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...

Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 3
20/07/2017  Insights on Australia's housing market, China's effect on domestic banks, and cyber-security readiness, in the final instalment of Brian Hartzer's interview with Morningstar's David Ellis.
Telstra won't be blown away by headwinds
17/07/2017  While it faces what Morningstar equity analyst Brian Han describes as a whirlwind of negatives, he suggests investors shouldn’t hang up on Telstra.
Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 2
13/07/2017  Westpac CEO Brian Hartzer joins Morningstar banking analyst David Ellis to discuss digital disruption, regulatory change and Australian banks' social license.
The home-truths of investing
12/07/2017  Look for companies that sit outside the cycle; heed the lessons of history; and remember the power of compounding, says Bennelong's Neale Goldston-Morris.
Exclusive: An interview with Westpac CEO, Brian Hartzer - Part 1
06/07/2017  Brian Hartzer, CEO, Westpac joins Morningstar senior analyst David Ellis to discuss his role leading Australia's oldest bank, how Westpac can continue to grow value, and its commitment to sustainability.
Self-managed super is not Do-it-yourself
03/07/2017  There are a few common pitfalls in running a self-managed super fund that mean trustees shouldn't go it alone entirely, says BT Financial Group's head of financial literacy, Bryan Ashenden.
Investing to protect on the downside
30/06/2017  There are investment strategies you can adopt to mitigate volatility-linked fear and uncertainty in markets, explains Roy Maslen, chief investment officer – Australian equities, AllianceBernstein.
Don’t overdo benchmark consideration
28/06/2017  Being benchmark agnostic is the most effective approach to fixed income investing, according to Anujeet Sareen, portfolio manager, Brandywine Global.
Factor-based investing using ETFs
26/06/2017  Investors should consider style-exposures--such as value, defensive or yield-- they would like in their portfolios, explains Jonathan Shead, head of portfolio strategists – Asia Pacific, State Street Global Advisors
Volatility plays to active manager strengths
--  The climate of political volatility in the US holds important implications for investors and the funds they invest in, particularly around Donald Trump's ability to pass legislation through Congress, says Pimco's Libby Cantrill.
Is the FTSE 100 Facing Another Market Crash?
16/06/2017  Ten years on from the pre-crisis FTSE 100 high, Morningstar UK's Emma Wall examines how UK stocks have fared
How to guard against retirement threats
16/06/2017  As retirement approaches, even the best-laid plans can go awry, as Tim Steffen tells Christine Benz, Morningstar US.
PIMCO Global Credit Fund
07/06/2017  The PIMCO Global Credit strategy receives a Morningstar Analyst Rating of Silver due to its sizeable and highly capable credit research team.
PIMCO Income Fund
07/06/2017  Morningstar's Tim Wong looks at the strengths and competitive advantages of this Silver-rated strategy.
3 pockets of opportunity in fixed income
07/06/2017  The head of PIMCO Australia portfolio management explains his views on active management in fixed income and outlines where he sees most value in this space.
Trump administration biggest macro threat for investors
05/06/2017  Even as European political volatility subsides, the US Government remains a considerable threat to financial markets, says Colleen Barbeau, director of equity portfolio management, Franklin Templeton.
Antipodes Global Fund: Class P
01/06/2017  Antipodes constructs this portfolio based on three major objectives--capital preservation, inclusion of attractively priced businesses, and investment resilience.
Investors Mutual WS Future Leaders Fund
01/06/2017  Investors Mutual Future Leaders is a capable strategy focused on investing in Australian companies outside the top 50.
Why the time is right to invest in India
25/05/2017  Indian stocks rallied after the appointment of Narendra Modi as Prime Minister--but then subsequently fell. UK-based investment manager Jonathan Schiessl says now is the time to buy.
When should you pay active fund fees?
23/05/2017  When is it worth paying higher fund fees for active fund management? The single most important factor effecting a fund's relative performance is its price.