Clients looking at this week's dip amid the longer-term bull market may wonder what, if anything, to do next.
While there's no pat, one-size-fits-all answer, Morningstar's personal finance and retirement planning director, Christine Benz, recently shared her thoughts on risks, opportunities and strategies for investors — now and in the long term.
On The Morning Filter podcast with Morningstar colleague Susan Dziubinski, investment specialist, Benz addressed a broad range of possible moves for investors. The pair recorded the conversation, posted this week, on Aug. 6.
1. A major risk: complacency.
Benz called investor complacency "the big one." U.S. stocks have enjoyed a "phenomenal long-term run," she noted.
"I think there’s a tendency to believe that it will ever be thus. In fact, there have been some people we really respect who have been kind of banging the drum for the virtues of long-term compounding. ... My worry is that investors will lean a little bit too much into that and not think that they need anything else in their portfolios," she said.
A slowdown in economic growth or consumer spending, or another catalyst, could stop the party, at least temporarily, Benz noted.
2. De-risk at 50 — and not before.
Starting at age 50, investors should look at de-risking their portfolios, according to Benz, who said people often retire earlier that they envision.
Clients shouldn't entirely remove risk from their portfolios, she added, "because you could have 45 or more years where you are still going to be wanting to grow that portfolio, but ... I like the idea of building a bulwark of safer assets, probably high-quality short- and intermediate-term bonds, little bit of cash."
Younger investors shouldn't be worrying about de-risking, "apart from whatever you have in your emergency fund or if you have short-term goals," said Benz.
3. Global stocks? It's not too late.
Diversifying portfolios globally makes "a ton of sense," Benz said.
"U.S. stocks have definitely been the path of least resistance. They’ve been very easy to own over the past decade-plus," she noted, adding that the global market cap today is roughly 62% U.S., 38% non-U.S. "It’s a rare investor who has that much in non-U.S. stocks but I think that’s a pretty good benchmark, and most younger investors are probably underweight in non-U.S. stocks."
Citing recent comments from Morningstar portfolio stratgist Amy Arnott, Benz explained there's probably still time to take part. Non-U.S. stocks enjoy a valuation advantage and higher dividend yields, and cycles where non-U.S. stocks do better often last several years, she added.
4. An opportunity in bonds.
Recent bond yields present an opportunity for investors, especially if they lock them in and use bond ladders, Benz suggested.
"The fact that bonds have been through a little bit of a dislocation recently actually sets up bond investors for better returns. It also provides a little bit of a buffer if bonds do have losses going forward," said Benz. "If bond prices fall, at least you have that higher yield to help offset those losses. So you shouldn’t have significant principal-related losses, I wouldn’t think."
5. Funds over individual stocks.
Benz considers ETFs and mutual funds preferable to investing in individual stocks.
"It's very simple to assemble an ultra low-cost portfolio of broad market index funds or exchange-traded funds. And then you don’t have to spend a lot of time on oversight. It’s pretty easy to see if you do need to do some rebalancing, you can quickly determine where the rebalancing should happen," she explained.
When it comes to retirement planning, she added, "as we age, we’re more likely to experience some diminishment in our cognitive functioning. And it only makes sense to try to simplify and streamline our portfolios as we age."
Another key advantage to an index portfolio is that, as data shows, active fund managers haven't added much value, Benz said.
6. Total market indexes as a core long-term play.
A total market index mutual fund or ETF would make sense as a core holding for investors with long time horizons to build wealth, Benz suggested.
"So if you have a U.S. total market and non-U.S. total market, you have the whole world there. You’re also diversified by sector and style. So I think that’s kind of the starting point," she said.
If investors want to own some individual stocks to supplement core funds, Benz suggested going off the beaten path a bit and not duplicating fund holdings.
"To the extent that I held individual companies, I would research them scrupulously. I would not own those largest names," she said. Unlike active fund managers, she added, individual investors don't face pressure to sell in market downturns.
"Your superpower is your ability to be patient, your ability to lean into that long time horizon, if you have really done your homework and know those companies."
7. Dividend funds as a retirement income source.
Dividend funds can be vital for retirees, Benz noted.
"The bird in the hand is very comforting. Once you are separated from your paycheck, the idea of having stable sources of income or semi-stable sources of income is very, very appealing. Then the other thing I would point to is that dividend-paying companies typically are more financially stable than non-dividend-paying companies," she said.
Dividend payers also tend to be less volatile, although clients should remember that companies do sometimes cut dividends, Benz said.
While some investors might even go exclusively with dividend payers in their stock portfolios, Benz recommended supplementing them with a safe buffer like cash and high-quality bonds.
8. A shout for dividend growth.
Benz, who said she loves dividend growth investing, named Vanguard Dividend Appreciation (VIG) as a go-to ETF for that strategy.
"I would augment it with some non-dividend-growers, some non-dividend-payers, because we have market environments, and I think we’re living through one currently, where the non-dividend-payers perform very, very well. So the large-cap tech names, for example, would tend to be underrepresented in a dividend growth strategy.
She suggested a total market index alongside the dividend strategy.
9. Set it and (mostly) forget it.
Benz continues to support the idea that investors not do too much with their portfolios.
"For most investors I would say you want to keep in mind the idea that your portfolio is like a bar of soap, and the more you touch it, the smaller it’s going to get. And that’s not my creation, but I love that metaphor — try to keep your hands off of your portfolio. ... I happen to believe that a good once-annual review of a portfolio is plenty," she said.
"Do a once annual review where you’re looking at performance. You’re looking at whether rebalancing is in order, you’re looking at whether any tax planning maneuvers might make sense, whether charitable giving or donating appreciated securities."
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