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The Short Answer

Timeless Lessons from the Morningstar Conference

Amid market turmoil, investors can find great long-term advice.

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The Morningstar Investment Conference, held this year from June 25-27, is always a great place to hear investors, academics, and industry leaders talk about what's going on in the markets. This year, there were keynote talks from such luminaries as PIMCO's Mohammed El-Erian, T. Rowe Price's Brian Rogers, and financial journalist Jason Zweig, and expert panels on such topics as real estate, exchange-traded funds, and growth investing.

Inevitably, much of the talk at the conference tends to be about the current state of the market; that was certainly true this year, given all the uncertainty that investors have had to endure lately. But amid all the discussion of commodity prices and the direction of interest rates, this year's conference also provided lots of timeless advice that's useful for investors in any kind of market. Chris Davis has recently discussed some of the fascinating insights from neurobiology that Jason Zweig presented during the conference, and in his book Your Money & Your Brain. Here are a few of the most valuable points that long-term investors could glean from this year's other speakers.

All Rebalancing Is Not Created Equal
One of the more interesting sessions of the conference was a discussion between Morningstar's John Rekenthaler and William Bernstein, author of The Intelligent Asset Allocator and several other books. In his books and on his Efficient Frontier Web site, Bernstein has been a big proponent of efficient-market theory and has often discussed how investors can build a portfolio with the best expected returns over the long term. One of the key elements of maintaining any portfolio is rebalancing, but, as Bernstein noted, the question of when to rebalance is not a simple one.

The standard advice is to rebalance your portfolio once a year in order to keep your asset allocation from drifting too far from the targets you've set. That's not bad advice as it goes, and it's certainly better to rebalance once a year than not to rebalance at all. However, such a one-size-fits-all solution may not be right for everybody; a portfolio containing mostly stable asset classes might need rebalancing only every few years, whereas one full of volatile assets might deserve more frequent tweaks. One solution Bernstein mentioned is to rebalance whenever your asset allocation drifts too far from your target; for example, if your target is 60% equities, you could rebalance if your equity percentage changes by 10 percentage points in either direction (if it goes above 70% or below 50%). The tricky part is to find the right range; if it's too wide, you might never rebalance, but if it's too narrow, you might find yourself rebalancing more often than you need to. Fortunately,'s Portfolio Manager makes it easy to keep track of your allocation and make appropriate adjustments. Premium members can sign up for  Portfolio X-Ray Alerts, which notify you by e-mail if your asset allocation goes beyond certain thresholds that you set.

Too Much Trading Can Decimate Your Returns
All the volatility in the market over the past year has understandably made many investors jittery, and in such an environment it's natural to want to do something. Unfortunately, frequent trading in an effort to outsmart the market is likely to do you more harm than good, since there's a natural human tendency to buy and sell at just the wrong times. This is a point we've made before in our discussion of investor returns and personal returns, which measure the effects of trading on total returns. It was also one of the themes of Jason Zweig's talk at the conference on the psychology and neurology of investing. The basic idea--that trading tends to hurt returns relative to a buy-and-hold strategy--also came up in several of the panels.

A particularly interesting discussion along these lines emerged in the panel on target-date funds, "Building an Ideal Target-Date Portfolio." Such funds are supposed to be one-stop options for investors who don't want to worry about asset allocation and rebalancing their portfolio as they get closer to retirement. The panelists emphasized the usefulness and increasing popularity of target-date funds, but also mentioned that investors don't always use them as intended. Christopher Sharpe, comanager of the Fidelity Freedom target-date funds, said that he sees way too many investors moving in and out of such funds in response to market volatility, and noted that such investors are only hurting themselves in the long run. The other panelists, Tom Idzorek of Ibbotson Associates and Seth Masters of AllianceBernstein, agreed that many target-date investors fail to get the full benefits from such funds because they engage in short-term trading and don't look at the big picture.

It's Often Darkest Before the Dawn
Given the market's nosedive in recent months, another prominent theme of the conference was finding bargains amid the wreckage, especially in the beleaguered financial sector. People are naturally wondering whether we're near a bottom and are trying to distinguish between stocks that are in danger of going into a death spiral, a la Bear Stearns, and those that are cheap but will bounce back. In fact, quite a few speakers at the Morningstar conference were touting bargains among financial stocks. For example, in the "Ultimate Stock-Pickers" panel, Robert Torray of the  Torray Fund (TORYX) said that big, beaten-down financial franchises such as  Citigroup (C) and  American Express (AXP) have a lot of long-term value that the market isn't recognizing now and predicted that their stocks could double in the next five years. Fellow panelist Charles Pohl of  Dodge & Cox Stock (DODGX) similarly said that  Wachovia (WB), one of his fund's largest holdings, is being unfairly lumped together with other banks having mortgage exposure, despite its more conservative underwriting standards during the mortgage runup.

The broader idea to take away here is that periods of market turmoil and pessimism are often the best times for clear-headed investors to find good long-term investments at bargain prices. Of course, only time will tell whether these financial stocks really will be bargains in the long term. There were certainly some skeptics at the conference as well, with such panelists as Susan Byrne of  WHG Large Cap Value (WHGLX) and Bruce Berkowitz of  Fairholme (FAIRX) (both on the "Let's Talk Bargains" panel) saying that a lack of transparency has kept them away from financial stocks for now. That's another worthwhile point to keep in mind: Experts often disagree about what will happen in the market, which is why it's so difficult for active managers to come out ahead.


David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.