Why Fund Investors Shouldn't Panic - But Rebalance Instead

VIDEO: Morningstar Investment Management's Dan Kemp has some advice for investors caught up in the market panic

Holly Black 19 March, 2020 | 10:15AM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Dan Kemp from Morningstar Investment Management. Hello.

Dan Kemp: Good morning, Holly. It's great to be here with you even though we're not really together.

Black: I know, we're not. So, it's a bit of a crazy time at the moment. From your perspective as an investor, what's been going on?

Kemp: Well, I think, it's a very exciting time to be an investor. It's concerning for people, obviously, particularly those with health concerns and those that need their money in the near term. But if you're able to be a long-term investor, then we're seeing a great opportunity to pick up assets at prices we haven't seen for years.

Black: So, we talk about looking at things in the long term. I think one of the hard things at the moment is, there's not within living memory a comparable situation. So, how can we put this into a long-term context?

Kemp: I think that's really a good point that every situation is different but bears similar hallmarks. And so, this situation is no real different in the way that people are responding, at least, to previous market crashes. And so, we can put it in context. The first thing to say is that we never know what will happen from a political perspective. We never know exactly what the immediate impact of policy changes will be. We certainly don't know how the virus will develop. What we do know is that if you buy assets at very attractive prices relative to their long-term fair value, then that sets you up well for strong returns into the future. And so, we would always encourage people to look up from the day-to-day news that we're seeing, stop trying to interpret every change in policy and every move in the market. And instead just compare the prices you're seeing with that long-term fair value.

Black: So, a lot of investors might feel panicked because they can track the stock market in real time and see those big price movements. But actually, I think most people probably exposed to them through funds, and they don't move in quite the same way. So, do we need to think about our fund investments a little bit differently?

Kemp: That's absolutely right. And this is one of the dangers of trying to interpret fund performance at this time during market crisis. Because as most investors will probably know, a typical fund just prices once a day. For UK funds, that's normally midday. Now, what we have to remember about midday is that that's before the US market opens. It's midway through the trading day in Europe and it's after the Asian markets have closed. And if you just have that one point every day, then it gives you a very limited picture and limited comparability across markets and across funds.

So, for example, when people are looking at the price of their US equity fund at, let's say, 8 o'clock this evening, what they'll really be seeing is the price at the close of the US equity market last night and not any changes that have happened in our afternoon, the US this morning today. Now, when you couple that with very volatile prices, then that means that you can get a very distorted picture of which funds are doing well and which funds are badly, how markets are comparing to each other. And that's why it's so important to stop looking at this near term and past performance. We know the broad shape of things. So, that's risk assets, equities in particular, have been falling, whereas some so-called safe haven assets have been doing better, but stop looking at those near-term market moves. There's very little useful information there, and instead, start thinking about the long-term opportunities for price.

Black: Does that mean that investors should think twice before even rebalancing their portfolio right now, because the rebalancing they do today might not actually work for tomorrow?

Kemp: Well, we always encourage people to rebalance. And not rebalancing is a way of making the situation worse or not capitalising on the opportunities. But the heart of rebalancing, of course, is to set the portfolio up correctly for the long term, not about what prices may do tomorrow. You can get yourself in a lot of trouble by trying to time puts and sales in this type of environment. Far better to make sure that your portfolio is in the shape that you want it to be in over the long term and you do that primarily from rebalancing. Keep rebalancing as the portfolio gets out of kilter due to price moves, and then what you'll find is that over the long term, you're well set up.

Black: Dan, thank you so much for your time. For Morningstar, I'm Holly Black.

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.

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Holly Black  is Senior Editor, Morningstar.co.uk


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