David Harrell: For Morningstar, I'm David Harrell. Market volatility has returned with a vengeance recently. I'm here today with Christine Benz, Morningstar's director of personal finance, to discuss what investors should, and perhaps shouldn't, do in times like these.
Christine, thanks for joining me.
Christine Benz: David, it's great to be here.
Harrell: I'll start with the what shouldn't people do at times like these, because you want to rush out and do something. But what should we avoid doing at a time like this?
Benz: Well, two key things. First, I would say resist the urge to "panic" do anything. There's almost nothing that you would need to do that can't wait a day or two, so deliberate. Potentially get some advice if you have a financial advisor. Do a little bit of reading about what's going on. There's no need to act very abruptly to make changes to your portfolio.
The other action I would say to avoid would be to resist the urge to do blanket market timing. You don't want to be all in stocks or all out of stocks, as tempting as it might seem to get out of stocks entirely right now. Oftentimes when people do that, the relief they felt upon selling is replaced by this nagging sense of well, when is a good time to get back in? I am not a believer in those all-or-nothing-type asset allocation moves. In fact, when we look at the performance of tactical asset allocators, professional money managers, they have a very difficult time with all-or-nothing maneuvers, so I think individual investors should certainly take pause in that as well.
Harrell: Now, let's break this down a little bit by where you are in your investment life span. The pre-retirement investors and then folks who have already retired and drawing down from their portfolios. How would you differentiate between the two in terms of what to do and not to do right now?
Benz: I think the key things that people at this life stage want to bear in mind is the fact that we've had this 10-year rally in equities. So, even though we've had a little bit of near-term volatility, it's been a great run. If you haven't done anything to adjust your portfolio's asset allocation, it's a good bet that you're heavier on stocks than you might want to be at this particular life stage. Think about your proximity to spending, certainly if you're already retired, you're already spending from your portfolio, and use that to determine whether you have enough in cash and bonds to tide you through a long running downturn in the equity market rally.
I'm a big believer in what we call the Bucket approach to retirement allocation. In the Bucket portfolios that I've created, I've typically set aside two years' worth of portfolio withdrawals in true cash investments and then another eight years' or so in bond investments, like high-quality fixed-income investments. That way, you have a 10-year bulwark against a sustained equity market downturn. I like that strategy. Revisit your asset allocation.
I also like the idea of people who are already retired, start thinking about your spending rate. When you have seen your portfolio grow larger and large, as all of us have, over the ...
Harrell: Lifestyle inflation, perhaps?
Benz: Exactly, exactly. A little bit of spending inflation. Revisit your withdrawal rate. If the downturn continues for a sustained period, be prepared to potentially pull in your spending a little bit. That's one of the best things you can do for the sustainability of your long term plan. That's especially important if you're a person just embarking on retirement, because if you encounter a lousy market right at the outset of your retirement and you're simultaneously spending too much from your portfolio, that leaves less of your portfolio in place to recover when the market eventually does. Keep those two things in mind.
Harrell: What about for folks like us who are still working and still in the accumulation phase? I know you cautioned against making big asset allocation decisions in response to a downturn, but is it maybe time to look at your equity allocation when prices have come down so much?
Benz: People who do have a long runway to retirement, to the extent that they can mentally handle it, should view market weakness as an opportunity to add more to stocks, if potentially they can. Revisit your contribution rates. Also, take a look at your intra-asset class exposures. Over the past few years in particular, we've had certain market segments perform super-well, other market segments perform pretty well but not as well, so we've seen this value versus growth bifurcation, where growth stocks have trounced value stocks. Revisit your portfolio style box exposure. You may find that you're inadvertently allocating more to growth stocks, which may not be as cheap, and you've kind of let your value stocks fall lower as a percentage of your portfolio. Check that out.
Also, check out your U.S. versus foreign stock allocations. We have generally seen U.S. stocks outperform foreign stocks over the past decade. If you have a nice long runway to retirement, think about correcting that, potentially adding more to your foreign stock allocation. Here's a place to get some advice, either from a financial advisor or maybe use a good target-date fund, like Vanguard's, as a proxy for your asset class exposures. Just get some professional guidance on what are people recommending for someone at my life stage, in terms of asset class exposures.
Harrell: Terrific. Thank you, Christine, for sharing these insights. From Morningstar, I'm David Harrell. Thank you for watching.
David Harrell is an employee of Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar. The opinions expressed in this video are those of Christine Benz and/or Morningstar, Inc., may not represent the opinions of Morningstar Investment Management, and are subject to change without notice. Morningstar Investment Management shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use.
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