Adviser-to-client template: What the last few months have taught us about staying invested through volatility

For financial advisers to use with clients.

This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.

 

Dear Client, 

By now, it isn’t news to anyone that the first half of 2025 has been marked by volatility, pessimistic headlines, and a sense of uncertainty – all a breeding ground for investor panic. But despite a sharp decline in markets, we’ve seen them rebound over the past 6-8 weeks—a real testament to the importance of staying invested, rather than reacting emotionally to market volatility.   

An investing framework doesn’t have to reinvent the wheel

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions, and the ability to keep emotions from corroding that framework.” Warren Buffet 

Warren Buffett is known as one of the world’s greatest investors – if not the greatest – for a reason. The importance of a strong investing framework is always relevant, but particularly in times of volatility like what we’ve been seeing in global markets lately.

This is particularly notable when we talk about the importance of behavioural finance in decision-making. Standard economic models infer that all investors make rational decisions, sometimes referred to as Homo economicus. But, even anecdotally, we know that doesn’t always hold true. Behavioural finance, on the other hand, asserts that we all have biases that influence our decision making and therefore Homo economicus cannot exist. Making rash, emotional decisions when markets wobble can have significant impacts on an investor’s long-term outcomes, as shown by the graph below.

During periods of market correction or turbulence, we remind you to trust the framework that our investment manager, Morningstar, has developed over decades of experience: one that focuses on the long-term, looks at portfolios holistically, and focuses on an investment’s intrinsic value, and not the whims of the market.

Markets change quickly – and you don’t want to miss out

As we’ve seen in the above graph, investors who stayed invested not only withstood the volatility, but ultimately continued on an upward trend for returns – even accounting for market drops. And in the charts below, we can see the turnaround between April and May of this year alone. If you cast your mind back to ‘Liberation Day’, you may recall doom-and-gloom headlines. Just a month later, the green far outstrips the red on the charts: continuing to demonstrate the importance of staying invested and adhering to your financial plans, despite the intense media noise that surrounded these events.

Source: Clearnomics, MSCI, Bloomberg, JP Morgan 

 

Source: Clearnomics, MSCI, Bloomberg, JP Morgan 

What do you need to do?

In short, nothing. A well-diversified, multi-asset portfolio that is anchored to investment fundamentals should help to smooth out some of the market volatility, and the team at Morningstar Investment Management have constructed your portfolio to do just that.

Of course, if you still wish to talk through how your portfolio is designed to weather turbulence, or have any other questions about your financial plan, I’m always happy to help. Please feel free to reach out at any time.

Until then – have a fantastic week ahead. 

Signoff 

 

 

Important Information

As noted previously, this document is intended to support your service proposition to clients and the commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use.

 

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

From the desk of the CIO: The importance of a robust investment process during geopolitical turbulence

by Matt Wacher, Chief Investment Officer, APAC

Key Takeaways

• Israel’s attack on Iran is sending shockwaves through markets, with risk being repriced and reflected in falling global equities.
• But history shows that wars, terrorist attacks, or economic crises, markets tend to recover quickly, posting positive returns six months and one year later at a rate of 60% of the time or more.
• Valuation discipline helps avoid overpriced assets and manage downside risk in volatile markets.
• Active risk management enables flexibility to respond to market dislocations and capture potential rebounds.

Last week Israel launched an attack on Iran, reportedly targeting nuclear enrichment facilities. With wars already raging on multiple continents, this adds to an already grim global backdrop, marred by tragedies affecting communities around the world.

From an investing point of view, we are seeing a few key details. Stocks are reacting, risk is being repriced, and major equity indexes are down 1–2%. It’s important to note that we’re seeing a short-term selloff—and it’s always possible it could get worse. Early indications show the situation could escalate and markets may move based on that. But for long-term investors, many will recognise that history shows that markets tend to withstand these events.

Looking at 20 major geopolitical shocks over the past 80 years, the pattern is clear: stocks have fallen about 3% in the month following a major event, but the median return one year later has been positive—up more than 8%. Understanding this is vital to understanding how Morningstar invests consistently, for the long-term, with portfolios positioned to weather external volatility.

Valuation Discipline, Diversification, and Active Risk Management

Indeed, volatility has left its mark this year—both to the upside and the downside. In early April, markets experienced one of the fastest corrections in history, followed almost immediately by a swift rebound. n the 3 trading days between 3 April and close of 8 April, the Morningstar Australian Market Index fell 7.2%.

This kind of volatility may not be a blip; it could be the norm for a while. Markets appear more event-driven than they’ve been in the recent past, and that dynamic may persist. Morningstar’s multi-asset models are designed to help investors navigate this type of environment—through a combination of valuation discipline, global diversification, and active risk management. In a market shaped by uncertainty and potential regime shifts, these models attempt to provide a resilient core allocation.

At Morningstar, we believe our portfolios are built for these types of environments. Our investment philosophy and portfolio management process seek to instill a discipline that tends to thrive when reality falls short of expectations and volatility spikes.   

How so? 

We Do Not Performance Chase 

Rather than managing our portfolios with a fear of missing out, our valuation-driven process kept us cautious about owning these overpriced companies.   

When valuations are rich, expectations embedded in stock prices tend to be extremely high—what some call “priced to perfection.” That creates vulnerabilities. Any disappointment–whether company-specific or at the macro level–can potentially lead to outsized losses.

This is why one of the key pillars of our investment philosophy is “price matters.” Put differently, we maintain a relentless focus on price because it helps build in risk management. While no one can know the exact correct price of every asset, we use a framework to estimate fair value ranges—creating a ‘margin of safety’ that acts as a risk management buffer.

Exhibit 1: Risk Reduction by Avoiding Overvalued Assets

^{Source: Morningstar Wealth. For illustrative purposes.}

Risk in markets is never constant and often reflects the expectations embedded in prices. That’s exactly what we’ve seen in 2025. The reality hasn’t lived up to the market’s lofty expectations, especially in the most expensive areas of the market. By staying underweight sectors like US tech, which we viewed as overvalued, we avoided significant downside and benefited from that positioning.

We Treat Volatility as Opportunity 

Avoiding expensive areas of the market helps manage risk—but what about delivering robust returns? The flipside of avoiding overvalued assets is identifying undervalued opportunities and preparing to buy high-quality assets if they were to become cheaper.   

As markets sold off, these cheaper, defensive assets held up better. That not only helped performance but also enabled the flexibility to be opportunistic and counter-cyclical. As equity and credit markets declined amid tariff uncertainty, we were able to add to assets that were getting hit the hardest. For example, we increased exposure to US technology stocks, and were able to add growth assets across the board.

While we didn’t expect an immediate turnaround, our quick, counter-cyclical moves allowed us to capture more of the recovery than we gave up during the drawdown.   

Targeted Approach: Leveraging a Global Team of Investment Professionals 

In periods of heightened market volatility and stretched valuations, having a globally connected investment team capable of identifying opportunities adds value.

With resources around the world, we can pursue opportunities across global markets. Examples of international positions that have added value to our portfolios in 2025 include Brazil, Mexico, and South Korea. These kinds of niche opportunities have added value over time and we believe this differentiates us from our peers.   

Exhibit 2: US Among Worst-Performing Stock Markets YTD

^{Source: Morningstar Direct. Data reflects YTD performance as of May 29, 2025. ETFs used for analysis. References to specific securities not an offer to buy or sell. Past performance no guarantee of future results.}

Preparing for the Road Ahead

In a market environment marked by elevated uncertainty, maintaining a disciplined approach is essential. Attempting to forecast short-term changes in trade policy, macro developments, or investor sentiment is difficult—and often exposes portfolios to risk at precisely the wrong time.   

At Morningstar, we believe a long-term, valuation-driven approach is not only built to weather volatile environments, but also to capitalise on opportunities in a headline-driven market.

 

 

 

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Training Your Clients to Be Flexible (but Not Fickle) With Their Goals

Preparing clients for a change in plans is part of good planning.

But I posit that goal flexibility not only is part of good financial planning but also something advisors should be introducing to clients.

Why Flexibility Is Key to Good Financial Planning

Financial planning requires advisors and clients to plan for a future that not only doesn’t yet exist but also may never exist.

The future is in flux, and a client’s ability to achieve all their financial goals depends on more than having a good advisor to help them get there. Other things that may hold them back include unexpectedly bad markets (think, the “lost decade”) or changes in clients’ personal lives.

That’s why clients need to be flexible with their goals or redefine what it means to hit their goals.

If they can do this in a productive way, they will be happier with their outcomes, even if it looks different from what they initially imagined. If they can’t do this, they may not only be unhappy with their outcomes but also may lose motivation to continue with other parts of their financial plans. So, although you don’t want clients to be fickle with their goals, you do want them to have some flexibility.

Clients Need to Learn to Be Flexible With Goals

Unfortunately, it’s not always easy to get people to think flexibly about goals—especially when they’re already set.

One reason for this is because people may stay committed to goals that no longer suit them simply to save face. We all want to look good to ourselves and others, so clients may shy away from changing goals because they don’t like what it may say about them: They may feel like it makes them flighty, a quitter, or a failure.

Second, there is the endowment effect. This is our tendency to value things that belong to us at higher than their actual value. Clients may be reluctant to relinquish goals that no longer hold true value to them because they are their goals.

Finally, there’s the fact we can get attached to the future we envisioned, making us rigid about what that looks like. It makes sense for clients to imagine the future they’re working toward, but sometimes that future is no longer an option or what they want, and it may be emotionally difficult to move on from it.

How to Teach Clients to Be Flexible With Goals

Goal flexibility can benefit your clients, but it may not be something they are comfortable with. Advisors who teach their clients how to be reasonably flexible with their goals can help clients change course when needed to still have positive outcomes.

1. Teach clients early on that revision is part of the process. A great way to introduce this to clients is by using a goal-setting exercise. This one, for example, has clients list their goals, then look at a list of common goals, and finally relist their goals. This process teaches clients (in a nonjudgmental way) that there’s nothing wrong with changing their goals. In fact, it shows how revising goals can be good because it helps them get closer to a reality they actually want. By teaching clients early on that changing goals is not only normal but sometimes good, advisors can help combat problems with clients being inflexible about goals to save face.
2. Help clients identify the values that undergird their goals. We call these values “deeper goals.” Unlike tangible, achievable goals, “deeper goals” help clients identify why they care about those tangible goals in the first place. For example, perhaps a client’s tangible goal is to retire at a younger age. But maybe this goal stems from them valuing exploration and wanting to have more time to travel while their health is still good—that’s the deeper goal. Knowing this motivation can help you and your clients find more flexibility. Say early retirement isn’t in the cards financially for your client or they realize they don’t really want to stop working altogether—there may still be a way for them to prioritize exploration and travel that’s more feasible. When you and your clients understand their values, you can work together to help create a new future for them to work toward when needed.
3. Help clients understand the trade-offs to sticking to or changing goals. There may be a point where clients find that they have a new goal but are reluctant to abandon a goal that they already “own.” Advisors can help these clients by providing them concise breakdowns of what they are leaving behind or giving up by sticking to this goal. This kind of exercise can help clients realize the true value of their older goal that may no longer serve them and make them more confident in changing course.

Advisors already know the importance of getting clients to define meaningful goals. In teaching them to be flexible with them, advisors ensure clients are working toward a positive outcome regardless of what has changed for them.

 

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Adviser-to-client template: Impacts of elections on the market

From the Desk of the CIO: Warren Buffett’s Legacy

At the annual Berkshire Hathaway shareholder meeting on 3 May 2025, Warren Buffett announced he’ll step down as CEO at the end of the year.

The investment world rarely agrees on anything. But with Buffett, there’s little debate: he’s one of the greatest investors of all time—if not the greatest.

At Morningstar Investment Management we leverage Warren Buffet’s investment wisdom in our investment process every day. Our at-times contrarian approach is underpinned by the Buffett adage: “be fearful when others are greedy and greedy when other are fearful.”

We saw this play out yet again as markets sank on ‘liberation day’ as a result of sky-high tariffs, only to bounce back as investors refocused on the long term and tariffs were paused.

Likewise, our long-term approach is founded on patience, and it is a message that we often talk to our clients about. As Buffett says: “The stock market is designed to transfer money from the active to the patient.”

Others have posted flashier short-term returns. But no one has matched his consistency, discipline, and long-term performance across nearly six decades.

The reason we pay so much adherence to Buffett’s approach and thinking is because since Buffett took control of Berkshire in 1965, the company has returned more than five million percent. The S&P 500 returned 39,000% over that same period—a strong number on its own, but it looks like an ant hill next to the Everest-sized mountain Buffett built.

Berkshire’s Performance vs. the S&P 500 (1964—2024)

^{Source: Warren Buffett’s annual shareholder letter. Past performance no guarantee of future results. References to specific securities not an offer to buy or sell. Indexes are not directly investable.}

A few years ago, investor Chris Bloomstran offered a jaw-dropping statistic: Berkshire could fall 99% in value and still have outperformed the S&P 500 during Buffett’s tenure.

When Bloomstran shared this with Buffett, he responded: “Ben Graham would be proud. But let’s not test the math.”

Humility is another trait of all great investors and Buffett has it in spades. According to Bloomstran’s estimates, Buffett paid under $11 per share for Berkshire in 1965. Today, the company earns $11 per share every 2.5 hours.

With his departure, all eyes now turn to the future of Berkshire. The stock dropped 4% on the first trading day after the announcement—a modest decline, all things considered.

When one of the greatest CEOs ever steps aside, you might expect a steeper decline. But perhaps that’s the ultimate testament to what Buffett built: something designed to endure.

His longtime partner, Charlie Munger, passed away two years ago, and Berkshire has continued its ascent—hitting record highs and surpassing a $1 trillion market cap for the first time.

Morningstar analyst Greggory Warren—who covers Berkshire—noted in a recent report that it’s important to ask tough questions about what comes next. When a world-class leader steps aside, it naturally raises uncertainty about the company’s future.

Still, there’s good reason to believe Berkshire’s wheels won’t come off.

Succession planning has long been in motion. Todd Combs and Ted Weschler have managed investment portfolios with increasing responsibility. Ajit Jain oversees the insurance business. And Greg Abel—Buffett’s chosen successor—has already been onstage at shareholder meetings and is well-supported to lead the entire company.

Buffett announced his exit with Berkshire at all-time highs, a balance sheet with nearly $350 billion in cash, and arguably stronger than ever.

There are countless lessons from Buffett’s career, but one stands out: a well-defined investment philosophy, executed with discipline over decades, can be incredibly hard to beat. And it applies just as well to multi-asset portfolios as it does to individual stocks.

So while I can’t promise five-million-percent return over 60 years, our clients know that the timeless investment wisdom Buffett shared with investors along his journey underpins our investment philosophy—and ultimately, the way their money is invested.

 

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

How Advisers Can Rise to the Challenges and Opportunities of Next-Gen Clients

Deeper engagement can build an advantage with the next generation of investors.

As a result, the latest generation of investors may feel that they need less guidance with their finances than their parents did at the same stage of life, while at the same time requiring more guidance to meet their expectations of investing.

How Advisers Can Engage the Next Generation of Clients

1. Challenge: Younger investors want to be active in their financial journey and view consumption as an expression of individual identity. As a result, they expect advisers to work with them to tailor their financial plans.

Opportunity: Be a financial co-pilot. Invite your younger clients to participate in the planning process by helping them articulate their goals and expectations and working together to build their plan. This fulfills their need for ownership and individuality in their financial plan and positions the adviser as an invaluable collaborator.

2. Challenge: An on-demand culture means advisers are competing against short-form and often free sources of financial knowledge. The newest generation of investors may not readily see the benefit of a financial adviser’s advice when they are used to short, sharp, and affordable content they can access from their phones whenever they want.

Opportunity: Create bite-size services. Virtual and on-demand sessions and workshops can help expand your reach to younger audiences. You can also offer segmented services around goal discovery, cash flow management, portfolio building, and behavioural coaching. Though small, these offerings can sow the seeds with investors who are still building wealth and grow into a long-term relationship.

3. Challenge: Younger generations of investors may place a greater focus on purpose and mission when it comes to their financial decisions. This means they may be less inclined to engage with financial advisers who are unclear about how personal values fit into financial planning.

Opportunity: Engage a values-driven approach. Advisers can help younger clients uncover personal values and craft meaningful goals that align with those values. This valuable service fosters deeper connections and results in meaningful strategies that better align with client preferences. As an added benefit, talking about nonfinancial concerns is an experience clients often share with their social circle, providing a valuable opportunity for advisers to reach new audiences.

All three strategies can serve as a sticky entry into financial advising by filling the needs of next-gen investors that cannot be met with just Google and ChatGPT.

 

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

From the desk of the CIO: Overreaction is never the right reaction

Disliking risk is only human but overreacting to short-term market noise usually does more harm than good.

By Matt Wacher, Chief Investment Officer, APAC

 

As President Trump stood on the White House lawn to announce sweeping new tariffs for almost every country in the world, the initial reaction was one of shock and uncertainty around the potential economic effects—which almost immediately drove widespread market volatility.

In fact, on 3 April 2025 markets experienced their worst day since the height of the COVID pandemic and the Morningstar US Market Index fell 5%, its worst single day since June 2020. In the 3 trading days between 3 April and close of 8 April the Morningstar US Market Index fell 12.4% and the Morningstar Australian Market Index fell 7.2%.

 

Figure 1: Daily US market moves from April 1 to April 14 2025. Source: Morningstar Direct.

At first glance this is understandable—in the words of Morningstar’s Chief Economist Preston Caldwell: “This kind of regime shift is so unprecedented the historical data and models derived there from are only a best guess.” This is because when you put up trade walls between multiple countries, you hurt the efficiency of all of them. And in doing so, there will likely be cascading effects. We don’t exactly know what those effects will be, but if you’re a business that’s unsure about things, you might pause hiring because you’re questioning your profitability—which has downstream effects that can hurt employment and ultimately flow through into less consumer spending. If companies can’t plan and seem to not know what to do, how can investors make appropriate decisions.

However, while economies may undergo some structural change and some companies may come under pressure economies and the firms that drive them have proven remarkably resilient delivering reasonably consistent returns to investors over the long term. So potentially the ‘noise’ that we are experiencing around theses tariffs is just that and investors must resist the inclination to overreact stick to their investment process and seek out the opportunities presenting to investors who stay the course.

Diamonds in the rough?

Given the context of the tariffs some of the opportunities may seem scary. At face value, it certainly appears that US apparel and furniture retailers were dealt a major blow. We can see the impacts of the tariff changes on some of these companies. Most of their supply chains are overseas. Nike, for example, does nearly 50% of its manufacturing in Vietnam. Because of that, these stocks came under significant fire.

Figure 3: Selected US apparel stocks daily return on April 3. Source: Morningstar Direct. Note: References to specific securities not an offer to buy or sell. Past performance no guarantee of future results.

These companies are a microcosm of a bigger issue—companies scrambling to figure out what to do next and how to invest. Imagine the conversations happening at the highest levels of these companies: if they move manufacturing to other locations, it could take years to build and get production ramped up to the required levels.

In short, there are so many unanswerable questions at this point, and markets never wait around for the answers to develop—they start pricing in an unknowable future immediately.

That’s what’s being observed in stock prices. Markets and businesses can remain resilient through a lot, but they hate uncertainty. Uncertainty removes predictability and confidence. That’s what we’re seeing right now.

However, these companies have the potential to be great long-term investments. If investor behaviour (in this case, the urge to get out of the market) has pushed prices to extremes, then it’s a possibility we can take advantage of this mispricing. It won’t always be the case, but if we focus on the fundamentals of the company and shock those fundamentals with a range of onerous scenarios then we may well find some diamonds in the rough. Often a company being less bad than the market is pricing leads to exceptional returns—and we then take advantage of the markets’ overreaction.

Why it remains important to block out the noise

At Morningstar Investment Management, we focus on the long term and our valuation-driven approach allows us to block out the noise we’re hearing from every angle. While the macro environment can seem scary and overwhelming, we continue to zoom in on the fundamentals. We are guided by an investment process that always considers the long term, prioritises resilient portfolios, and prepares for volatility knowing that it’s an inevitable part of investing. As Warren Buffet says, ‘be fearful when others are greedy, and be greedy when others are fearful’. When others overreact, we like to use that opportunity to be greedy.

We focus on end investors who are not day traders punting on every market move—most are people investing for a happy retirement. For that reason, it’s important to provide context on what it means down the road if they were to overreact in the moment. In scenarios like what we’ve recently experienced, overreaction can feel like the comfortable thing to do.

However, we counsel not to be swept up in the frenzy. April 3 was a bad day, but it barely cracked the top 20 worst single days for markets since 2002, coming in at number 19. The charts below show 20 largest 1-day % declines and the subsequent bounce backs for the US and Australian markets.

Figure 4: US and Australia historical returns after large short-term falls. Source: Morningstar Direct, return data represented by the Morningstar US Market NR USD and Morningstar Australia NR AUD. Past performance is no guarantee of future results. Indexes are not directly investable.

Each of these dates represents a point in time where investors likely overreacted, and the long-term consequences were severe in terms of opportunity cost as markets ended up higher in all cases. This list is littered with times when overreacting felt right: COVID, the global financial crisis, the European debt crisis, and so on. Each of these dates represents a point in time where a number of investors likely overreacted, and the long-term consequences were severe in terms of missed opportunities as markets ended up higher in all cases. Morningstar’s behavioural science team has investigated this reaction extensively in their Mind the gap research, which has found a 1.1% annual estimated return gap due to mistimed purchases and sales when investors get spooked and withdraw from the market. 1.1% per annum can be a huge amount when compounded over time.

Being valuation driven investors at Morningstar means that we can be very countercyclical when markets are behaving a little irrationally. We can be buyers when sellers are desperate to sell, and we are happy to sell when markets get a little exuberant. Volatility in markets like we experienced over the first two weeks of April 2025 has allowed this type of investment process to do what it does best–rebalance. In fact, by rebalancing, we’ve been able to take advantage of opportunities to reduce assets that had done well and redirect that capital towards the assets that have been underperforming. This kind of rational investor behavior won’t make Page 1 of the Australian Financial Review but it goes a long way toward potentially increasing future returns as the portfolio moves towards more undervalued assets. It’s not flashy, but it is a tested framework that rewards patient investors.

Put simply, the tariffs saga is messy—and that will likely remain so. A full implementation of tariffs could have severe economic consequences, and we acknowledge that. However, like every other period on the list of the 20 worst days for markets, we eventually recovered to new all-time highs. We have already seen the market rally in response to this dip, and will continue to monitor the situation. What we do know is that markets tend to move up over time, and while we can’t predict exactly when this will happen, we remain optimistic that this pattern will persist over the long term.

We often say that volatility is a feature, not a bug, of investing. And it bears repeating: overreaction is never the right reaction.

 

 

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Adviser-to-client template: Staying the course through tariff volatility

For financial advisers to use with clients.

This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.

 

Dear Client,

We choose patience over panic.

By now, you’ll have heard of President Trump’s sweeping new tariff regime, which has sent global markets into a tailspin, with the Australian market not immune. Uncertainty has reached new levels as policymakers, businesses, and consumers are dealing with how to adjust to the new US trade policy.

During these uncertain times, our investment manager, Morningstar, sticks to timeless investing truths that have guided long-term investors over many decades:

• Don’t panic: It’s crucial to avoid overreacting and selling assets during market downturns. Periods of heightened uncertainty often lead to sharp recovery rallies; missing these can significantly impact investment outcomes.
• Avoid overconfidence: Recent developments have increased the range of potential outcomes. Recognising this heightened uncertainty underscores the importance of measured and well-considered action.
• Stick to a time-tested playbook: During significant asset declines, Morningstar’s initial response tends to be rebalancing portfolios back to their targets, maintaining the intended portfolio exposures. Next, they conduct a rigorous assessment of how the events have impacted fair values, looking for potential areas of mispricing. Lower prices often create fertile ground for attractive investment opportunities.

Preparation is everything

Morningstar believe that preparing for inevitable crises is foundational to a good investment process. It starts with diversification and an acknowledgment that the future is inherently uncertain. Few people, for example, expected the U.S. economy to slow heading into 2025—but being able to navigate this uncertainty is key to maintaining robust portfolios.

Diversification is essential for navigating potential market outcomes that are unknowable ahead of time. Morningstar’s strategies are diversified across economic sectors, regions, and types of securities such as stocks and bonds. By not putting all your eggs in one basket, we can ensure you’re prepared at a foundational level.

Morningstar also routinely stress-tests your portfolios against various growth and inflation scenarios, in different economic environments, further underlining the importance of a robust portfolio construction process.

Why it matters today

The period leading up to the current market volatility did not reward this kind of preparation. A handful of big tech firms dominated much of the market narrative and propelled markets to new highs. Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” Though uncomfortable, periods of market turmoil do reveal the benefits of preparation. And, as a result of Morningstar’s portfolio construction process, many of their portfolios weathered the storm better than the market because they’d factored in a wide range of possible paths.

Charting a path forward

The current market environment remains highly uncertain, setting a high bar for any portfolio adjustments. The economic backdrop remains fluid with many unknowns on how businesses, consumers, and policymakers will respond to the new trade policy, including the room for negotiating trade terms. This environment calls for a patient and measured approach, which Morningstar is confidently implementing.

It bears repeating that markets have faced challenges before, and that history is littered with periods of significant drawdowns. Though it’s completely understandable to have concerns, our advice is to tune out the noise and trust the process.

And as always, if you have any questions, I’m more than happy to set up time to chat.

Signoff

 

 

 

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Investors: Don’t Fall Prey to ‘Environmental Uncertainty’ as Tariffs Roil the Market—Try This Instead

Don’t let recession fears and political unpredictability derail any long-term goals.

 

 

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Adviser-to-client template: The U.S. Tariff Announcement

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Trump’s Tariff Announcement: Implications for Australian Investors

By Michael Malseed, Head of Institutional Portfolio Management

 

There’s a well-known maxim in the markets: sell the rumor, buy the fact—a belief that market expectations can often be worse than reality. However, in the case of today’s US tariff announcement, the outcome was, unfortunately, worse than anticipated, leading to increased volatility across global markets. Equities took a hit, and bond yields fluctuated—at this early stage, trending lower as concerns about growth appear to outweigh inflationary fears. This is a strong reminder of the importance of diversification and maintaining a margin of safety in your investment strategy. While the new tariffs will undeniably have significant implications for global trade, economic growth, and inflation, volatility can create attractive entry points for quality assets, especially for investors with a medium- to long-term time horizon. It’s also important to remember that there’s much more to unfold as countries respond to these changes.

What We Know About the Tariffs

Today, the US announced a set of “reciprocal tariffs” on a range of countries, based on what it believes to be the effective tariff rates that these nations impose on US goods, including factors like local sales taxes and alleged “currency manipulation.” The new tariffs have had a notable impact on countries that serve as major manufacturing hubs for US goods. For instance:

• Vietnam will face a 46% tariff on goods imported to the US.
• China, already subject to a 20% tariff, will see an additional 34% added.
• Australia, with which the US maintains a trade surplus, will face a 10% tariff (the minimum rate).

Notably, any goods manufactured within the US are exempt from these tariffs. Additionally, there are some temporary exemptions, including:

• Steel and aluminum
• Automobiles and auto parts already affected by Section 232 tariffs
• Copper, pharmaceuticals, semiconductors, and lumber
• Bullion, energy, and certain minerals not readily available in the US.

What We Don’t Know

While President Trump did not provide a definitive timeline for the duration of these tariffs, he implied that they could remain in place indefinitely. Many factors could influence the length of these measures, including potential legal challenges and the outcome of upcoming elections.

One major uncertainty is how the affected countries will respond. Will they retaliate by raising tariffs on US goods, prompting further US tariff increases? Or could we see countries seek to negotiate and lower tariffs on US exports in exchange for concessions on their goods? The next steps in this evolving situation remain unclear.

Initial Market Reactions

In after-hours trading, US stocks experienced a sharp sell-off. Unsurprisingly, companies reliant on imported goods were among the hardest hit, including:

• Apple (-7%)
• Nike (-6%)
• Amazon (-6%)
• Gap Stores (-12%)

Foreign companies with significant exposure to the US market, particularly those based in China, also took a hit, such as:

• Alibaba Group (-6.5%)
• JD.com (-5.5%)

US broad market indices followed suit, with the S&P 500 dropping over 3% and the NASDAQ falling by more than 4%.

However, the most significant consequence of today’s announcement might be its impact on future US Federal Reserve policy. The tariff news, which some commentators have described as worse than even the worst-case scenario, could shift the Fed’s focus from inflation concerns to economic weakness. If this occurs, the Fed may decide to resume interest rate cuts sooner than previously anticipated.

Prior to the announcement, Treasury yields were rising, but they quickly reversed course and moved lower during the press conference. The Federal Reserve has found itself in a difficult position—balancing the need to support economic growth while simultaneously combating inflation. Unfortunately, today’s news adds pressure to both fronts.

In response, Fed Funds futures now indicate that three rate cuts are priced in for 2025, up from the previous expectation of two. However, this projection remains highly fluid and subject to change.

Potential Ramifications

The negative implications of today’s tariff announcement are clear. These new tariffs will disrupt the efficiency of the global trade system, which is built on comparative advantage. As a result, consumers in the US will face higher prices, leading to inflationary pressures. Furthermore, global GDP growth could be stifled as profit margins come under pressure from increased costs.

That said, economics is rarely so straightforward. There are counterbalancing factors that could offset these challenges. For example, the US might respond with fiscal stimulus measures, such as additional tax cuts, to support the economy. Furthermore, the tariffs could accelerate the “reshoring” of manufacturing, which has been one of President Trump’s key goals.

What Should Investors Do?

Market volatility, particularly in reaction to policy shifts like tariff announcements, is a timely reminder of the crucial role portfolio diversification plays in mitigating risk. While short-term fluctuations are inevitable, a diversified portfolio can help smooth out the bumps and provide relative stability during periods of uncertainty.

Take a Long-Term View

While tariffs can cause immediate disruptions, it’s essential to take a step back and focus on the long-term picture. Markets often overreact to news, creating potential opportunities for those with a disciplined investment approach. We invest based on the fundamentals of a company—their ability to innovate, generate cash flow, and maintain competitive advantages over time. Tariff-induced volatility may present opportunities to initiate or reinforce positions in companies with strong, sustainable growth trajectories.

Focus on Companies with Competitive Advantages

It’s important to remember that not all businesses will be impacted in the same way. Companies with true competitive advantages, often referred to as having “wide moats,” will likely have more pricing power to withstand tariff increases. These businesses are better equipped to pass on costs to consumers or adjust operations in a way that minimizes the impact of rising tariffs. Focusing on firms with strong brand recognition, economies of scale, or unique intellectual property can help investors weather the storm.

Look for Opportunities in Domestic Manufacturing

Adjustments in global trade dynamics due to tariffs may lead to a shift toward domestic US production. This trend could create significant opportunities for U.S.-based manufacturers who stand to benefit from the relocation of supply chains or reduced competition from foreign imports.

Keep an Eye on Fiscal Responses

Lastly, investors should be mindful of potential fiscal responses to tariff announcements, such as government stimulus programs or changes to tax policy. These responses could create opportunities in sectors that benefit from increased government spending or regulatory adjustments.

Conclusion

The US tariff announcement has added to market volatility and uncertainty. While short-term disruptions are inevitable, it is important to reinforce the benefits of diversification and a focus on the fundamentals.

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

How Advisers Can Differentiate Themselves From Generative AI Advice

While artificial intelligence tools may replace ‘limited scope’ advice, advisers must do more to stay relevant.

Wrapping Up

Although generative AI has immense potential in the financial advice sphere, our research indicates that investors greatly value the soft skills that a good financial adviser can bring to the table. Generative AI does a great job of spitting out answers, but it still can’t replicate the social connection inherent in good adviser-client relationships and the quality of advice that can result.

To differentiate themselves from generative AI applications, advisers should consider devoting more time to building a strong relationship with clients—and maybe even using gen AI to free up more time to spend with clients.

 

 

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

How Financial Advisers Can Improve Their Relationship With An Unresponsive Client

One way to demonstrate your interest in their specific needs.

 

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Risky Play: Trading Platforms Are Gaming Investors Into Bad Decisions

Investors may be nudged to take more risks.

It has never been easier to trade, thanks to ubiquitous online zero-commission trading platforms. The US online trading market is projected to exceed $4 billion by 2029.

On the one hand, this is great news. Stock ownership is positively associated with building wealth and financial awareness, and online trading platforms are leading the charge to find new ways to attract new investors. On the other hand, the introduction of gamelike elements such as leaderboards, badges, and points may be encouraging “gambling” behaviour and leading investors to take on riskier choices.

Gamified Trading

Trading platforms are incentivized through payment for order flow, or PFOF, and advertising revenues to keep investors engaged and trading more frequently.

To achieve these goals, not only have platforms made trading seamless, but they have also introduced gamelike elements to take the fear out of investing and entice novice investors. These features have the added benefit—for the platform, that is—of keeping users trading. The more you trade, the greater the trading value, and the higher your gains, the more positive reinforcements you get in the form of points, badges, and celebratory messages. The problem is consumers are getting caught up in playing the game.

Research shows that people can be negatively influenced by these types of features. Gamified elements are linked to more-frequent trades, speculative herding, and, subsequently, poor returns. Even more worryingly, these features are linked to riskier behaviours such as using higher leverage, trading larger amounts, and selecting riskier stocks.

In recent research, participants in a simulated gamified trading app environment were more likely to invest in risky stocks compared with those presented with a nongamified app. These participants were driven by their goal to win the game or move up the leaderboard, which prompted them to ignore their risk preferences and make riskier choices.

Gamified trading platforms are nudging consumers toward choices they otherwise would not make. Many investors may be distracted by the gamelike features that blur the lines between investing and gambling. In a UK survey, one participant stated that the app “feels more like a sports betting app.”

Gamifying to Invest, Not Gamble

Regulators in the UK, EU, US, Australia, and Canada are taking note, issuing new warnings on design features that may lead consumers to act against their own interests, regulating in-app prompts as advice, and even calling for a ban on PFOF. But until these concerns are addressed through the regulatory system, investors must protect themselves by being aware of how their own behaviours are affected by gamelike features.

When used properly, gamelike features have the potential to help investors. They can generate interest in sound investing and wealth building, even though the rewards may be many years away.

If implemented mindfully, nudges and gamified design elements can motivate actions that drive better outcomes for investors. Such elements include:

• Rewarding points for getting closer to target goals.
• Assessing risk preferences using robust tools rather than assessments that encourage consumers to associate investing with gambling.
• Sending reminders to contribute to savings plans.
• Creating virtual portfolios to simulate market movements and better understand risk and composure.
• Building communities to share advice and experience.
• Giving badges for completing learning modules.

Investors can have fun and make informed investing choices; the two are not mutually exclusive. While many trading platforms currently seem to be designed to encourage frequent trading and other risky behaviour, that does not have to be the case. These platforms have tremendous influence. If they use gamelike features properly to promote positive outcomes, they can transform retail investing for the better.

 

 

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

How Financial Advisers Can Use Generative AI in Marketing

For advisers looking to use AI now to better serve their clients, our research gives a few suggestions.

 

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.