Benz: Learning From My Own Missteps

Jason Stipp: I'm Jason Stipp for Morningstar as part of Morningstar's 5 Days to Better Investing, today, we're talking about investor mistakes and how to avoid them.

We're going to get a little personal today and ask Morningstar's Christine Benz about some of the mistakes that she has experienced in the past and what she has learned from them. She being a good sport for sharing those with us. Thanks for joining me Christine.

Christine Benz: Jason good to be here. I hope to turn the tables on you one day and hear about your own investments.

Stipp: Well, that might be a long video. So, we'll have to wait and see on that one.

So, I talked to Pat Dorsey this week about some ... of the mental problems that investors have and have trouble getting over, and it and that can lead them to make certain decisions that aren't in their best interests. One of them is recency bias, and you had an example of how you were affected by recency bias. What was that?

Benz: A couple of examples. Jason. I started at Morningstar in 1993. That was a period when growth stocks were really outperforming value. So, I think probably my initial 401(k) portfolio here had a little too much of a growth emphasis than it should have had. We had a fund called PBHG Growth in the plan. It turned out to be just a terrible fund, blew up in several different ways on several different occasions, and I'm sure I probably sold it at an inopportune time, but I definitely had too much growth in my portfolio.

I also drank the Kool-Aid on emerging markets in early '90s. I still think emerging markets are a decent part of one's portfolio, but I bought, I think it was my first non-401(k) plan fund, bought an emerging-markets fund, and I believe that I sold out around the late 90s '97-'98, there were a couple of crises that affected emerging markets. They sold off very sharply. And I sort of looked at the asset class and wasn't a believer anymore, and probably should have been at that point versus doing the performance-chasing I was doing when I initially bought in.

So, those are two good examples of when I have fallen prey to recency bias.

Stipp: On the specific stock side, you had an experience also related to the tech boom that had to do with the relative valuations. What was that?

Benz: It did. That Tech Wreck that we saw in early '00s kind of took a few years to unfold. There were a few steps down early on where tech stock sold off very sharply, and I and I'll say some of my other colleagues here at Morningstar, took that as an opportunity to buy into some of those tech names because their relative valuations looked better than they once did. Of course, they were by no means fairly valued at that point.

The specific stock I bought was Microsoft, and Microsoft didn't know that it was once $100. It still had a long way to go after I bought it. So, I think that was another example of thinking about the recent past and using that as a lens to position my portfolio, which usually isn't a good thing to do.

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Stipp: So, tech and emerging markets, these are obviously areas that can get supercharged and can also see some pretty severe corrections. But on the flipside, sometimes you look at the portfolio and you'll see funds that don't really seem to be doing a whole lot for you, but that's also an area where you can make a misstep?

Benz: Right, right. I am happy to say this is one thing I didn't act on, but one thing I recall thinking about was looking at this fund that's long been in my 401(k) plan, Vanguard International Growth. A really good, steady-as-she-goes international fund. I remember looking at it at one point, maybe it was during the tech growth stock euphoria, and kind of thinking, "Eh, this fund never really does a lot for me; it always kind of goes along in the 40th percentile." Well, a fund like that can actually be a very good long-term performer by assembling those back-to-back-to-back steady above-average returns. So, I have learned from thoughts like that not to underestimate those seemingly boring funds because they can actually be a terrific part of a long-term portfolio, and I am happy to say I still hold that one.

Stipp: So, not going to knock your socks off in any given year, but over several years, actually, that might knock your socks off.

Benz: Exactly.

Stipp: So, Christine, I think this also leads to another issue, which some people might think is a mistake, but can sometimes work out for you, which is the idea of inertia, where you don't actually tinker with your portfolio that much. What are some examples there?

Benz: Well, I have some good examples of when I've been inert and that's actually benefited me. I know sometimes inertia can work against investors, but one example I would think of is coming into this year, 2011. I remember saying to my husband, do we really need bonds, given what's likely to happen to bonds in the years ahead, and still may, I remember thinking, we're probably fine with cash and stocks.

Well, thankfully I didn't act on that idea because actually the best-performing part of our portfolio year-to-date are our core bond holdings, our Vanguard Intermediate-Term Tax Exempt has done just fine, the version of PIMCO Total Return that my husband holds in his 401(k) plan has not been as good as other funds, but it's actually held up reasonably well. So, sometimes not acting on those impulses can really be a pretty good thing.

Stipp: So, Christine, last question, also on the portfolio level. I think for a lot of us, our portfolios can get away from us. Our number of holdings can multiply over time. What's been your experience with that? Have you found that you've had to correct any issues with portfolio bloat in some respects?

Benz: That has happened where I have ended up with a little list of holdings that isn't too streamlined. So, if you have two partners, each of whom have their own 401(k) plans, and then maybe you have IRAs and taxable accounts, things can get a little unwieldy.

So, over the past few years that's been a bit of project of mine, has been streamlining my portfolio holdings, and just really focusing my efforts on those holdings in which I have the highest conviction, and that's something that my husband and I have done a lot of within our taxable accounts. We've really focused on just a handful of different funds. We've cut out some of our stock holdings over the years, taken some tax losses actually, but actually assembled what we think is a very compact list of our favorite holdings. And I think that gives you less to monitor on an ongoing basis and also ensures that you're putting your assets behind your highest-conviction names.

Stipp: Well, Christine, some great food for thought. Thanks for being such a great sport and sharing some of your experiences with us today.

Benz: No problem, Jason.

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