When does market volatility matter to your portfolio?

Emmal Wall  |  18/05/2016Text size  Decrease  Increase  |  

Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Morningstar Investment Management's Dan Kemp.

Hello Dan.

Dan Kemp: Hello Emma.

Wall: So we've had extreme volatility in markets over the past 18 months. And a lot of people are very nervous about this and nervous about what this means for their portfolios. But it doesn't necessarily mean that portfolio is experiencing more risk, does it?

Kemp: No, that's absolutely right. So volatility is a statistical measure it's not what we think about, when we think about risk. It is a relevant measure for some people. People need to be able to cope with the day-to-day volatility to stay invested for the long term. It's particularly important if you are drawing an income from your investments after a time.

But it's not the main measure of risk. The main measure of risk is permanent loss of capital--is that money going somewhere where you are never going to get it back and that's what we think about in the investment management team.

Wall: Of course this ties in with a lot's of people's feelings about benchmarks as well. Because fund managers can turn around and say, "But I beat the benchmark" and the investor might turn around and go, "But you lost 20 per cent of my money and I wanted to take it out at that point". It's all about as you say when you are going to capitalise or crystalise rather those losses and real loss of money is of course risk.

Kemp: Absolutely right. And volatility again tends to be that sort of shorter-term measure. You get caught by volatility. But really if you are a long-term investor, if you are saving for your long-term retirement then you need to embrace volatility because that's when the real opportunities come along. Volatility allows you to buy things cheaply and that's what we all want to do in investment.

Wall: But, it's easier said than done isn't, because market timing is famously difficult to do. So how can investors use this knowledge that volatility is an opportunity and not a risk in order to maximise their returns?

Kemp: Well, there are few things that people can do. The first is again to maintain that long-term perspective, provided they are long-term investors and be able to look through this volatility. The second is make sure that the portfolio that you are investing is at right level of risk for you in the starting place. And then finally don't try and time the market--very few people if anyone can do it, but gradually investor over a long period of time again to capture the benefits of what we call pound cost averaging.

Wall: And this of course can be done through an advisor if perhaps you want to take the responsibility away from yourself, or indeed from drip feeding if you invest 50 pounds a month every month and it's taken out of your hands. You automatically are going to be buying units when the market dips. And of course those units can grow as the market picks up again.

Kemp: That's absolutely right and so there if you are buying over a long period of time you are doing it regularly, it's a part of your routine then that's by far the best way of investing.

Wall: And it's one of the philosophies that we have here at Morningstar as well with the Morningstar Investment Management team, isn't it?

Kemp: Exactly right--we are all long-term, value guys. We get strangely excited when the market falls because it gives us a great opportunity to buy things more cheaply. Equally when markets rise very strongly, we get slightly sad because we have to sell things that have become overpriced. But again we are always focused on what's going to happen over the long term--where we are going to get the best returns and try and ignore that day-to-day noise, that day-to-day market volatility as much as we can.

Wall: And putting the end investor first.

Kemp: We always put the end investor first.

Wall: Dan thank you very much.

Kemp: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

Video Archive...

Earnings season wrap: Telstra feels competitive heat
17/02/2017  As the 1H17 earnings season rolls on, Wesfarmers posts a bumper profit, Newcrest restores its interim dividend, while Telstra's profit falls as it feels the heat of intense competition.
Earnings season wrap: Rio Tinto's dividend surprises
10/02/2017  Rio Tinto delivers a surprise full-year payout of US$1.70, NAB records a soft first quarter, and CIMIC posts an annual net profit in line with Morningstar's expectations.
Leveraging the opportunity of international students
07/02/2017  Co-founder and CEO of Navitas, Rod Jones, explains the firm's business model, which is built largely around international students and university partnerships.
Xero CFO gives outlook for 2017 and beyond
02/02/2017  Sankar Narayan, chief operating and financial officer of accounting software firm Xero gives his insights on the company's business model and outlook, with Morningstar analyst Gareth James adding his views
Asia growth engine not threatened by Trump, says Barings
30/01/2017  Long-term investors in China and wider Asian equities should not worry about President Trump, says Barings head of Asian equities Hjung Jin Lee.
Shifting fortunes for ANZ, more of the same for CBA in 2017
12/01/2017  Australian banks are well-positioned as they head into 2017, with ANZ moving from least profitable in 2016 to become one of the sector's top performers and CBA remaining an investor favourite.
Is Trump a threat to emerging markets?
12/01/2017  Is President Donald Trump a threat to emerging market returns? Paul Jackson from the UK-based Source ETF considers the outlook for sector and where investors can find the best opportunities.
Platinum, Aussie banks and Peter Warnes among top interviews of 2016
22/12/2016  We look back on some of our most notable interviews of the year, as Morningstar analysts and external experts helped us delve into some of the biggest events that shaped Australian and global markets in 2016.
Oil price finds sweet spot, while mining hits rock bottom
20/12/2016  The rise in oil prices should see improved performances from Australian producers in 2017, while mining services companies will continue to struggle amid weaker Chinese demand, says Morningstar equity analyst Mark Taylor.
How Greek mythology can make you a better investor
07/12/2016  Don't be over confident or follow the herd, and like Odysseus, learn to have yourself "tied to the mast" when it comes to long-term investing.
Supermarket headwinds prompt fair value cut for majors
06/12/2016  Growing competitive pressures and a declining revenue outlook for Australia's two grocery giants now look to be part of a longer-term, structural shift.
What returns should you expect from markets?
01/12/2016  As market risks rise, investors must adjust their profit expectations--gone are the days of 8 per cent returns. But there are still growth opportunities out there if you know where to look.
Why healthcare stocks got a bump from Trump
28/11/2016  Australian healthcare and pharmaceutical companies continue to enjoy a purple patch, and for various reasons including the recent US election result, explains Morningstar's healthcare equities analyst Chris Kallos.
Equity and hybrid investors react as bond prices tumble
24/11/2016  The negative correlation between bonds and equities is reasserting itself following the US election of Donald Trump, according to John Likos, Morningstar's senior credit analyst.
2 global themes that are finding favour among ETF investors
15/11/2016  Australian retail investors are increasingly turning to ETFs for specific tactical exposures to global themes, particularly in the context of large-scale market events such as US election 2016.
Maintain discipline and stick to fundamentals when selecting stocks
14/11/2016  Steer clear of fads, maintain a disciplined approach and focus on company fundamentals in building and maintaining your investment portfolio, says Anton Tagliaferro, investment director, Investors Mutual
How Trump could impact economic growth
10/11/2016  Slowdowns in trade and immigration could hold back the US, and infrastructure spending could boost GDP, but it's too early to make any major changes to our economic forecast, says Morningstar's Bob Johnson.
President Trump: What should you do?
10/11/2016  Donald Trump has beaten Hillary Clinton to become the 45th US president. What should investors do?
Software companies worth watching amid tech deployment phase
08/11/2016  Kate Howitt, portfolio manager at Fidelity International discusses some of the core phases in technological disruption and identifies software companies among those currently presenting opportunities.
Kerr Neilson hot, cold and tepid on Europe, US and China
07/11/2016  Platinum co-founder and CEO Kerr Neilson explains his views on the major global markets and outlines where he sees opportunities--and where he doesn't.