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Christine Benz's Midyear Portfolio Checkup

Christine recaps the market's activity for the first half of 2015 and provides a checklist for investors to use to evaluate their portfolios midyear.

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Christine Benz: Hi, I'm Christine Benz for, and welcome to a special session about how to check up on your portfolio at midyear. During the course of this presentation, I'm going to recap the first half's market activity, and then I'll also spend some time talking about some specific factors that you can use and look at as you review your own portfolio.

I'll start by talking about where the market ended up at midyear. You can see that stocks generally outperformed bonds and foreign stocks outperformed U.S. stocks by a pretty significant margin. Generally speaking, foreign developed-markets stocks performed better than emerging-markets stocks during this period.

The reason for bonds' weakness can be pretty well explained by this slide, which shows the increase in 10-year Treasury bonds during the first half of the year. You can see that rates rose fairly significantly during the period--especially in the second quarter--and that had a ripple effect for the bond market as well as for various types of equities. When we look at the worst-performing fund categories for the first half, you can see that most of them are pretty interest-rate sensitive. So, naturally, long-term government bonds were hit fairly hard. Long-term bond funds, in general--those that buy governments as well as corporates and mortgage-backed bonds--were also hurt, but some of the equity categories that we think of as being rate sensitive were hit even harder than these bond types.

Utilities were the hardest hit. In fact, some of our equity analysts actually think that utilities represent a buying opportunity now, given the sell-off in the sector. REITs were also fairly hard-hit, as were energy limited partnership funds--these are investment types that focus on master limited partnerships. We saw a pretty significant sell-off there as well.

These categories, I think, investors widely view as rate sensitive. And in fact, they behaved that way in the second quarter of 2015.

In terms of the best-performing market segments: In a lot of ways, this is a familiar pattern, where we've seen growth stocks--and small- and mid-cap growth stocks, in particular--outperform large and value-oriented companies in the U.S. We see a similar phenomenon overseas, where foreign small- and mid-cap growth funds have dramatically outperformed large-cap value-oriented foreign-stock funds. Japan has also continued on its tear; it has extended its winning streak into 2015 and now has a roughly 10.5% gain during the past five years. So, in terms of what performed well, there are a lot of familiar patterns here.

When we look at the Morningstar Style Box for U.S. equities so far in 2015, what we see is a confirmation that growth has outperformed. Regardless of market cap, we generally see that growth stocks have outperformed more value-oriented names.

When we think about portfolio checkups--actually getting into your portfolio and taking a look and doing some due diligence about your portfolio's current positioning and the state of your current holdings--I'll first share some best practices for conducting your own portfolio checkup. One of the first pieces of advice I would give is that less is more when it comes to checking up on your portfolio. I always say for individual investors that a good checkup every quarter, maybe semiannually, or even just annually is going to be plenty. The risk of checking up on your portfolio too frequently is that the more you're in there looking at your holdings, looking at how various positions have behaved, the more inclined you might be to make changes to your portfolio. In hindsight, [you may have been better off taking a more hands-off approach] with your portfolio.

So, I usually say less is more. A quarterly checkup, at most, is going to be adequate for most investors. It also makes sense, as you conduct your portfolio checkup, to be targeted rather than spending hours and hours noodling over your portfolio. I think it makes sense to be surgical. Keep your portfolio checkup to an hour or two at most. Anything more than that, again, is probably going to encourage more trading than is really necessary.


I think it also makes sense to use a checklist format when conducting your portfolio checkup. That's really the structure that I've used in this presentation. It also makes sense to proceed from most general and most important to more specific and perhaps less important when conducting your portfolio checkup. Again, that's how I've structured this presentation.

I think it also makes sense to focus on the fundamentals of your portfolio rather than getting too caught up in performance. Of course, it's natural to want to look at how your portfolio has performed and how various holdings have performed; but generally speaking, you want to keep your focus on the fundamentals of your investments and let that dictate whether you make changes. If, in fact, you determine that you do need to make changes to your portfolio, it's really wise to take tax and transaction costs into account before making any trades. That's one of the reasons why I always say if you're making changes to your portfolio or if you decide that your asset allocation is not where it needs to be, start with your tax-deferred or Roth holdings first. Because you won't confront tax consequences if you need to unload highly appreciated securities. If you need to reduce their importance in your portfolio, you're better off doing that in your tax-advantaged accounts where you won't face tax consequences for making those trades. You want to take a light touch to your taxable accounts by contrast--in part, because the drag of those capital gains taxes can really reduce the benefits that you achieve by making changes to your portfolio.

In terms of the portfolio-checkup process itself, I'll just quickly run through the key steps that I've used to structure this presentation. The first step--and this is the most important thing that you want to accomplish when you conduct a portfolio checkup--is to gauge the viability of your current plan. So, over the course of the presentation, I'll share some tips for people who are still accumulating assets for retirement as well as for people who are already retired.

The next step is to take a look at your portfolio's current positioning. This is really the bulk of the portfolio-checkup process. I'll talk about how you can use Morningstar's X-ray tool and various other tools on to help you do that.

The next step in the process is to check your liquid reserves. So, regardless of what life stage you're in--whether you're still accumulating assets, whether you're still working, or whether you're already retired--you need to make sure that you have a baseline worth of liquid reserves set aside. I'll talk about some rules of thumb that you can use for your own liquid reserves.

The next step in the process is to review your individual holdings. Again, you naturally want to pay a little bit of attention to performance, but I think it makes the most sense to focus on the fundamentals of your holdings. Here, I think Morningstar Analyst Reports, whether you are a stockholder or a fund or ETF holder, can really be invaluable in helping you get your arms around a lot of different factors.

I'll also talk about how to troubleshoot your portfolio for current risk factors. A lot of the material I'll cover up to this point will be more or less evergreen, but I'll talk about some risk factors that should be top of mind for investors today--some specific risk factors that pertain to the current market environment.

Finally, Morningstar often evangelizes about the importance of watching the costs of your portfolio and watching the costs of various holdings. I'll talk about how to conduct a quick cost audit of your portfolio and of your individual funds.

The first step in the portfolio-review process is what I call a wellness check. Here, you're getting in and you're looking at your current savings rate as well as the amount of assets that you've managed to set aside so far. A very rough rule of thumb for your current savings rate is to make sure that you're saving at least 15% of your current salary on an ongoing basis. Certainly, folks who are earning a higher income should set an even higher savings target. This amount is generally pretty low, but it's a good starting point for a savings plan.

Then, as you evaluate the viability of what you've managed to save so far, you want to think about a few benchmarks that I've provided here. These come courtesy of Fidelity Investments. These vary based on life stage. If you're someone who is 35--still fairly early in your investing career--you want to make sure that, by age 35, you at least have one times your annual salary set aside for retirement. As you hit 45, you'd want to have at least three times current salary set aside for retirement. And folks who are age 55 and above--starting to get close to retirement--they'd want to have at least five times current salary set aside and earmarked for retirement. Again, these numbers are just starting points. Certainly, if you want to reach higher, you absolutely should; but these are just basic milestones that you can use to check your portfolio's progress.

In addition, I think it's a great idea to get out there and use a number of the online calculators that are out there to help you gauge the viability of your plan. One that I often recommend is T. Rowe Price's Retirement Income Calculator. I like it because it's a holistic tool. It factors in a lot of different variables. No matter what calculator you're using, I would say that you want to make sure that it is encompassing as many of these different variables as possible. So, you want to make sure that it is taking into account the role of inflation, which can whittle away the value of our portfolios; you want to make sure that it's using reasonable return expectations. We're in year seven of the current rally, so arguably you'd want to take down your return assumptions on a going-forward basis. Any time you see equity-market return assumptions over 10%, that's a red flag that the tool you're using is being a little bit aggressive or maybe a lot aggressive in terms of its return expectations.

You also want to factor in the variability of possible returns. That's one of the reasons why I always like to see tools that use Monte Carlo analysis because they are incorporating the fact that, over our savings period, it's really luck of the draw in terms of how the markets behave.

One of the reasons I like the T. Rowe Price tool is that it takes into account taxes when determining the viability of someone's savings plan. So, it factors in money that I might have in tax-deferred accounts like traditional IRAs and traditional 401(k)s. It takes into account that I have Roth assets that will not be taxed during retirement, and it takes into account that I will pay taxable capital gains when I take money out of my taxable accounts. So, ideally, any tool you are using would be adding that nuance that taxes would add and would be giving your returns a little bit of a haircut to account for the role of taxes.

And then, ideally, you would also use a tool that is incorporating other income sources that you may be able to rely on in retirement. Social Security is a biggie in many households. Some families will come into retirement with one partner or more having a pension, so you want to make sure that the tool that you're using is factoring in the helping hand that you might be able to get from those outside income sources.

If you are getting ready to retire or are already retired, the key thing you want to focus on is your withdrawal rate. This is the big swing factor in whether your long-term portfolio plan is, in fact, sustainable. The rule of thumb that many retirees and pre-retirees have heard about is that you don't want to take more than 4% of your portfolio. That 4% rule assumes that you take 4% of your balance in year one of retirement; then you gradually inflation-adjust that amount as the years go by.

So, in the example that I've used here, someone using the 4% rule with an $800,000 portfolio would be able to take $32,000 out in year one of retirement; then, in year two, assuming inflation is in a normal range, that person could take closer to $33,000, and so on from there as the years go by.

So, if you are someone who has taken withdrawals from your portfolio, reflect on whether you're in that safe range. Certainly, older retirees with shorter life expectancies could probably take more from their portfolios--the reason being that their time horizons are shorter, so they could arguably be a little bit more aggressive with their withdrawals. But asset allocation also plays a role here. So, if you're someone who has a portfolio that is quite conservative--maybe you have the majority of your portfolio in cash and bonds--you'd need to be even more conservative about your withdrawal rates. So, asset allocation and time horizon play a big role here. It's important to understand that the 4% research that you often hear referred to actually assumes a 30-year time horizon as well as a roughly balanced or 60% equity/40% bond portfolio. If your own situation does not resemble those assumptions, you'd want to use a different withdrawal rate--maybe more conservative, possibly more aggressive.

The next step in your portfolio checkup--and this is really the bulk of the portfolio checkup--is to evaluate your portfolio's current positioning. The best way to do that, in my view, is to use Morningstar X-Ray functionality. You can access this in a couple of different ways. If you have a portfolio saved in our Portfolio Manager tool, all you need to do is click on the X-Ray tab to view your portfolio's X-Ray. If you do not have a portfolio saved on the site, you can use the Instant X-Ray tool, enter each of your portfolio holdings as well as the dollar amount that you have in each, and then you can click on it and you will see a screen that looks something like [the Instant X-Ray slide shown in the presentation]. So, regardless of how you get into X-Ray, your screen will look like this.

It's really kind of a data dump. You can see a lot of different factoids about your portfolio's positioning on this screen. The key one that will be the biggest determinant of how your portfolio behaves is that asset-allocation pie chart to the left of the screen. So, you want to focus on that and pay relatively less attention--but at least some attention--to your portfolio's investment-style positioning, or how it's arrayed across the Morningstar Style Box as well as your portfolio's geographic positioning and sector positioning. So, I'll just take these one by one.

In terms of evaluating your portfolio's positioning, as I said, it's most important to focus on your portfolio's asset allocation, and then secondarily check up on its investment-style positioning, its sector positioning, and its geographic exposure.

What should you do if you're light on stocks? This is not an uncommon conundrum. In fact, many investors got defensive during the bear market and never quite got themselves out of that defensive positioning. This is kind of a tough spot to be in. I think you can take some comfort in the fact that when we look at the price/fair value for all of the companies that our equity analysts cover, it shows that stocks aren't a screaming buy currently, but they aren't egregiously expensive either. In fact, after a little bit of the market turbulence at the end of June 2015, the typical stock in our coverage universe actually fell a touch below our analysts' estimate of fair value. That's somewhat encouraging, but again, stocks are perhaps not a screaming buy currently.

So, I think it does make sense to proceed with some caution. Here are a few ideas for doing that if you determine that you are light on stocks relative to your asset-allocation targets: One idea would simply be to implement a dollar-cost averaging program. So, if you determine that you're, say, 10 percentage points light on equities relative to where you should be, given your life stage, you might think about staging your contributions--making regular fixed contributions each month or each paycheck until you hit your target. That can keep you from putting a lot of money to work in the equity market at a time that, in hindsight, could appear to be a relatively high point [valuation-wise].

I think it can also make sense, as you look across your portfolio, if you're someone who is light on stocks but a little bit nervous about adding to equities at this point, [to look at value stocks]. As we saw on some of the previous slides, value stocks do appear to be somewhat undervalued relative to growth-oriented companies. So, you want to make sure that, in your portfolio, you have a good value-oriented fund or two working on your behalf. If you're an equity investor, you could look for companies that are trading below our analysts' estimate of fair value.

And finally, I think it's a reasonable time, given where we are in the stock and bond markets, for investors to hold a little bit of extra dry powder to make sure that they have some money to put to work if, in fact, we see more volatility in the weeks and months ahead.

On this slide, I've listed some of our analysts' favorite value-leaning equity funds. Not all of them land in a value category--some of them land in blend categories--but generally speaking, they have some valuation discipline in play. These are funds that are rated both Gold and Silver by our analyst team.

This next slide features a short list of companies that currently rate 4 or 5 stars (meaning that our analysts think that they're inexpensive), that have wide moats (meaning that our analysts think that they have sustainable competitive advantages), and that have what we call low fair value uncertainty ratings. So, that means that the analyst believes that he or she can forecast the company's future cash flows with a pretty good degree of accuracy. That gives the analysts greater confidence in those fair values that they're arriving at for the various companies that they cover. I compiled this list as of late June. It may change over time. This is a screen that I periodically like to run using the stock screener for Premium Members on

When we look across this list, what we see is a pretty good cross-section of sectors--a significant emphasis in the consumer-staples, health-care, and energy spaces. Those tend to be the areas where our analysts are seeing most of their high-conviction underpriced names currently. If you've gone through the process of comparing your asset allocation to your targets and determine that you're actually light on bonds relative to those targets, it does make sense to still rebalance into bonds; but it is a little bit of a tricky scenario, in part, because rising interest rates could harm bond prices. In fact, we saw that a little bit in the second quarter of 2015. We saw long-term bonds get hit particularly hard.

If you're someone who has determined that you do need to add to your fixed-income exposure at this point in time, I think it does make sense to put the money into some sort of a high-quality intermediate-duration fund that has a lot of flexibility. I've listed a couple of Morningstar's favorites on this slide. Dodge & Cox Income (DODIX) is one--a fairly flexible fund, albeit one with a fairly significant emphasis on corporate bonds. Fidelity Total Bond (FTBFX) is another idea. It is not a bond index fund, but it does showcase Fidelity's strong taxable fixed-income management skills.

If you're someone who's getting close to retirement and you determine that you're very light on bonds relative to where you should be, it's more urgent that you act to derisk your portfolio. So, you might move some of your money that you need to move into bonds to hit your fixed-income target into a good flexible fund, but you might also put some into cash and implement a dollar-cost averaging plan into bonds. I think the risk for investors who need to add to their fixed-income exposure at this point in time is if they are dramatically underweight, they could be adding money to bonds at what, in hindsight, was not a great time to do so.

So, you might put some of the money into bonds right now, hold some aside in cash, and then gradually dribble it into the bond market via a dollar-cost averaging program. Generally speaking, I would avoid long-duration bonds at this juncture, in part, because they will be the most interest-rate sensitive. If I were adding to bonds at this point, I would probably keep my fixed-income exposure high quality and generally short or intermediate term, in terms of its interest-rate sensitivity.

In terms of evaluating your portfolio's investment-style mix, here are a few guideposts that you can use for evaluating your portfolio's investment-style exposure. On the left side of the slide, you can see a total-market index arrayed across our style box. You can see that it includes about three fourths of its assets in the large-cap band of the style box--equally distributed by growth, blend, and value. It has about 18% of its assets in the mid-cap band of the style box and about 9% in small-cap stocks. This is not to say that your portfolio needs to be in lockstep with a total-market index; this is just a way to evaluate the bets that you have in place when you look at your portfolio's X-Ray investment-style exposure and make sure that you're comfortable with that positioning.

On the right side of the slide, I've included the price/fair value estimates for the various equity-market squares. This is a global coverage universe. So, if your portfolio is predominantly U.S., you'd want to bear that in mind. But what you can see is that, generally speaking, our analysts think the value side of the style box represents a better value at this point in time than do the growth squares of the style box. We do not have sufficient data or sufficient small-company stocks under coverage to really formulate a judgment about the relative attractiveness of small-cap stocks at this point in time, so I've left them blank. But this is a way to see if you do need to add to equities or if you need to make changes to the equities within your portfolio. These are some benchmarks for helping to evaluate your portfolio's current positioning.

You also want to take a look at your portfolio's geographic exposure. On this slide, I've included a few benchmarks for gauging your portfolio's geographic exposure. You can see that, as of midyear, the U.S. market is just a hair below half of the global market capitalization. Foreign stocks compose about 52% of the global market cap, currently. This is based on a total world-equity-market index fund.

You can see that developing markets are just under 10% of the total global market cap. Again, this is not to say that your total portfolio must be in lockstep with these allocations. In fact, arguably, U.S. investors would want to have an even larger share of their portfolio in U.S. stocks than is depicted here, in part, because the U.S. economy is so broad and so diverse and, in part, because, as U.S. investors, we don't experience foreign-currency swings by investing in U.S. stocks. We do when we invest in foreign stocks and don't hedge that foreign-stock exposure. So, that's one of the reasons why it typically doesn't make sense for U.S. investors--especially older U.S. investors--to be in lockstep with the global market capitalization. But these are just some benchmarks for evaluating your portfolio's geographic exposure.

The next step in the portfolio-review process is to check your liquid reserves. I've included a few baselines here geared toward people who are still working and still accumulating assets as well as for people who are already retired. So, if you're retired, I think it usually makes sense to set aside one to two years' worth of living expenses in true cash instruments. You don't want to hold any more than that in cash because it will be a drag on your returns. But you do want to make sure that you have at least some liquid reserves set aside. That way, if stocks go down or bonds go down or both, you know that your near-term income needs are set aside. This is the strategy that I often talk about when I'm talking about the bucket approach to managing your retirement portfolio.

For people who are still working and want to have that emergency fund set aside, it generally makes sense to have at least three to six months of living expenses set aside in highly liquid assets. We're not taking any risks with this part of our portfolio. We're keeping the money in true cash instruments because we can't tolerate big losses in this portion of our portfolio, as we might need that money. So, again, there's an opportunity cost to having too much in cash; you don't want to go overboard. But certainly, if you're a high-income earner or if you're someone who thinks it would take a while to replace your job if you lost it, you probably want to have even more than three to six months in liquid reserves; you probably want to have closer to a year's worth of liquid reserves.

You do want to calculate these liquid reserves by hand. Don't rely on our X-Ray functionality to get your arms around your liquid reserves. That's because when X-Ray looks through your various holdings, especially if you have mutual funds in your portfolio, it will take into account any cash holdings that are appearing in your funds. Those aren't liquid assets to you. You can't readily access them if you need to raise cash for whatever near-term expenses might arise. So, you want to make sure that you are factoring in only the money that you personally have set aside in true cash instruments. That's what you should use to guide your assessment of the adequacy of your liquid reserves.

The next step in the process is to conduct a holdings-by-holdings review of each of your positions--whether you have mutual funds, exchange-traded funds, or individual stocks. Here's a part of the process where I think Morningstar Analyst Reports can be invaluable in helping you get your arms around a lot of different factors. For fundholders, you want to be paying attention to manager changes--certainly drilling in and seeing what's going on there--meaningful strategy changes, ratings changes. So, for example, has a fund that Morningstar analysts in the past rated Gold or Silver moved down to Neutral? You want to drill into why that has happened. You may or may not agree with our analyst's reasoning, but at least get the analyst's rationale for whatever the upgrade or downgrade was motivated by.

You also want to take into account your holding's performance. So, has your holding persistently underperformed some sort of benchmark, whether it's category peers or maybe an inexpensive index fund? But also, as you evaluate performance, you want to give a little bit of slack right now to defensive holdings because what they bring to the table has arguably not really been on the surface recently. We've seen risk-taking rewarded. We haven't seen defensively positioned funds rewarded quite as much, so I think you want to look back over a full market cycle. If you have a fund that has underperformed recently but maybe really earned its keep during the 2008 market crash, that should count for something.

If you have individual stocks in your portfolio, you definitely want to spend time reading our analyst reports. You also want to look at changes in fair value and changes in moat trend. Is a company that we used to rate as having a wide moat now a narrow- or no-moat company? You may or may not agree with the analyst's assessment, but it may be a factor in whether you keep it in your portfolio or perhaps decrease its percentage weighting as a percentage of your total portfolio.

The next step in the portfolio-review process is to troubleshoot current risk factors--risk factors that are more temporal in nature versus some of the more evergreen portfolio-management techniques that we discussed earlier. There are three that I'm going to run through during the course of this presentation.

The first is taking stock of the interest-rate sensitivity of the various holdings in your portfolio. These might be bond holdings, but they might be equity holdings. I'll talk about some of the key areas to look at and how to do a quick-and-dirty duration stress test, interest-rate stress test of your portfolio's fixed-income holdings. I'll also talk about how to sniff out liquidity risk in your portfolio and to make sure that at least a portion of your fixed-income portfolio is parked in securities with adequate liquidity. And last but not least, I'll talk about how to assess your portfolio's investment-style exposure on the equity side. Specifically, you'd want to make sure that your portfolio is not listing toward the growth side of the style box, given this tremendous runup that we've had in growth stocks versus value names.

In terms of the first risk factor--evaluating your portfolio's interest-rate sensitivity--one thing I've talked about on has been the merits of doing what's called a duration stress test. Here, you really just need two pieces of data. You need the investment's duration, which is a number that you can find on This pertains to bond investments. Find that duration. Find also its SEC yield--Securities and Exchange Commission yield. What you want to do is take duration, subtract from it the SEC yield, and the amount that you're left over with is the rough amount that you would expect to see that investment lose in a one-year period in which interest rates rose by one percentage point. This kind of stress test is going to be most useful and more accurate for high-quality bond types. It will tend to be less accurate and less useful for other bond types. So, if you have junk bonds in your portfolio or a junk-bond fund or maybe some sort of a global bond fund, you'll find that this duration stress test is going to be less helpful and less accurate. It's more accurate for high-quality fixed-income holdings.

Let's just run through a couple of examples. Using Vanguard Total Bond Market Index (VBMFX) for the first one, we can see that its duration runs 5.6 years currently, and its yield is 2.1%. So, the person who held that fund and experienced that one-percentage-point interest-rate hike over a one-year period would be able to expect a roughly 3.5% loss during that period. You can see that if you hold some sort of a long-term government-bond index, which has a substantially longer duration, right now it's in the neighborhood of 17 years and an SEC yield of about 3%. You can see that that investor would be in for a much worse set of returns in rising-interest-rate environment. So, that person could expect a roughly 14-percentage-point loss during that period.

The previous slide illustrates that high-quality long-duration bonds will tend to be vulnerable in a rising-rate environment, but so will a broad swath of other investment types. Junk bonds--their yields aren't what they once were. So, they don't have the cushion that, arguably, they have had in previous rising-rate environments. Emerging-markets bonds may also be hit hard. That was certainly something we saw in the so-called "taper tantrum" in the summer of 2013. Emerging-markets bonds suffered quite a bit during that period. A swath of equity investment types could also stand to lose ground in a rising-rate environment. As we saw when we looked back on performance over the first half, we saw that utilities took it hard, particularly in the second quarter when bond yields began to rise. REITs have also suffered recently, as have master limited partnerships. This is not to say that you want to purge your portfolio of these securities completely, but it is to say that you should be prepared for performance to decline at least a bit if bond yields begin to go up.

The next risk factor that I want to highlight is liquidity risk for fixed-income investors. This is something we heard a lot about at the recent Morningstar Investment Conference. We heard a lot of bond-fund managers say that they're concerned about investors fleeing various bond types if, in fact, bond yields begin to go up. One thing we heard from fund managers is that they're keeping cash on the sidelines. They're also holding more Treasury securities than usual. They want to have money on hand not just to meet investor redemptions, but they want to make sure that they're not having to sell some of these less-liquid securities into an unforgiving market.

Granted, liquidity can be a really difficult thing to get your arms around as a fixed-income investor, but I think the key message I would impart here is that if you do have fixed-income holdings that you're using to offset some of the riskier portions of your portfolio--certainly, your core fixed-income positions I'd think of in this vein--you want to make sure that they have ample high-quality exposure in their portfolios. You'd want to make sure that there is plenty of AAA rated exposure. Those securities will tend to be more liquid. They will tend to be easier for the managers to buy and sell if liquidity becomes a problem in the bond market.

So, quickly run through your bond portfolio's holdings and take a look at your portfolio's credit-quality exposures. You can see on how much each of your holdings has staked in each of the various credit-quality bands. One thing we heard from fund managers was that they are particularly concerned about some of the liquidity risks in the bank-loan area as well as in the high-yield area. So, again, if these positions are portions of your portfolio, you want to make sure that they are not your core fixed-income positions and that you are using them as more or less supporting players in a broad fixed-income portfolio that does include a healthy allocation to high-quality bonds.

Another risk factor to pay attention to as you review your portfolio's exposures is, on the equity side, making sure that your portfolio isn't veering too much to the right of the style box. Make sure that you don't have too much staked in the growth column of the style box. As previous slides have illustrated, we've seen pretty strong outperformance in growth-oriented companies. That means that if investors haven't done a lot to rebalance their portfolios, they could be emphasizing that portion of the style box disproportionately.

As you can see on this slide, the Morningstar U.S. Growth Index has returned about 19% on an annualized basis during the past five years. The Morningstar U.S. Value Index, by contrast, has returned about 15%--still a healthy return, but well below what U.S. growth stocks have returned. We've seen a similar phenomenon in play on the foreign-stock side, especially with foreign small- and mid-cap growth stocks. You can see that they have outperformed foreign large-value stocks by a wide margin. So, this is something to stay plugged into as you review your portfolio's equity exposure. Make sure that you're not taking too much risk in growth stocks. They've performed well, but arguably, it's time to perhaps reposition and steer more money toward the value side of the style box.

The last stop in the review process is to conduct a simple cost audit of your portfolio. Morningstar's Portfolio Manager tool makes this process really easy. You can see an asset-weighted average expense ratio for your portfolio. It more heavily weights your large positions and gives smaller weight to your smaller positions. You can then compare that to a hypothetical average portfolio to see whether most of your holdings are attractively priced.

I think it also makes sense for investors to compare their portfolio's asset-weighted expense ratio to, say, a good target-date fund geared toward someone in the same age band. Morningstar's two favorite target-date series are those from [Vanguard] and T. Rowe Price. I've included the 2025 examples here, but go ahead and find the Vanguard and T. Rowe Price target-date funds geared toward someone in your same age band and compare it with your own asset-weighted expense ratio.

If you're someone who holds index funds or exchange-traded funds as part of your portfolio--and that's certainly an increasing share of the investment public--you want to make sure that you're getting as good a deal for those holdings as you possibly can. One thing we've seen is that price wars have broken out among index-fund and exchange-traded-fund providers. That's great news for consumers, so make sure that you're taking advantage of those very low expense ratios available for those commodified products today. If you are a U.S. equity investor investing in some sort of a total-market product, you can obtain that type of exposure for just 4 basis points. You'll have to pay a little bit more for a broad foreign-stock index fund, but you can obtain that type of exposure for less than 10 basis points. For fixed-income exposure, you can gain broad exposure to the U.S. fixed-income market for just 5 basis points today. So, get in there, compare your index fund and ETF expense ratios to these very low benchmarks, and make sure that you're swinging as good a deal for yourself as you possibly can.

With that, I'll conclude this session about conducting a portfolio checkup. Best of luck to all of you for the rest of the year. Thanks for joining me here today.

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