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

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.