fitness watches do it, but they they track your like your deep sleep, your REM times awaking through the night and total hours slept. Eight hours and 15 minutes of a hundred.

SPEAKER_00:

And so I will give it to you, Nick. You're always across the numbers. What about you, Dave? What was your little win?

SPEAKER_01:

Summer's a special time for us because you know we spend quite a lot of time down here. We've got a little orchard talking about that little weekender. Summer's a really nice time because it's when we get all the stone fruit. And so we get apricots and plums and nectarines, and then there's the veggies, you get tomatoes and all sorts of good stuff. And because we're growing it ourselves, we've got space to grow it. It actually tastes like the fruit that I used to enjoy in my childhood. Eating apricots straight off the tree is such a special treat. No cold store, no nothing. It's just, you know, you've just got to fight with the rats to get them before they do when they're really right. But yeah, it's just one of life's small pleasures.

SPEAKER_00:

Yeah, sometimes they're the best, right? Um so mine's a mine's a little win as well. And it's uh it happened over the course of the break, so and I guess a little bit before. But recently I've had a few university students just reach out, they've either come in contact through the work we do with Curtin University or even one one or two had heard the podcast, but just reached out to catch up for a coffee to give them a little bit of career guidance or what they should be thinking about. And I I really enjoy it just because there's so many people that put in that time and effort to me when I was looking back, say 10, 15 years ago, and it's nice to actually be able to start paying some of that forward, and um particularly when you've got people that are just curious, full of questions and yeah, genuinely want to move forward in life. So that's been a good little win. Good for you. That's awesome. So to the topic at hand, so we're gonna be looking at what does 2026 have in store for us, and I think in order to do that, sometimes it's nice to look back and reflect on the year that was, so 2025, and we're gonna go through essentially what were some of the key themes, what actually happened, what happened in markets, and what what made the most noise over this period. So if we're looking back over the past year, what actually happened?

SPEAKER_01:

I'm happy to lead off with that if you like, because um when we were sitting here a year ago, we were just contemplating the first year of another Trump presidency, and that just feels so so so so long ago. And um we knew it was gonna be topsy turvy, we knew it was gonna be turbulent. And with everything that's been going on in the last sort of week or so with the Venezuela craziness and all the rest of it, we can I think we can bag the fact that 26 is gonna be turbulent too. But I just I'm gonna use the US US uh market as our proxy for this because the S P 500 index represents the top 500 stocks in the United States, you know. So all the names we know, you know, the the big global brands and some more. But the the S P 500 index rose almost uh 18% in 2025. 46 new all-time highs throughout the year. And people get really fancy about when the market reaches an all-time high. They say, oh, gee, the market's at an all-time high is at the time I should be selling. When you think about what the stock market is, it's a it's a value creation machine, it's a it's a it's the um commercialization of human ingenuity, essentially. Of course it's gonna be reaching all-time highs most of the time. It's gonna have the occasional hiccup, yes. So that was a pretty amazing outcome, almost 18%. Um, but it actually doesn't capture the experience that we had during the year. Um so some of the headlines were crazy. Um and some of the news uh sort of feeding into noise, you know, voices and choices and noise and feeding into uh investor uncertainty and anxiety were quite amazing. You know, between February and April the S P 500 index fell almost 19%. Um and on the April 7th, it briefly went into sort of bear market territory because it was down 21%. So I'm just saying this to remind all of our listeners that you can have a year, calendar year 2025, for the S P 500 index, where it rose by almost 18%, but within that year, we had periods where it was down by 21%.

SPEAKER_03:

And I so if you I think just on uh not only on a money side, in terms of a mood side, uh we've had such big swings in it as well, in the fact that in January, I think the number one question we were getting asked is should we have more invested in the US? Because everyone was excited about a second Trump to term. And Trump is pro-business, and so everyone was really, really excited about the US. And yeah, number one question from clients should we have more there? And then obviously April rolls around and the question reverses, and it's should we have less in the US? Um, and David, to your point, on that day where they paused on tariffs, it jumped by 10% that day. So crazy swing there. And then we almost had another mood event um towards the back end of the year around AI. Everyone got really nervous about Nvidia's earnings and the mood really, I don't know, shifted. It felt quite pessimistic about the AI bubble again. And then Nvidia, as they've done for the last eight years, um, they hit their earnings targets andor beat their earnings target and the market moved on again. And so the not just has it been tumultuous in terms of returns, it's been the mood has been tumultuous as well. And so there's been a lot of emotions.

SPEAKER_01:

Well, we also had a really relatively long government shutdown in the United States. Um, you know, that probably doesn't affect us here very much.

SPEAKER_00:

Uh, can I jump in there? Sorry, Dave, just a quick story. Yeah, yeah. It does when I was in the United States with a friend, it does affect us because he was trying to get a flight back to Charlotte. Oh, I know. And it got delayed by eight hours because of all the shutdowns.

SPEAKER_01:

So yeah, right.

SPEAKER_00:

So yeah, but it obviously all's been resolved now.

SPEAKER_01:

Yeah. But but I what I wanted to draw out here was I've got this amazing graph in front of me from Avantis Investors. You know, what investors can learn from 2025 market trends. And oh, geez, I don't know, fellas, it's probably got a hundred different events that happened during the year from um you know Trump's inauguration in late January through to his, you know, um Liberation Day tariffs, then his reversal of the Liberation Day tariffs on everyone for 90 days except China. Um and then so the shutdown happens, and then when the shutdown finishes, so Senate passes the spending bill ending the government shutdown, and the market fell again. What's that about? Like seriously, pick the trend in that.

SPEAKER_00:

So as we've yeah, as we've talked about, there's if you look at the end-of-year result, plus 18% in the US share market, really, really strong markets, really good result. But like we said, you had to sort of live through that volatility during the period, particularly in April and March. And I think what um quite often investors and people generally forget is when all that of uncertainty is you're going through it, it's really, really hard to be rational. And so there's lots of times when nervy investors might reach out at that point because you don't know when the bottom is. And I think this year has been another really, really good example of why we don't try and play the crystal ball game. Because who would have been able to sit here and say all of this would have occurred throughout the year and would be staring at an 18% return for US share market?

SPEAKER_03:

And corrections like this happen all the time in the sense that you know, 5% we have a few times a year, 10% correction we have uh on average once a year, and then uh 15 and 20% is every few years. And so a 20% correction is um like we had in April, best part of, is not uncommon. Like it's part and parcel with being invested in equities and getting those long-term returns.

SPEAKER_00:

So going to the going to the figures, Nick, what what did that actually look like? So we talked a lot about the US share market and the SP 500, but as our listeners know, we're really diversified evidence-based investors here. But let's give it a little bit more colour to what happened around other sectors and asset classes in 2025.

SPEAKER_03:

Yeah, sure. So uh in Australia, the um ASX 300 returned about 11% for the year, 10.6. And the um the dimensional, the value and small strategy version of that and profitability, that returned about 16% for the one year. So it was a fantastic year for that strategy um last year.

SPEAKER_01:

Hang on, hang on, slow down. So so you're saying the ASX 200 index returned 11%, did you say?

SPEAKER_03:

Yeah, ASX 300, but yeah.

SPEAKER_01:

And then our strategy with the the essentially the broadly diversified ASX 300 at its core, then tilt to value small and profitability returned how much?

SPEAKER_03:

16.3.

SPEAKER_01:

Okay, so let's just pause on that. Let's not gloss over that. This is one of those moments in time where a systematic strategy is so much more valuable than an index strategy. Like that is 5% outperformance. And I I know it's only one year, and I I'm not claiming any fame or expertise around this, but I don't think we can gloss over that. This is this is a critical reminder of the difference between a systematic strategy and uh an index strategy. You know, there are there are periods where we we have underperformance, yes, but it's generally marginal. Um, but then there are periods where we have significant outperformance, which is which is the harnessing of the small smaller company premium. Smaller companies are really hard to invest in. So when it's done, when it's done systematically and well, the benefits can be enormous, especially small value. Then you look at the profitability factor, and I suspect the profitability factor will have been a really strong driver over the last 12 months, Nick.

SPEAKER_03:

Yeah, profitability and value. Small, small was um, it was positive, but it was like pretty much uneven, on par. It was the value and profitability that really drove that. And so some of the it was more being underweight, some of the things like CSL. Like CSL is down 40 odd percent this year, um, and dimensional because of their positioning is underweight that. And so there's a lot of um um, it's not just what you do invest in, it's what you don't invest in that can um lead to those returns. And so, yeah, a great year um in the Australian strategy. Um internationally, uh so this, so US we've talked about about 18%. Internationally, uh the um market weighted was about 18.5%. So the um that's the non um non-value small profitability strategy. The profitability small, the dimensional strategy is about 17% or the um approach we follow. And then um emerging markets had a great year. So emerging markets um returned about, depending on um what you just look at with hedging, about 25, 24%. And so it was a it was a really good year for emerging markets. What what caused that? Uh pretty much all of the big um big exposures. So China, Taiwan, Korea, India, India not so much, but the other three really had awesome years. So Korea was up um 100% per year. Um Taiwan was up, uh I've got the numbers here. I've lost it though. Um Taiwan was up 40%, China was up 30%, India was up 3%. Um a lot of that's tech. So Taiwan obviously heavily in the tech sector. Korea's got a good semiconductor industry. Um, and so um they had some wins there, and China um again, a bit of belief in their AI and tech sector, um, led to all three of those, which are the so China's number one largest holding, Taiwan's two, India three, Korea four, and all of them just had um extraordinary years. And obviously the US dollar depreciating also helps them. Um, and so they um across the board, emerging markets has had yeah, a great year. Um, and it's a it's a good, you know, emerging markets the last 10 years has kind of lagged as some of the um as some of the mega mega countries um or sorry, the mega companies dominated. So, you know, we've talked a lot about the Mag 7. They've done incredibly well with the last um 10 years, and emerging markets have kind of lagged a bit of the developed markets, and so it's good to see them um kind of return. And it's a bit of a reminder of the benefits of diversification, and you can't um just follow the US, which is um what we started to hear a bit 2022, 2023.

SPEAKER_01:

I think um that is a good reminder, Nick. Um, many people have said to me, well, you know, you don't really have a large allocation of my portfolio in emerging markets. And that is true because they are riskier. And then on top of that, you go through so so does it matter? Does it really contribute anything? And then you look at it again from a different angle, and it's well, you know, the emerging markets have underperformed by a reasonable margin for a period of time. And one of the things that investors don't see is the diversification effect. So whilst whilst the market might underperform relative to another market, it's the interrelatedness of the way those two sub asset classes work together that often creates enormous value. And so I'll give an example that's related. You know, the value premium can underperform for a very, very long period of time. But when you combine it with the profitability premium, it very rarely lets you down. So it's quite interesting that that the interoperability and the the the correlation between those asset classes makes makes a real difference.

SPEAKER_03:

Yeah. Um, if you wanted to nerd out, it's the covariance, but um that's it.

SPEAKER_01:

It's the it's the that's why you have that's why you have your job and I have mine.

SPEAKER_03:

You explain it, I think about it. Um the only other uh asset classes that I'll mention are bonds. So bonds uh over the last 12 months are up about 4.6%, which is a good year, and it and starting to see bonds return closer to long-term averages. Um and bonds, it's probably uh worth touching on because if you look at the longer-term figures, because of what happened in 2022 with interest rates rising, so suddenly long-term bond returns do look relatively low. So looking at uh at the global ag index, which is a pretty standard bond index for um retail investors, that has averaged about 2% a year for the last 10 years, which people are looking at that, they're thinking they're comparing it to cash and they're thinking, why bother? Like, why should I have that in my portfolio? 2%, I can do better in cash. And that, while that has been true over the last, like I said, 10 years, it's only because of the correction in 2022. And when you take longer time horizons, so I went back to um 1970 to get a longer picture because all of our short-term figures are so heavily tainted by what happened in 2022. Um, and while we're not ignoring it, it it if you focus too much on short-term figures and 10 years can actually be short-term figures, it um you almost forget why you have them in the portfolio. And so looking at longer-term numbers, about six percent is closer to average and compared to cash, cash is closer to four. And so there's still a material premium on average in having long-term bonds in your portfolio, and it's about one to two percent over long-term average. And so, while yes, in recent times it hasn't worked out perfectly, there's still a good basis to have bonds in the portfolio, and they also serve other purposes, but on a return seeking of say bonds versus cash, we still have good conviction that you should continue to hold bonds in your portfolio.

SPEAKER_01:

Before we move on from the sort of review of the asset classes looking backwards for 2025, can I shine a light on something that I find fascinating? Um, all of our listeners who take any interest in the sort of financial and economic press will have been fed. I don't know what they've actually consumed, I don't know what they've heard, but what they've been fed is a diet of it's all about the US and it's all about the Magnificent Seven. Right. But what very few people are talking about is it's actually the share markets outside of. The US that stole the show in 2025. So whilst we're talking, we started the podcast talking about US stocks, the SP 500, returning almost 18%, non-US stocks, so all the rest of the world, excluding the USA, return 32.4%. So when you hear Europe is dead, European economy is dead, Japan is a basket case, blah, blah, blah, all of those things. Just remember you're going to have a period like 2025 where non-US stocks can perform really strongly. And generally speaking, and this is very, a very basic way to put it, when a market has had a really hard time, rather than thinking, oh gee, should I be getting out of that market, it has had past tense a really hard time. What investors should really be thinking is wow, that market that's had a really hard time now has a higher expected return in the future. And and this is a great example. The relative outperformance was partly emerging markets, but you know, just very, very powerful performance. And I guess another reminder, Nick, of why we just keep focusing people's attention on having a diversified portfolio. Because coming back to the crystal ball idea, we we don't have any idea which asset classes are going to perform best for 2026.

SPEAKER_03:

And not only is there the um, you know, there's almost two parts in portfolio management, there's return seeking and there's protection, and there's downside protection. And if you look at the world, and I'm skipping a bit, I'm screwing up your agenda, sorry, Aiden, but looking to 2026, um, if there was a, you know, it's been in the headlines, is there an AI bubble? We're not predicting that there's an AI bubble or saying that there's going to be a crash. But if there hypothetically was, where is that likely to be centered? And so having exposures to economies that aren't so AI centric, like you could argue the US is, not only does it have return potential like it did this year or return benefits, it also has downside protection. Like if you look at the 2000s and the tech rec, Australia versus the US, in terms of how they performed, performed vastly differently because our country, our stock market is so heavily weighted to banks and mining that we didn't feel it nearly as much as um as the US. And so there's yeah, like we've been talking about, there's returns and there's also just protection because you have exposures to different industries and different markets. Um, and some of that 32 is currency returns as well. But uh, it's uh um the put the reminder of diversification or 2025. If you could um give if you could pick a hypothetical perfect year to remind you of the benefits of diversification and not trying to pick it, I think 2020 is that year.

SPEAKER_00:

And I'm yeah, I'm glad you mentioned that, Nick, and also sort of talks to the point of one of our most important roles as advisors is um the allocation of capital and determining where it should be allocated and but also protecting the downside risk as part of that allocation of capital. And we talk a lot about, um, Dave, you you we've talked a lot a lot about having that critical capital um set aside in a really diversified way and making sure that it's there so that it doesn't let you down. So when we're building portfolios or advising clients, we are not seeking the new shiny thing and we're not seeking returns. We want to make sure that based on what you want to achieve, we've got the capital allocated in a way that adequately protects the downside risk and also gives you the best possible possibility of achieving long-term returns, good sustainable long-term returns. And I emphasize sustainable because every asset class has their day in the sun, as we've seen with gold this year. Up 53%.

SPEAKER_01:

Yeah, gold's a great example because we talk about our methodology of portfolio layering, where we have our critical capital layer, our emotional capital layer, and then our entrepreneurial capital layer. So let's just remind our listeners what we're talking about there. Critical capital layer is the is the layer that as you build it and as you maintain it later on in life, it ensures that you will never be poor. Your emotional capital layer has a completely dis different decision-making matrix around it because it is it is the layer around making decisions around money that probably make no sense. Right? Should I buy a holiday house? Should I buy a boat? Um, should I help my kids financially? Should I help my parents financially? If all you cared about was financial return, you would not make those decisions. Financially, they probably make no sense. In terms of living a wealthy, rich life, they make a hell of a lot of sense. You want to make sure you do that. And then the final is the entrepreneurial capital layer, whereas you might lose a lot, you might win a lot, you might lose a lot. So, you know, your your business, if you're a business owner, your business owner equity is is part of your entrepreneurial capital layer. And it's just a great reminder, I think, for us to remind our listeners that we have to remember what game we're playing. So I had, I'm getting to a point here. I had I had a conversation with someone over the Christmas break, my age, said, Oh my god, the run in gold. What did you say, Nick? 57%?

SPEAKER_03:

53%.

SPEAKER_01:

Should I be investing in gold? I I wanted to slap this guy. Seriously, I wanted to slap him. And because gold as an invest, and I don't gold isn't really an investment, it's a commodity, but as let's call it an investment for the minute, it's got to have about the lowest expected return of any asset class going forward.

SPEAKER_03:

Well, it should theoretically not know, because it has some uses, but there is no value to it other than what someone else will pay for pay for it in terms of other than in occasional tech uses and jewellery. It's um no income, no productive capabilities. Yeah.

SPEAKER_01:

Yeah. So so again, just keep we're just gonna keep driving this home. When an asset class has done really, really well, it has a lower expected return in the future. Now that is also true. You know, we're talking here, I don't want to be inconsistent. You know, the markets have done really, really well in 2025, so they probably have a lower expected return next year than they would have done if they'd had a really crappy year in 2025. And that's the reality. But we need people to stay strapped in. We need people to stay in their seats, keep rebalancing. And the biggest, the biggest mistake any investor can make is fear-based, fear-based capitulation, where they sell when they're feeling fearful.

SPEAKER_00:

And there you go. I was gonna say that's a really good frame up for the 2026 because uh rightfully so. A lot of the questions we're getting, or at least I'm getting, is we've had three really good years on equity markets. So when's it gonna turn or is it gonna turn? What should I be doing differently? And so what would your counsel be to people that are saying that, Nick?

SPEAKER_03:

Well, I mean, I think that um the ultimate way to be to be successful in markets is to be a prepared optimist. And that's to um markets, we don't know when corrections are going to happen. We know that they will happen, we don't know when. And just because we've had a good few years doesn't necessarily mean that next year is going to be bad. So I've got um some numbers here, and the median S P 500 return after a more than 10% gain, the median return next year is 11.4. The median return after a 15% gain is 13, and the median return after a 20% return is 11.4. So, regardless of how positive last year it is, it doesn't necessarily imply that um next year is going to be bad. And so just because we've had good years doesn't imply that um we're gonna have a bad year coming. And because we can't predict when they're gonna come, the best way to approach it is to continue to be invested, be smart about it. So you make sure you have enough in your defensive assets, you've got cash, you're not taking on risks that you can't sustain through market downturns. But then once you've got that sorted out and you're appropriately prepared, then just trust that the market's, you know, it's gonna be volatile, there's gonna be bumps, but over the long term it's gonna work. And so that's what I'd continue to recommend in 2026, despite the great few years we've had in the last five, 10 years.

SPEAKER_01:

I think it takes a lot of the emotional burden out of us worrying about, oh my God, I've got this portfolio of stocks. No, you don't. You have a portfolio of really high-quality operating companies that have suffered a temporary setback based on the trading emotions of investors. You do not have to buy into that narrative.

SPEAKER_00:

So the world events, so looking to 2026, the one that I definitely want to start with is Venezuela, Trump, the US, what's going on there. Ignoring anything humanitarian related or potentially political, what what are events like this, what does that mean for investors and what does that mean for markets when we're looking at it over the next 12 months and what's what might play out?

SPEAKER_03:

I'd have to dust off my crystal ball. Um, I mean, in terms of uh geopolitical conflicts in the past, um, I mean, as recent as what, 2022 was uh was a good example in terms of we had the um we had Russia invade Ukraine and the conflict in the Middle East, and um other than a temporary spike in oil, it pretty much didn't move the needle at all. Now, obviously the US is involved in here, and so it's a bigger market, and so there's bigger implications. But how does this play out? Like, I almost don't want to answer it directly to the Venezuela conflict because if you look at um, and we're using a story we've told before, but if you look flashback to 2020 and you predicted what's gonna happen in the next five years, you might have predicted and you successfully predicted what is actually gonna happen in the world, and that's you know, COVID and the deaths of um so many people, the shutdowns of borders, inflation spikes, interest rate spikes, the geopolitic political events we talked about, you successfully predicted everything that was gonna happen. You're probably pretty pessimistic about what happens in equity markets, and then what's happened since then? Equity markets have averaged well over 12, they're about 15% since then. And so, even if you can successfully predict, you're one of the few people that has a crystal ball that can predict what happens next geopolitically, what does it do for equity markets? That's a that's a second question, and that's even harder to answer. And so um, where does it play? I don't know, I'm not sure.

SPEAKER_01:

Yeah, look, I I think they're such big questions. The um, you know, people seem to be getting excited about an end to the Russia-Ukraine conflict. Um, it would appear to me that uh Putin has no interest in ending that conflict. So if that's true, then the conflict won't end. How how Europe responds to that in terms of continuing to fund the poor Ukrainians is is another matter entirely. Um another really good reminder for our listeners is irrespective of what's going on in the economy, the markets, and the world, we're never going to be able to know what the trigger is going to be for a market sell-off. I think I think an overarching concern that we were on a call to a fellow in Chicago this morning, Nick, and um he was just saying, Well, what's going on in my country right now in terms of the Venezuela thing? He was just shaking his head in disbelief. And um, you know, we've still got three more years of a of a Trump presidency. And um I, you know, being in America recently, and you were too, Aidan, I think there is real concern about the undermining of uh democratic democratic institutions. Now it's those democratic institutions that support our economic system, you know, the rule of law, you know, confidence in the in the judicial system, confidence in um open and fair elections. And and so, you know, they these are really, really important things for us to uh to keep our eyes on. But the reality is that optimism is our only choice. You know, as humans, optimism is our only choice. Um, rational optimism, yes, be prepared for setbacks. Um yes, be rational about the fact that we all have to work hard to create economic value in order to be rewarded. There's no free lunch. These are all really rational decisions that we can make, and yet they're based in optimism. If I work hard and I create value for others, then chances are the world is going to reward me for that. And I and I think that's the issue with companies, you know, the the the markets, you know, um of the 10 most value, I think it's the 10 most valuable companies in the SP 500 index at the moment. Um none of them even existed in 1970. So irrespective of what happens in geopolitics, we as humans are going to continue to be inventive, to be value creators. And yeah, that I think that's all we can do is leave our leave our listeners with that sense of optimism about the future. But also, when things do go haywire, when things do go topsy turby, to remember you are acting on a plan.

SPEAKER_00:

And if I can add to that as well, I will give our listeners a reminder, particularly as it relates to geopolitical conflict and President Trump, is in April when we did have that really big pullback and also the bond markets started to wobble, that kicked him into action because he sees equity markets and the broader market as his scoreboard. And so when when the markets are saying, hey, we don't really like what you're doing, this isn't giving us a lot of confidence. That was what prompted him to kick the can down the road and tweak a few little things and actually react. So we don't know what's around the corner, we know it's going to be volatile, but I would say that that was a pretty clear indication that um that the markets do potentially sway the way that Trump works. So, what about anything else in 2026? So we talked a little bit about Nick, you mentioned that all these headlines saying, is there an AI bubble? What does that look like? We're seeing so much expenditure, capital expenditure in these companies in the AI space. But is there anything we need to worry about or what what do we need to be thinking about in that space?

SPEAKER_03:

Well, I think in terms of um looking forward to 2026, it'll be interesting to see what happens with OpenAI and ChatGBT. Um recently Google, and it's been actually an interesting um, or it's been a good reminder in the sense that 2023 Chat GPT um, or late 22, I think it was, ChatGBT is released. And all of a sudden, people are looking at Google like, okay, Google might be the one that gets hurt by this AI wave. And then all of a sudden, Google's just released Gemini 3, which is seemingly, I mean, ChatGBT has just issued a code red because they're nervous about Gemini taking market share away from them. And so it's been a big swing in that space. But looking at open AI, they've got$1.5 trillion worth of um cost commitments in the next um, I think I think that's to 2030, and their revenue last year was 20 billion. And so they um how they um how that plays out, how they monetize um the knock-on effects of them and uh their story in 2026, I think will be um one to watch. But in terms of what would I do about it, uh I actually really like the way the portfolios are positioned in terms of they uh still have exposure because you know, um, these companies, AI is a transformative technology. We don't know exactly where it's gonna land, we don't know exactly what its um uses are gonna be, but it is a transformative technology without a shadow of a doubt. So having an exposure to that is absolutely critical. And, you know, they've performed extremely well in recent years. Being a little bit underweight because they do seem a tiny bit um tiny bit expensive, I feel really comfortable with that. And so for our clients context to give some indication of their international exposure, about 16% is exposed to those big companies. But if you're in say 70% um growth assets, 30% defensive, um, and you include your Australian exposure and all that, it works out to be about 6% of the portfolio. So it feels like a measured bet in terms of you've got some exposure if they continue to do what they've done in recent times, but also 6% in terms of it, it's not going to completely blow up um your portfolio if there were to be um a bubble. And so um I think it's one to watch and it'll be interesting, and um, we don't know where it will go and who the winner will be, and whether it's one winner or as many winners, or if it the consumer's the end winner, which is probably most likely. But we feel well positioned in terms of enough exposure, but not so much that it could potentially um impact your ability to find your goals in the future.

SPEAKER_01:

Yeah. Yeah, I think that's wise, Nick. You know, if you think about what the market is, the market is a capital allocation machine. And so money is being a lot of money is being allocated to these big um tech companies at the moment, the AI companies. Not all of that money is being spent efficiently. So at some point there will be a reckoning. But what is being built is the infrastructure for the future of economics and our economy. Just as it was in the 1990s, early 2000s, the internet was a fad. I I I would I remember it well. You know, I was running a running a running a business and and the internet was seen as a fad. And then one day, you know, a computer, you guys, you guys will laugh at this. But before about 1992, I had never had a computer on my desk. If I wanted to write a document, I would handwrite it or dictate it and take it to the typing pool. And the ladies in the typing pool would type my letter and then give it back to me in written form. I would put it in an envelope and send it off to the recipient. So 1992 is not that long ago, right? And so there was lots of talk back then about oh, you know, this is a fan, and it's well, I don't know about you guys, but we get parcels arriving every other day because of e-commerce, because it's convenient to shop the boxing day sales from the couch in front of the cricket, than it is to go to the shops. Now, none of that could happen without the internet, and that will also be true of the AI transformation. And I think another thing that's really important for our investors and our clients to understand is that we are not underway. AI technology stocks because we think AI technology stocks are overvalued. We are naturally underweight because we take a systematic structured approach. Right. So they're doing exceptionally well at the moment. But because we have an exposure to value stocks, and because we have to have an exposure to smaller companies and profitability stocks, we naturally have to underweight our strategies naturally have to under underweight some of those market darlings. Now, in the short term, you might be leaving a little bit on the table, but that is just a fact. In the longer term, you're buying some insurance and the fact that, you know, there's very, very strong evidence that says that over the long term, profitability and value are going to outperform growth.

SPEAKER_03:

And we saw exactly that in the dot-com in the lead up to 2000, the um the pure index approach, which had you know market cap weights to those to the mega companies, the the most bubbly um of the of the tech companies, it did outperform. The the index outperformed the value of profitability in small approach because um it was taking that risk. But then when you go through that full cycle and um you go through the um proceeding correction, the outperformance completely reversed and it was meaningful. You went from uh about missing out on about a 1% per year on a 10-year basis to outperforming by about 3% a year on a 10-year basis. And so it's only through, so it's it's disproportionate the downside protection to um um or the potential losses or short-term losses to upside to downside protection.

SPEAKER_00:

I think that talks to that whole point of like part of our role is to make sure we're not just generating sustainable long-time returns, it's about downside protection. And you don't always see downside protection until it happens, right? You don't see it until you're going through the ringer.

SPEAKER_03:

And just last one on AI. Even if um, or if your concern is that there's not enough AI exposure, you might not have your um direct exposure in the companies that are um, you know, building the AI itself. But the knock-on effect of AI for other companies, like your exposure to AI is much broader than your exposure to Mag 7. Like, how many companies are gonna benefit from the tools that come out of AI? It's gonna be the whole ASX, it's gonna be the whole SP 500. And so your exposure to the AI trend is going to be felt in your whole portfolio. It's just that that specific cluster of people that are building it, it's gonna be boom and bust.

SPEAKER_00:

And absolutely, just quickly to round out as well, we don't probably don't have time to go into a lot of detail around this, but a couple of the other asset classes that we've discussed in previous podcasts, I think are in for an interesting 12 to 18 months. So we talked a bit about private credit and private debt and also private equity and what's going on in that space. And I know, Nick, when we did the private credit episode, what must have been a couple of months back, you talked about this term of these tourists and essentially what's going on there. But it'll be interesting to see how that plays out this year as well.

SPEAKER_03:

Absolutely. Um, and gold. I can't wait to see what happens with gold this year. Um, and I do, I'm sorry, I have uh you said we don't have long, but I'm gonna steal one minute. Um, I just wanna um I think there's a bit of a misconception around gold that gold never corrects, gold never crashes, it only ever goes up. I just wanted to flag to people that that is not true. Um and we have had uh in recent history three major corrections. So in 1980, um, it corrected by 65% and it took 30 years to recover. In 2015, sorry, 2011 to 2015, it fell by 45% and it took nine years to recover. And in 2020 to 2022, it fell by about 20% and it took three years to recover. And so it's I just wanted to flag that um it's not like a um a guaranteed bet, which is what I think people think it is, in that um it might not do as well as equities, but it's only ever going to go up. That's not true. It can go down, um, it can go down materially. And when you get what feels like we've had is FOMO at the end of a bit of a run, it it's a little bit concerning.

SPEAKER_00:

And so I'd be very um cautious in in gold this year. Wise counsel, as always. And so, as our listeners know, we love it when you send through questions to the podcast, and we'd really love it if even if you've got any questions yourself heading into 2026 regarding investments, financial planning, or any other matters. We'd love it if you could send it through to the podcast email, ask at capital-partners.com.au, or my um work email address. We love it when you share the podcast with a friend, family member, someone in your network, um, and make sure that you keep subscribing so you never miss an episode. David and Nick, thanks for joining me. Always a pleasure. Thanks for having me, Aiden. Thanks for joining us on the Purposeful Investor Podcast. We love being able to share our insight and guidance. If you've enjoyed today's episode, make sure that you subscribe, leave a review, and share it with someone in your community. We encourage all of our listeners to share their questions and ideas that they would like to know more on. You can contact us at ask at capital.com.au. All information in this podcast is general in nature and does not take into account your personal situation or circumstances. Capital Partners Private Wealth operates under the Australian Financial Services Licence 227-148. Thanks and see you next time.

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