Article adapted from Morningstar Investments - interview with Jody Fitzgerald, Head of Institutional Portfolio Management at Morningstar.
Compounding is an extremely effective investing tool, says Morningstar Investment Management’s Head of Institutional Portfolio Management and Solutions, Jody Fitzgerald, but it’s important to be aware of its inverse power on the downside.
Record low interest rates have created asset price bubbles across many investment markets around the world – in other words, the price you stand to pay for an asset or investment is greater than what it’s worth – also known as its fair value. Avoiding overpriced assets is key to reducing losses. At times like this, what you don’t invest in is as important as what you do invest in.
When we experience volatile and weak markets, overpriced assets tend to fall the furthest. And more broadly, assets reprice to reflect their true or fair value. A portfolio that’s avoided overvalued stocks can smooth the investor’s journey, enabling them to hold on to more of their money.
Using a $100 investment and 10% interest rate as an example in Morningstar Investment Management’s video, Why
Losing Less Is So Important,
Fitzgerald acknowledges the passive returns afforded by compounding. “Compounding becomes more and more powerful the longer you’re invested,
where effectively the interest that you earn continues to make more money for you.” That $100 becomes $110 after one year, or a $10 return.
After another year, 10% delivers $11, without having to add any more capital to the investment.
In our webinar, Jody Fitzgerald will explore how to capture opportunities in periods of heightened uncertainty, emphasising the importance of having a flexible and robust portfolio management process in 2023 and beyond.