Many investors remain pessimistic about market prospects despite indices having sharply recovered from 2022’s fall, Morningstar global chief investment officer, Dan Kemp, says.

Kemp told Morningstar's Wealth of Experience podcast that it's a dangerous time for these investors because if markets drop again, they may not be prepared for it.

He says investor bearishness is likely because there’s been market volatility of late after a long period of little volatility.

Kemp believes that investors need to be prepared for whatever direction the market takes. To do that, he advocates three things:

  • The right portfolio
  • Good advice
  • Staying the course

The right portfolio means an ‘all-weather’ portfolio that can handle all market and economic scenarios. For example. if there’s a recession, people need to have assets that may potentially benefit from this, Kemp says.

He believes having the right portfolio also involves having genuine diversification. Sometimes, investors think they have portfolio diversification through owning lots of different assets and investment managers, yet that may be mistaken:

Kemp says owning an all-weather portfolio can protect investors from their worst instincts. For instance, investors believing that they can forecast the future:

Kemp suggests the right portfolio for investors should focus first on quality, following by value. He likens buying investments to buying a car. If you buy a car, you normally look at the quality of the car first, before looking for value. Kemp advocates a similar approach for the purchase of assets.

As for how investors should approach valuing assets, Kemp says there’s no single metric that is perfect, and it’s best to look at a range of valuations and compare them to competitors.

On the second point of investors getting good advice, Kemp is obviously biased in favour of Morningstar research. But above all, he says investors should largely ignore financial headlines and economic forecasts:

More important is what’s already factored into asset prices, Kemp argues:

Kemp’s last point on the importance of staying the course depends on investors getting the right portfolio and good advice. Getting the latter two right will ensure investors are prepared for whatever the market throws at them and they’ll be more likely to hold investments for the long term.

You can hear the full interview with Dan Kemp on the Wealth of Experience podcast.

James Gruber is an assistant editor at Firstlinks and Morningstar.com.au