Talk about timing. On Monday, a day before the U.S. stock market suffered its worst one-day decline in what Bloomberg calls an “awful year,” Morningstar’s director of personal finance, Christine Benz, published “Your Market Downturn Tool Kit.”
The checklist for investors, originally published in February but republished Monday, can be used by advisors who want to offer more than simple “stay the course” advice to nervous clients during market routs, which lately have often lasted for several days.
The latest price plunge on Tuesday erased all of this year’s gains in the S&P 500 and Dow Jones industrial average, which remained the case even after the rally on Wednesday, before Thanksgiving.
Benz includes in her checklist a number of Morningstar tools to help with this exercise as well as apps from mutual fund companies such as Vanguard, Fidelity and T. Rowe Price. We include these tools in the checklist below only as guide acknowledging that advisors usually have their favored tools for conducting similar exercises. Advisors can, however, compare their tools to those that Benz recommends. That could be especially useful when talking to clients who regularly read Morningstar and may even ask about Benz’s recommendations.
Review Stock/Bond Mix
A 60/40 stock/bond allocation in 2009 now has even more stocks than an 80/20 mix due to the surge in stock prices that began soon after the dramatic rally that followed the Great Recession. Investors who want to stick with a more balanced portfolio need to reduce their stock exposure but should also take into account the underlying holdings of their mutual funds when doing so, according to Benz.
With that data in hand, they can then compare it to a benchmark such as Morningstar’s Lifetime Allocation Index or a target date fund that’s geared to an investor’s retirement date such as Vanguard’s and BlackRock’s Lifepath index Series, writes Benz.
For retired investors or pre-retirees, Benz suggests they review their own portfolio spending amounts when choosing their asset allocation and check their cash reserves. Pre-retirees who are still working should have three to six months of living expenses in cash; high income earners should try for a year or more of cash reserves, suggests Benz.
Tools: Morningstar Portfolio Manager, Instant X-Ray Tool, Lifetime Allocation Indexes, Model Portfolios for Savers and Retirees
Check Whether a Retirement Plan Remains on Track
Benz recommends that investors have an investment policy statement that states their investment goals, ongoing contribution amounts, basic asset allocation framework and the qualities an investor seeks in their investments. Retirees and pre-retirees should also have a separate retirement policy statement that documents a withdrawal rate regime as well as other needed retirement planning factors.
Meeting with a fee-only financial planner, however, is “the gold standard for getting a check on the viability” of a retirement savings plan, writes Benz. For do-it-yourselfers, she recommends the T. Rowe Price Retirement Income Calculator, Vanguard Retirement Nest Egg Calculator and Fidelity Retirement Score and retirement plan calculators included on the Bogleheads website.
Review the Investment Quality of a Portfolio
Focus on the big picture rather than just short-term gains or losses, suggests Benz. Do holdings align with the investment policy statement? Is the portfolio streamlined or does it include redundancies which can be eliminated? Benz suggests investors check the ratings for mutual funds, ETFs and stocks.
Tools: Morningstar Medalist Mutual Funds, Medalist ETFs, Highly Rated Stocks List.
Check out the rest of the list on Morningstar.
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