Dan Kemp is head of investment consulting and portfolio management, EMEA, Morningstar. Here he talks about market volatility with Emma Wall, editor at Morningstar.co.uk.
We’ve had extreme volatility in markets over the past 18 months. But it doesn’t necessarily mean that an investor’s portfolio is experiencing more risk, does it?
No, that’s absolutely right.
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 time.
But it’s not the main measure of risk. The main measure of risk is permanent loss of capital. It is money going somewhere where you are never going to get it back.
Volatility tends to be that sort of shorter term measure. You get caught by volatility. But really if you are a long-term investor, 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.
How can investors use this knowledge that volatility is an opportunity and not a risk in order to maximize their returns.
There are few things that people can do.
The first is 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 your portfolio is at the right level of risk for you.
Finally, don’t try and time the market. Very few people, if anyone, can do it. Gradually, invest over a long period of time to capture the benefits of what we call cost averaging.
If you are buying over a long period of time regularly, and it is part of your routine, then that’s the best way of investing.
It’s one of the philosophies that we have here at Morningstar.
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.
We try and ignore that day stay noise, that day stay market volatility as much as we can.
