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5 Ways Retirees Can Take the Edge Off in Volatile Markets

Christine Benz
Jeremy Glaser

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Volatility has come back in a big way in 2018 with worries from everything from inflation to new tariffs. I'm here with Christine Benz, she is our director of personal finance, for five things that retirees can do to take the edge off this volatility.

Christine, thanks for joining me.

Christine Benz: Jeremy, good to be here.

Glaser: Christine, your first piece of advice is just to rebalance.

Benz: That's right. I have been evangelizing about this for a while now. But the key reason is that if you have done nothing to your portfolio during this great bull run that we've all experienced, your portfolio has gotten progressively more equity-heavy, and in turn, it's more vulnerable to volatility in the equity market. A portfolio that was 60% equity, 40% bond back in March 2009 would now be upward of 80% in equities. Meanwhile, you are nine years older. It's valuable to revisit your portfolio's asset allocation. 

I think sometimes when we have the kind of market shocks that we've had here in 2018's early innings, there's a temptation to do radical shifts to your asset allocation. So, maybe go all to cash with your equity exposure. Rebalancing is really a healthy way to address asset allocation imbalances that may have cropped up in your portfolio.

Glaser: Your second tip is that it is OK to hold a little bit more cash right now.

Benz: I think so. For investors who are using the bucket approach that I often talk about where you hold some liquid reserves aside to help meet your ongoing living expenses in retirement--I typically say hold one to two years' worth of cash investments of the amount of living expenses that aren't being met by Social Security and other stable sources of income--hold that in cash. Right now, I think, holding two years' worth of cash is a reasonable thing to think about, especially when you think about the differential in terms of yields on money market true cash investments relative to, say, a short-term bond fund today. With cash, you get those FDIC protections. You are guaranteed stability of your principal. If you venture into a bond fund, you are going to pick up a little bit of principal-related volatility. I don't think there's a huge opportunity cost to holding a little bit extra cash these days.

Glaser: Your third piece of advice is to consider a balanced fund.

Benz: That's right. Look at a good, a solid all-in-one fund that really lets you set it and forget it. This can be a particularly good strategy of maybe you just have one smaller account alongside a larger account. With the smaller accounts, I think, it makes a lot of sense to try to get it done with a single-fund vehicle. When I did simulation of portfolio returns, retiree portfolio returns a few years back, I looked at an all-in-one portfolio relative to, say, a bucket portfolio with discrete asset class exposures. The all-in-one funds did underperform a little bit simply because by holding discrete equity and bond holdings you are giving yourself a little bit of discretion to pick and choose where you pull your withdrawals from. But the differential was not huge. On the other hand, with the all-in-one fund, you do get a lot of simplicity and you get that rebalancing built in typically. I think that there are a lot of attractions to the all-in-one-type funds.

Glaser: What would be some good options there?

Benz: Vanguard Wellington, Vanguard Wellesley Income, a simple balanced fund would, I think, make a lot of sense. People who are retired, might also look at some sort of a high-quality target retirement income vehicle, which is typically the last phase in a target-date series. Any of those options, I think, would make worthy choices.

Glaser: Your fourth piece of advice is to think about quality within your equity holdings.

Benz: Right. We've seen a little bit of underperformance in terms of high-quality stocks in 2016 and 2017. I do think that when we look back over periods of market volatility, a high-quality strategy has typically held up better than a lower-quality equity strategy or even the broad market indexes. Here I'm thinking about a fund like T. Rowe Price Dividend Growth or a Vanguard Dividend Appreciation. Another fund that I know our ETF team likes is Schwab U.S. Dividend Equity, which is kind of a hybrid of a yield-centric strategy as well as a growth-oriented strategy. Those are all good ways to shade your portfolio toward higher-quality stocks which I think will give you a little bit more of a hedge in high volatility markets.

Glaser: Finally, now might be the time to rethink some noncore asset classes that you have accumulated over the years.

Benz: In retiree portfolios, sometimes the noncore asset classes, whether it's emerging-markets equity or a high-yield bond, give retirees a lot of worries and aren't making a meaningful difference in the portfolio's returns. If you have some of those holdings where when you open your portfolio on Morningstar.com, your eyes go right to them because you want to see what's going on with them, those are the ones to maybe consider excising, especially if they are not very large positions. I think it's a great time to think about simplifying, moving toward quality, and shading a little bit more toward conservative investments overall.

Glaser: Christine, thank you.

Benz: Jeremy, great to be here.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.