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Christine Benz

Portfolio > Portfolio Construction

When and When Not to Revamp Portfolios: Morningstar's Benz

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What You Need to Know

  • A volatile market generally isn't a great time to overhaul a portfolio, Morningstar's Benz said.
  • Advisors can show skittish clients the trade-offs in veering from plan and selling amid turbulence.
  • Major life changes and streamlining are among reasons to consider an overhaul.

A highly volatile market environment is likely not the ideal time for investors to revamp their portfolios, no matter how tempting the prospect may be, according to a top Morningstar expert.

Investors may be frustrated to see their stocks and bonds lose value, but generally, it’s not a great idea to consider a major portfolio upheaval during the kind of market volatility we’ve seen recently, Christine Benz, Morningstar’s director of personal finance and retirement planning, said on the research firm’s website.

“I really wouldn’t recommend market action as a catalyst. I would try to stick to whatever plan you have and just do your annual check-in or your quarterly check-in or whatever you do,” she added.

Guiding Clients

Rattled investors may be tempted to let emotions rule their decisions during volatility.

How an advisor can guide clients to hold tight in turbulent markets will depend on the individual investor, Benz noted, expanding on her comments via email.

“Every investor is different, and advisors will be the best judges of what might provide a specific client with peace of mind. But there are a few key worries that crop up when the market is volatile,” Benz told ThinkAdvisor.

“A big one is whether the market’s recent losses will jeopardize the client’s current standard of living or any imminent or long-range plans. So a good discussion to have with retirees is that their cash flows won’t be disrupted; the advisor can walk through that cash flow will continue to come from X, Y and Z,” she said, noting that she suggests retirees hold one to two years’ worth of portfolio in liquid reserves on an ongoing basis.

“For people who are still accumulating assets, advisors can talk to them about how sticking with the current savings and asset allocation plan puts them on track to reach their goals,” said Benz. Some clients might benefit from looking at various stress tests of their plan — “what if” scenarios.

“The advisor could demonstrate that the plan is still on track even if market losses intensify, and walk through any course corrections that might be in order if volatility drags on (or) worsens. Clients who are so nervous that they’d like to sell out of stocks would also likely benefit from an exploration of the trade-offs that would need to happen if their portfolio were to be much more conservatively positioned and its return potential constrained,” she said.

The advisor, for example, could show that the client might need to delay retirement by a few years or live on less in retirement. “Understanding the actual implications of those decisions may stave off the desire to get into a conservative crouch,” she told ThinkAdvisor.

When to Revamp?

So when does a portfolio overhaul make sense for financial advisors’ clients? Major life changes, especially imminent retirement, call for a reassessment, Benz suggested in her Morningstar.com talk.

People in their 60s to early 70s, nearing retirement, typically think about the feasibility of their portfolios and plans, she said, noting the importance of positioning investments to last as clients age.

Benz advocates a bucket approach for retirement portfolios, which uses the client’s time horizon to guide how to position their assets. This concept holds that clients should keep near-term living expenses in cash and invest assets they won’t need for years in diversified, long-term securities.

“I would hold portfolio withdrawals for just one to two years in cash, withdrawals for the next five to eight years in bonds, and the remainder of the portfolio, for years 10-plus, in stocks,” she explained to ThinkAdvisor.

A Windfall Evaluation

Receiving a financial windfall also merits a portfolio reevaluation, according to Benz.

In that case, a client’s portfolio moves will depend on their goals, she said, noting that a client will likely put the money into different investments if they plan to add an inheritance or lottery winnings to retirement savings versus making a major luxury purchase in the near term.

“By all means get the assets into something that is safe and pays at least some interest while you sort out next steps. And it makes a ton of sense to both review goals and figure out which capital-allocation decision, including debt paydown, offers the highest potential return on investment and does the most to improve the investor’s financial picture,” she told ThinkAdvisor.

“For investors who don’t have adequate emergency savings and/or have high interest-rate credit card debt, steering the funds to address those issues will very often be the most prudent use of funds. But such individuals might benefit from taking an ‘all of the above’ approach, using the funds to pay off high-interest rate debt, bolster the emergency fund, and invest for long-term goals such as retirement or college savings for children,” Benz added.

Streamlining

Clients also could be well-served by a portfolio assessment if they’ve collected many — even hundreds — of securities over the years but haven’t really developed a blueprint for their holdings, she said on Morningstar. “That can be a phenomenal catalyst, realizing that you’ve been an investment collector, now it’s time to get serious about my portfolio’s asset allocation,” said Benz.