The fundamentals of investing haven’t changed, but the way people invest has. Financial innovation, digital connectivity, social media influencers, and market access are reshaping the landscape of investment.
Morningstar CEO Kunal Kapoor shared these insights at the Morningstar Investment Conferences held in Chicago in 2022 and 2023.
4 things to remember about an investor.
- Every investor evolves over time.
- The way they interact with technology changes.
- What investors want to achieve in life changes.
- The time they enter the market affects their mindset.
When I first started at Morningstar, I was very keen to make my first investment immediately. So I wrote a check, and walked down LaSalle Street to the offices of Harris Associates. I opened an account of the Oakmark Select Fund, monthly investing.
Along the way life happened. Had a family. Had kids. Started to do a 529 plan. Started to get more serious about what we’re going to do in retirement.
This year, our oldest will go to college, and we’re starting to think about withdrawing from the 529 plan and funding what he is doing. We’re going to do it all over our phones or our computers. I’m not going to be walking down any streets to make that interaction happen.
So many folks said that older investors would not embrace technology. Well, that’s not the case. They want both. They want to sit down with their advisors, and they want the technology right next to them.
What they want changes over the years. Sometimes it’s stability, sometimes it’s accumulation, sometimes it’s the art of the drawdown. And it’s also true, that every generation of investors changes.
However, all investors are influenced by the timing at which they enter and experience the market, the way they think about risk and how technology impacts their investing experience.
Look at the last two years. I think it’s very fair to say that if you entered the market in 2021, you thought you were a genius for about 12 months. I think it’s also fair to say that if you entered the market in 2022, you’re probably wondering “What have I gotten myself into?”
Last year, the Morningstar Moderate Allocation Index had its worst year on record. That’s a 60/40 portfolio. What we like to say, “set it and forget it”. That should be a steady portfolio and it was down 15% last year—very, very significant.
Personalize the experience.
To get a sense of how investors’ behaviors and attitudes have changed, and conducted the Voice of the Investor study (2023). We polled more than 2,000 people across the U.S. to get a pulse on their moods and what they’re thinking about.
Here’s what investors told us.
- They are overwhelmed with data.
Oracle just published a study saying that nine out of 10 business leaders say that the volume of data that they’re getting is so huge that even they don’t know what to do with it. So, it’s no surprise that investors feel the same way.
Investors, and particularly those who have not worked with an advisor, say that they’re having trouble seeing the value of advice. Surprising to me, people rated advisors as providing similar value to investment or trading platforms and only slightly above financial media.
Digging into the data, we found that where we see the value of advice shining through is in boosting clients’ understanding of risk management. We looked at the responses of those who work with advisors (42% of investors in our study work with advisors), and 90% of those investors said that they find advisors to be extremely valuable because advisors are personalizing the risk experience for them in a very tangible manner.
There have been about 2 million tests that demonstrate that a person’s comfort with risk-taking is a psychological trait that doesn’t meaningfully change with market swings. Now all of you know this makes sense because as your spouse or my spouse will tell you, people don’t fundamentally change no matter how much you wish it.
Active Personalization is the New Active Investing.
Active personalization is the new active investing. It blends traditional approaches with more modern ones to create a new way to help you serve your clients in a personalized, scalable fashion.
We see through three lenses: Returns, Risk, Sustainability.
Reframe sustainability as investability. Think about it through how your clients think about risk and reward. Because investors increasingly want risk mitigation and being rewarded for making a difference in the world.
Let's take the emerging area of climate tech, a very valuable investing theme that is worth investigating. Our data in PitchBook suggests that carbon-negative technologies, especially one around direct air capture, is part of a megatrend today that's driving significant investments from venture capitalists. So, why should this be an area that you ignore for your clients, especially when many of them are beginning to tell you that they care about the positive impacts associated with making investments in spaces like this.
As far as risk goes, I believe that tough lessons of down markets are sometimes more important to the long-term success of investors than those of rising markets. So, getting this right is different for every person and every portfolio.
You need to tie the person to the portfolio that you're building for them. Tangible personalization really requires you, the advisor, to uncover investors' true goals and motivations, then connect that information and the portfolios you're building for them together. This will reveal to your clients the value of collaboration.
Finally, returns matter. Without good results, no amount of personalization is going to matter.
Larissa Fernand is an Investment Specialist and Senior Editor at Morningstar India. You can follow her on Twitter.