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Morningstar Views: Being prepared for market volatility

Daniel Needham, CFA, is president and chief investment officer for Morningstar’s Investment Management group, a unit of Morningstar, Inc. Investment Management provides retirement, investment advisory, and portfolio management services for financial institutions, plan sponsors, and advisors through investment management entities around the world. Needham also chairs the Global Investment Policy Committee, which oversees the unit’s global investment capabilities, committees, and processes.

Daniel expressed the following views in a short video:

How to prepare for a market downturn

Market volatility is one of the most reliable things that you can predict. You do not know what prices are going to do next month, next year. The one thing investors know is that prices are going to move around, and what we see is that prices often move around more than fundamentals, more than the underlying cash flows. That means at times you have these volatile periods where market prices will fall a lot, where stocks, share prices will fall and maybe even residential property prices will fall. Often people get scared, people feel the pain of losses more than they enjoy the pleasure of gains.

One of the most important things is that you do not overreact and sell stocks or shares when they are down, that is the worst thing that people can do. Morningstar thinks that what you want to be able to do is, be prepared for the periods of market volatility by buying assets that you think are worth more than the price that you are paying for them, at times that means being willing to hold more cash.

Morningstar view market volatility as an investment opportunity. Warren Buffett always says that he likes his stocks the way he likes his socks – on sale. Often market volatility means lower prices. It is a funny thing that in the in the stock market or the share market people actually want more of something when the price goes up and they want less of something when the price goes down. They think that is exactly the opposite of how you should think about it. Generally when prices fall it means you are able to buy stocks or shares, fractional ownerships of companies, at better prices. Morningstar view it as a positive, not a negative. They prepare for the volatility by demanding good prices before they invest and that allows them to have capital or cash available to take advantage of the market opportunity.

Doing nothing is sometimes better than doing something

It is really important during periods of market volatility that you do not overreact. That you don’t sell out your investment at the bottom. That is the worst thing that people can do. Research shows that those that sell out at the bottom and then buy back in around a year later when they feel more comfortable, do much worse than those that stay invested. 

The importance of staying invested - Morningstar 16 March 2020

Morningstar think the most important thing is to actually not do anything and to talk to your financial adviser or your financial planner and really stick to the plan – that is what the plan is there for. In the short term, markets are going to move around a lot, and it’s very important that you take a long-term approach to investing. Morningstar’s view is that when there are periods of market volatility or where prices fall, it is often a time where you should be adding more to your investments rather than taking them away you.

You can view the video below:

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BlackRock Commentary: Staying dynamic in our strategic views

BlackRock anticipates that the new macroeconomic environment, characterized by increased volatility, will lead to more frequent valuation changes across asset classes. While short-term outcomes may not always be influenced by valuations, they remain significant in the long run.

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