Lessons From the Past 25 Years
On becoming a minimalist, focusing on the really important allocations, and talking about hard stuff.
I celebrated my 25th anniversary at Morningstar in 2018, just a day after my husband and I toasted our 26th wedding anniversary.
I’ll spare you my thoughts on what makes for a happy and successful marriage, though I wouldn't rule out a healthy dose of dumb luck. Alas, luck has also played a starring role in my career at Morningstar. On the hunt for a job in 1993, I randomly stumbled upon an open position at a small but fast-growing investment research company in Chicago, my hometown. My dad, an avid investor, knew of Morningstar and liked what they were doing to shed light on the rapidly growing mutual fund universe. Never mind that I knew next to nothing about investing: Morningstar actually liked to hire people with diverse backgrounds (no one was put off by my poli-sci/Russian language background), and offered a robust in-house training program. The best part was that Morningstar's mission of empowering investors through information aligned with my own vague goal of doing some good in my career. Morningstar has been a happy home for me ever since.
One of the best aspects of my current job is that I get to think about and work on a huge range of topics that have a real impact on people's lives, from constructing sturdy retirement plans to coping with cognitive decline to paying for college. I'm constantly learning new things, and I love hearing from Morningstar.com users about their strategies and successes. I also like to hear what they're worried about, because that helps me know what I should be working on.
As I reflect on the past 25 years and look forward, here are some of the key lessons that I've learned.
Investing Is Overrated
I'm not saying you shouldn't invest. You absolutely should. It's essential. End of story. What I am saying, however, is that investing is the attention hog in many discussions about how to reach financial goals. It's sexy, there's often a current-events hook to explain why the market is behaving as it is, and hitting it big with an investment doesn't usually require any sort of sacrifice. But ultimately, your boring pre-investing choices--like your savings rate and how you balance debt paydown with investing in the market--will have a bigger impact than your investment selections on whether you amass enough money to pay for retirement or college. (I call these types of pre-investment decisions your "primordial asset allocation.") If your savings rate is high enough and you start early enough, that can make up for some lackluster asset-allocation and investment-selection choices. The flip side is also true: If you haven't saved enough, great investment picks probably won't be enough to save you.
Less Is So Much More
In my early days as an analyst, I covered all kinds of funds: convertibles funds, technology-specific funds, funds that invested exclusively in zero-coupon bonds. It was a great crash course in how various investment types work. But the more I've learned about investing, the more minimalist I've become. If an investment type can help investors get the job done simply, cheaply, and without a lot of moving parts or oversight, I'm all over it. That's why I increasingly recommend total market index funds, allocation funds, and target-date funds. (I like some well-diversified actively managed funds, too--and own them--but I'm super-picky.) If investors build a well-diversified core portfolio using these kinds of building blocks, then more narrowly focused products--whether sector or region-specific equity funds or focused bond funds like emerging markets--are usually going to be redundant. I'm also attuned to the role of investor behavior in all of this: Because more narrowly focused products will tend to be more volatile than broadly diversified core funds, there's a greater likelihood that investors will mistime their purchases and sales.
In addition to reducing complexity at the product level, I'm also an evangelist for eliminating complexity elsewhere in a portfolio. While the tax code necessitates that most of us save for retirement in multiple accounts (IRAs, 401(k)s, and taxable), I like the idea of merging together as many accounts together as is realistic. Old 401(k)s and multiple IRAs, for example, can be rolled over into a single Traditional IRA. That sort of streamlining is particularly important as you move into retirement. The fewer moving parts in your portfolio, the easier it will be to keep tabs on the real drivers of your financial results--your asset allocation and saving/spending rates, for example.
Beware the 'Financial Complexity Complex'
In a related vein, I've seen enough to conclude that many new products that come to market don't actually help to improve investor outcomes. Rather, they're an effort to help investment firms capitalize on what's hot and generate fees on new assets. One investment craze after another has hit the market over the past 25 years: technology sector funds, narrow commodities-tracking funds and ETFs, MLP products, and liquid alternatives, to name a few. A consistent theme behind new-product mania is firms' zeal to create products around an asset class that has performed exceptionally well in the recent past--and may not do so in the future. Whether you're transacting with a pure investment provider or an insurance company, always ask yourself, "What's in it for them?" Oftentimes the upside looks better for the seller, them, than it does for you.
But Some Innovations Are Brilliant!
That's not to say every new investment innovation is motivated by mercenary intentions, however. A small handful of the ones I've seen over my 25 years at Morningstar have hit the bull's-eye. At the top of my list are target-date funds, which solve some of investors' most vexing problems in an extremely low-cost way: They help them arrive at a sane stock/bond mix given their life stage, and change up the asset allocation to become more conservative as retirement approaches. The early results of actual investor outcomes in target-date funds--that is, investors' ability to stay the course and benefit from compounding--are incredibly encouraging.
I'd also put exchange-traded funds on my extremely short list of innovations that have benefited investors. While most individual investors won't derive much of a benefit from the ability to trade an ETF intraday like a stock, the tax-efficiency benefits of equity ETFs are compelling for investors' taxable portfolios. (Traditional index funds are tax-efficient, too, but ETFs are apt to be even more so, in most instances.) I like tax-managed funds, too, but they've obviously not taken off to the extent that ETFs have.
Get Some Help in Retirement
Thanks to innovations like target-date funds and robo-advisors, the process of allocating assets during your working career has never been simpler. If accumulators are going to spend on advice and they're on a tight budget, my bias is that they spend the money on good-quality holistic financial-planning guidance rather than investment advice, which can be obtained pretty cheaply through the aforementioned avenues.
But accumulation is a walk in the park compared with decumulation, the process of generating cash flow during retirement. Even though I've tried to address the nitty-gritty of portfolio decumulation through the intuitive framework of Bucketing, it's still not simple. Most people approaching and in retirement could benefit from another set of eyes on their plans, to help ensure that their withdrawal rate system is sustainable, that they're being tax-efficient with their withdrawals, and so on. Having a financial advisor who knows what's going on in your financial life and portfolio is also the gold standard for helping ensure that nothing falls through the cracks if you become incapacitated or die. While the traditional investment-advice model requires investors to pay a percentage of their assets year in and year out, soon-to-retire and retired investors who are confident in their abilities can pay for advice on an hourly or per-engagement basis. That will be more economical than paying for ongoing advice or oversight; the downside is that the hourly or per-engagement advisor won't be looking over your portfolio unless you ask for help. So it's a trade-off.
Don't Be Afraid to Talk About the Hard Stuff
On a panel at an investment conference, I referenced my personal situation as the adult child of two parents who struggled with cognitive decline toward the end of their lives. In so many ways, my parents had everything at the end of their lives: My sisters and I adored them and saw them often, they had enough money, and they stayed in their home until very close to the end. Yet I can sum up those last years in two words (forgive my language here): They sucked. We seemed to lurch from one crisis to the next; it was a physically and emotionally taxing experience for all of us. And it cost an arm and a leg.
After the panel, it was as if the floodgates had opened. Everywhere I went at the conference (even in the bathroom!), people stopped to share their own stories of struggling with the care of loved ones. It was obviously cathartic for them. We talked about the financial aspect of care but also the hard decisions that often come fast and furious later in life. My experience at that conference illuminated for me the value of simply sharing our experiences with one another. So many times, financial matters are about much more than finance. I've been thrilled to share my thoughts with readers for all of these years, and I'm so grateful for all that you've all shared with me.