Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Finding the right stock bond mix is a hugely important question when managing your retirement portfolio, but it's one that investors often struggle with. Here to address that question for us is John Ameriks, he is Head of Investment Counseling and Research at Vanguard. John, thanks for being here.
John Ameriks: Thanks for having me. It's great to be here.
Benz: So, let's start with the key question these days which is, whether to take a more tactical hands-on, active approach to managing your asset allocation or whether you should be hands-off and strategic in long-term. What's your take on that question?
Ameriks: Well, the reports of the death of strategic asset allocation are greatly exaggerated, I would have to say. So, I know it's the same old story when there does seem to be a period that we go through where active managers struggle, folks start to talking about the utility of trying to get in and get out in front of the markets, but that remains just as much of a challenge today as it ever was.
And so we think for most investors there is a very strong role, continued role for strategic asset allocation, taking a risk tolerance questionnaire, finding out what portfolio might be the right fit for you given your risk tolerance and then sticking with that. That doesn't necessarily mean just set it and completely forget it. It means make sure that you rebalance on a periodic basis and get back to those targets, but those targets are of primary importance.
Benz: And periodically make the portfolio more conservative as you get closer to needing your money?
Ameriks: For most people, that does make an awful lot of sense and is in fact the main idea behind the target-date funds, that as people get older their ability to handle risk changes and a more conservative allocation will generally make sense.
Benz: So, one question I have for you John is that, when you look at 401(k) participant behavior, do you see that they tend not to make a lot of changes, and so would that argue for maybe dialing up the equity allocation if they are not particularly risk conscious and not paying attention to those big market downturns?
Ameriks: Well, I think it's all about the analysis you do around what level of risk is appropriate given someone's end goals. We do know that, while in general – I guess I was the one that many, many years ago myself and my dissertation advisor did some of the earliest work looking at inertia in a 403(b) plan actually. I mean what we found was very large fractions of the participant base not doing anything over very long periods of time.
But we also know that during periods of stress when there are bumps in the market, big bumps like there were in September of 2008 and through the end of that year, we do get some participant reaction. And so, that you are always trading off, at some level if things get bad enough, some people are going to be tempted to try to do something, and so you are always trading off risk and return. So we think that finding some middle ground in between a 100% extremely risky portfolio and something that's way too conservative is what's going to make sense for most people.Read Full Transcript
Benz: And that's what you've tried to find with the target-date funds for Vanguard?
Ameriks: You've got it. Yes.
Benz: So you've mentioned a couple of times assessing your own risk tolerance, but it's my view that sometimes investors aren't great gauges of their own risk tolerance. So how do you think investors should factor in that question?
Ameriks: You know I think the risk tolerance questionnaires that are out there can be very helpful that way in terms of giving you sort of 10 questions that will give you an initial portfolio to think about. But then the other think is people do gain experience after a while. And just like anything else, in some cases you may have to make a mistake before you get it exactly right or maybe you can get it exactly right on the first swing in something like a target-date fund. You get a in the middle a balanced allocation. But you have to continue to look at that. And if it ends up being too risky for you, then you've got to take the reins, take a risk tolerance questionnaire, and figure out what direction you need to move in.
But that should be a strategic assessment. We think that most often changes to risk tolerance are about things that happen in your life as opposed to things that are happening in the markets. The market shouldn't be what drive your view of risk tolerance. That's not what risk tolerance means.
Benz: So what's an example of a life change that would drive up more conservative or aggressive asset allocation?
Ameriks: Well, the biggest one is something I've already alluded to which should be retirement and you move out of the labor force, and it's very important to be clear on that as well that we're not talking about leaving a job, changing jobs and a lot of people will do that. They'll get to 45 or 55 and take an early out-package at their current employer. But that doesn't mean they are stepping out of the labor force, it just means they're moving on to something else.
But for somebody, who really is deciding that look work is not going to be how I earn my living going forward. Thinking about getting a little bit more conservative does make an awful lot of sense. That really I think is the big one. Obviously, the loss of a job or loss of a spouse's job can also have some influence on how you approach what risk level is right for your portfolio.
Benz: So last but not least, I know a lot of Morningstar users might say, 'Well, these target-date funds, they're blunt instruments. They couldn't begin to suit my needs.' What do you say to people who think that these funds aren't – that they are too sophisticated for a target-date fund?
Ameriks: Well, I think first of all, the idea that they can't be all things to all people is exactly right. And they are a fund that's trying to do the most good for the most amount of people. But we do think that there is some sensibility to using a target-date fund in conjunction with perhaps other assets.
At the end of the day almost no investor puts a 100% of their money in one single fund. You always have assets somewhere else or your spouse has assets or something else. So you've got to think about your portfolio holistically. When you do that you find that the service aspect of target-date funds, the fact that they automatically rebalance, they will ratchet down risk as you get older becomes even more valuable, and so that can still be a very important part of your portfolio.
Benz: Well, thanks John. Thanks for sharing your insights. We appreciate it.
Ameriks: You're welcome. Thank you.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.