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Benz: Top Four Resolutions for Investors in 2011

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar.

As 2011 gets under way, we know a lot of investors will be checking in on their portfolios, so now is as good a time as any to make a few resolutions about how you'll be managing your investments in the New Year.

Here with me to offer some tips on that front is Morningstar's Christine Benz, director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So, Christine, I think around this time of year, we would say there are few key pieces of investing advice that should always be on your resolution list. What are some of those evergreen things that you should always be keeping in mind?

Benz: Right, so the equivalent of eating well and exercising for investors; that would be savings and investing as much as you possibly can, having a sensible asset allocation framework given where you are in your life, and not chasing performance. Those would be some of the key things that I would look at in terms of evergreen-type investment advice.

Stipp: Very classic investing rules, but always good to remind yourself of those.

But right now given some things that have happened in the market over the last couple of years and where we see ourselves today, there are some specific resolutions that you might want to have on your list for 2011.

The first one: Let's talk about market performance and where it's been and how that might affect your resolutions going forward into the New Year.

Benz: So stocks have had a tremendous run over the past few years now, so relating to stocks I would say your key resolution should be to take it slow. So don't pile into stocks. Don't chase the hottest-performing stock categories. Really plan to take a measured approach to stocks. When we look at the broad markets, certainly according to Morningstar's stock analysts, they see it as pretty fairly valued currently.

So, I think dollar-cost averaging makes more sense than ever right now, and also look at some of those categories that are kind of slow-lane fund and stock categories, so large-cap stocks, for example, have not performed especially well relative to small and mid-caps.

It could be worth maybe tweaking your portfolio to give it a greater emphasis on some of those categories, not just with U.S. stocks, but also foreign stocks.

Stipp: So, certainly a measured approach is a good one if nothing looks screamingly cheap right now.

On the fixed-income front, we've had some bumps in the road over the last couple of months, and I think a lot of Morningstar readers are very concerned about their bond portfolios right now. If you had a resolution for fixed income, what would it be?

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Benz: I would say "resolve not to panic." The key thing to remember is that asset allocation framework that might prescribe X percent in bonds will probably still make sense for you. You don't want to throw bonds out the window altogether even in a nervous interest rate environment.

What you want to do, though, is avoid some of those obvious problem spots. So, long-dated Treasuries, for example, will tend to respond worse than any other category when rates are rising. You want to steer clear of that category.

I've also been saying it makes a lot of sense to delegate your fixed-income portion or a big portion of your fixed-income portfolio to a truly active fixed-income manager; PIMCO has got some great go-anywhere funds; Met West Total Return is another one we like.

And also consider dividend paying stocks for a sleeve of your fixed-income portfolio, but don't look to them to supplant your fixed-income portfolio.

Stipp: In fixed-income, as is the case with lot of investing, your time horizon is an important thing to keep in mind as well.

Benz: Absolutely. So, people get confused by duration, what it means. It's a rough gauge of the interest rate sensitivity of a portfolio, but it can also be useful, if you're trying to figure out, is this investment right for my time horizon? If you see duration of say 3.5 years, make sure that's in the ballpark of how long you expect to hold that investment; it can be really useful from that standpoint.

Stipp: So, Christine one of the things I think you could say is an evergreen piece of advice is to manage how much your investments cost, the expense ratios on those funds. But it's importantly, right now, a good resolution for 2011 to keep a close eye on costs?

Benz: Right. So, we see costs as the best predictor of how investors will do in mutual funds, certainly. One nice thing for investors is that we've had price wars breaking out over the past few years with firms competing for the lowest price mantle. So, shop around, make sure that you are getting the best deal, particularly if you do use some of those commodity-type investments.

So, if you have a big emphasis on index funds or ETFs in your portfolio, make sure you're getting the best deal out there, because there are some really broad disparities. There are emerging-markets ETFs that are charging literally 50 basis points more than some other emerging-markets ETFs. So, make sure that you truly have the lowest-cost basket of securities that you can possibly have.

Stipp: So, typically it's going to be those index-based funds that will be the cheapest. But some folks, obviously, will want to go with active managers, they feel like they can get some value out of that. As you are gauging how well your performance has been in your portfolios, what's a good way to make sure that you are getting what you're paying for, if you are paying a little bit more for active management?

Benz: So, that leads me to another resolution, Jason, which is to be honest about how you are doing. So, if you are someone who picks individual stocks or you cast your lot with active managers, make sure that you're really getting a bang for your buck in terms of any extra commissions or expense ratios that you're paying. So, what I always say is good advice is to set up a mirror portfolio using Morningstar's Portfolio Manager tool that essentially mirrors your own asset allocation.

Set up a portfolio consisting of inexpensive index funds and periodically compare that portfolio's performance with your own more active portfolio. If, over a period of a few years, you see that you're really not outpacing that simple low-cost portfolio, maybe it's time to consider tipping at least some of your portfolio into index funds and ETFs.

Stipp: Christine, some great ideas and resolutions for the New Year. Thanks for joining me.

Benz: Jason nice to be here. Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.