Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. As stocks take another tumble, I'm here with Christine Benz, she's our director of personal finance, to see what the return to market volatility could mean for investors in various life stages.
Christine, thanks for joining me.
Christine Benz: Jeremy, great to be here.
Glaser: So, we see again here on Thursday, stocks heading down lower. Obviously, last week, some very large declines, even if we did get a little bit of a bounce. One group that could be particularly concerned about this are people who are about to retire, or just retired. Why is this scary for people who maybe just stopped working?
Benz: Well, because they're looking at their portfolios, they're not earning any more, typically, and so that's what they have to live on throughout their retirement, which may be 25 or 30 years, if they're just starting out. It can be really scary to watch their portfolios drop. This is the group, Jeremy, where I would say that usual advice of 'stay the course' doesn't always apply. If people have been getting close to retirement or they're retired and they have not been making their portfolios a little bit more conservative as time goes by, some adjustments may actually be in order. I think it's well worth taking a look at a few elements of the portfolio construction as well as the retirement plan at this life stage.
Glaser: Will that mostly be checking asset allocation? What would you recommend?
Benz: Yes, I think asset allocation is a great starting point, and I love our X-ray tool to help get your arms around your total portfolio's asset allocation. One statistic I've been saying over and over again is the fact that, if you had a 60% equity, 40% bond portfolio back in 2009 when this rally started, you'd be sitting at 80% equity, 20% bond today. Even if you hadn't been shoveling money into equities, your equities are taking up more and more of your portfolio. Check that asset allocation. Check your liquid reserves. You know I'm a big evangelist of the Bucket strategy, the idea of having some cash set aside alongside your long-term portfolio. Your cash is there to meet your living expenses for the next couple of years. That way, you can see the market go up, down, and sideways, and you know that it won't jeopardize your standard of living.
Then the last thing I would check at this life stage is your withdrawal rate. I think we all have a tendency to feel a little bit complacent, maybe a little bit good about our portfolios when we see our balances get larger and larger, we might be more inclined to spend more than we actually should be spending. Revisit your withdrawal rate. If you don't have a budget in retirement, I think it's well worth doing one at every life stage, as well as when you're in draw-down mode. Take a look at whether you might be able to tighten your belt a little bit, because I think that can be, maybe not fun, but tremendously empowering when the market's volatile.
Glaser: What about midcareer investors--40s, 50s, around there?
Benz: Yeah, at this life stage, especially for people who are 50-plus, I do think it's a good time to start also taking a look at your asset allocation, perhaps tipping back on your equity exposure a little bit, remembering that even if you know yourself to be a tremendously risk-tolerant investor and you still might have even 20 years until retirement, it really does help reduce the volatility in a portfolio to have a little bit of high-quality fixed income exposure, whether that's 10%, 20%. Take a look at that if you haven't any idea what your asset allocation should look like at this life stage, either consult with a financial advisor or use a target date fund to see what investment professionals are recommending for people at various life stages.
I also think it's important to remember that even though the most tantalizing bond types might have much higher returns than high-quality fixed-income exposure, if you're looking for something to be ballast for your equity allocation, you wanna look to the really bland, boring, low-returning asset classes. Here, I would focus on intermediate-term bond, for example, where returns certainly haven't been great recently, in part because we've had a little bit of interest-rate-related volatility, but those are the bonds that will tend to hold their ground the best when we see some sort of an equity market shock.
Glaser: Finally, how about younger investors who might have 30-plus years before retirement happens?
Benz: This is the group that really does need to stay the course, where equity market volatility can in fact be their friend, and if they can add to their equity allocations in periods of market weakness, that's a great strategy. If you're using some sort of a dollar-cost averaging strategy through a 401(k) plan, you're automatically doing that. This is the group that, at least, when you look at it on paper, has less reason to be rattled by market volatility.
One thing I would say, though, is even though stocks have had a couple of down days here, they are not cheap at this point. Where our analysts, when we look at the price to fair value for all of the companies in the coverage universe, trading roughly in line with fair value today. It doesn't seem to be a great, once in a lifetime buying opportunity by any stretch.
This is another cohort where I would say, take stock of your near-term goals. People in their 20s and 30s often have stuff that they'd like to accomplish that's shorter term, within the next two to five years, whether it's paying for a wedding or making a home down payment, or whatever it might be. Remember that that isn't money that you want to risk in stocks. If your time horizon is shorter, you need to have it in safer securities like cash, like high-quality short- and perhaps intermediate-term bonds. Don't get too aggressive with that short-term spending portion of your portfolio.
Glaser: Christine, thank you.
Benz: Thank you, Jeremy.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.