Emma Wall's 5 Investment Lessons

After 13 years as a financial journalist, including six happy years at Morningstar, Senior International Editor Emma Wall is moving on - so what has she learned?

Emma Wall 28 February, 2019 | 9:17AM

 

Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and joining me today is Mark Preskett from Morningstar Investment Management to discuss the five lessons I've learned in 13 years of financial journalism.

Hi, Mark.

Mark Preskett: Hi, Emma.

Wall: So, the first lesson I have learned over 13 years of being a financial journalist is that it's just impossible to time the market. Trying to work out when the high is and getting to sell then and trying to work out when the low is and that's the time that you should pile in is near impossible, isn't it? Even the professionals get it wrong.

Preskett: Absolutely. I mean, making short-term predictions on markets is extremely difficult to do and frankly, some would say impossible. We've done a lot of work on – you know, countless studies have been published on how the generate the best returns for investors.

And when we look at the data, when we see global equities, say, over the last 30 years, you'd have received around 6.8% per annum over that 30-year period which is a decent return for any investor, but you miss the 25 best days and your return goes down to 3%, you miss the 50 best days and your return is 0.7% per annum, which is lower than cash and definitely lower than inflation over that period. And often those best days come in the darkest moments of the market.

Wall: And the way to get around that is the second lesion that I've learned, because if it's almost impossible to time the market then you've got to be in it to win it. And if you don't have the time, the inclination or the skillset to work out when the best time to invest is, then drip feeding is the best option?

Preskett: Well, absolutely. I mean, a concept called pound cost averaging is when you have a lump sum to invest, rather than investing it on day one, you invest it in stages over a period of time. And clearly, in falling markets that does benefit you as an investor because your average price is lower.

If the market is rising, then perhaps you'd have been better off investing it on day one, but that depends on your risk, valuations of markets today, your attitude towards risk, your willingness to take risk. One thing that we do advise is regularly saving, dripping into he market. That's slightly different concept in trying to set up a direct debit, set up a standing order. It's a flexible, affordable way of saving and over the long term, you will build up a tidy sum.

Wall: And also, it's a way of investing through inertia, isn't it? Something that I've learned through my own personal experience. As you said, you set up that direct debit to go into your investment portfolio on the day that you are paid, then the decision made for you?

Preskett: Absolutely. It just comes out. It's an easy way. There is flexibility. You can turn it off and on. But there's that peace of mind that every month some money is going into the market irrespective of what's happened over the last few weeks.

Wall: The third lesion I've learned is that income investing is not just for income investors, by which I mean that you shouldn't just think of an income-paying stock or an income-paying fund if you need an income right then. Because reinvesting those dividends, investing that yield is the surefire way to hit your growth goals as well as your income goals.

Preskett: Yeah, absolutely. So, income is a crucial concept in all investments is it actually delivers the majority of your return from a bond, from a fixed income investor and decent chunk of an equity return comes from the dividends. That rolling up those dividends you are benefiting from compound interest.

So, reinvesting your dividends, those dividends accrue, dividends in turn and so on and so on and your pot can grow pretty exponentially. Einstein famously called it the 8th wonder in the world and I do still like that quote. It is a way over the ultra-long periods, over 20, 30-year period, your returns can be significant.

Wall: And the fourth lesion I've learned is one that I've had to guide against myself and that is to ignore sensationalist headlines. I've always been careful as a journalist to educate and inform readers rather than scare them, because there are quite a lot of headlines around, especially at the moment that could put you off investing forever.

And as we've already previously just discussed, if you miss those days when the market ticks up because you were scared of the market, then you miss out on great gains.

Preskett: Absolutely. The investors need to remember the media is there to generate page clicks and views. I mean, that is their job and they tend to exaggerate to create interest. I mean, investment journalism, as you know, is no different really than any other journalism in terms of current affairs and politics.

I mean, at Morningstar, we try to avoid these headlines, look past sort of the scary headlines and focus on fundamentals, things like valuations, how much is the paying, dividends, structural changes in industries and we actually seek out contrarian ideas. We look at things like fund flows as a good indication of an area that's unloved. And what we found is, some of our best returns over the last few years have come from areas that are seemingly contrarian, such as Russian equities in 2016, healthcare stocks last year.

Wall: And the fifth and final lesson that I have learned is to take advantage of what I call free money and that is tax-efficient savings accounts, be that an ISA or a SIPP or indeed your workplace pension where you get not just the tax back but also a contribution from your employer.

Obviously, this is something that's available particularly to individual investors versus professional investors such as yourself. But ensuring that your tax wrapper is working extra hard for you on top of the, hopefully, informed decisions you've made for your portfolio can really make the difference to returns.

Preskett: Absolutely. I mean, tax efficiency is key. I mean, every year, the first thing I do with my wife is look at our tax wrappers, our ISAs, what we are going to save, and the tax allowance has grown quite considerably over the last 20 years. I mean, I remember back there was few thousand pounds, now it's up to £20,000. I have SIPP that I actively save into as well every year which is shielded from the taxman. So, these are ways of growing your money and what we talked about before, the pound cost averaging, using compound interest, but doing it inside a tax-efficient is key.

Wall: Mark, thank you very much.

Preskett: Thank you.

Wall: This is my final video and my last day for Morningstar. I wanted to take the opportunity to thank you, our dedicated viewers and readers, for all your support over the last five and a half years. Good bye.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Emma Wall

Emma Wall  is Senior International Editor for Morningstar

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