5 Key Takeaways for Investors From 2019

Susan Dziubinski: Hi, I'm Susan Dziubinski from Morningstar. As 2019 winds down, most investors likely feel satisfied. It's been an awfully good year. Joining me to discuss some of her key takeaways from this past year is Christine Benz. She's Morningstar's, director of personal finance. Christine, thank you for joining us today.

Christine Benz: Susan, it's great to be here.

Dziubinski: So, let's briefly recap why it's been a good year. Talk a little bit about the market action this year. Pretty much you won, no matter what you were invested in almost, right?

Benz: That's true U.S. stocks have been the place to be. So, as of mid-December, the U.S. stock market is up about 30%. So that's just with a total market index fund. Foreign stocks haven't performed quite as well. So non-U.S. indexes are up about 20%, but still in awesome.

Dziubinski: Not too shabby.

Benz: Not too shabby. And even bonds have been absolutely great--so, defying a lot of people's expectations about how the bond market might behave. The Bloomberg Barclays Aggregate Index is up about 9%. So, it was very hard to go wrong. Russ Kinnel mentioned to me this morning that just a couple of categories are actually in the red for this year. One is commodities, the other is bear markets. So, you would have had to be awfully unlucky to not have some strong gains in your portfolio this year.

Dziubinski: So, one key takeaway from this year's strong performance is, you know, you do run the risk of you making a mistake if you're going to make dramatic shifts in your asset allocation.

Benz: Well, that's exactly right. So, think about this time a year ago--things were pretty gloomy. I think there was a widespread perception that we're heading into some sort of a recessionary environment. Stocks took a nosedive. So, investors who at that time, took a lot of steps to get their portfolios defensive and maybe really scaled back on stocks--well, they really missed the boat because we've had a great year. So, I think that, to me, it's yet another reminder that it is a mistake to be really radical in terms of shifting around your portfolio's asset allocation based on the headlines.

Dziubinski: That being said, given the strong performance we've seen this year in the market, you know, is it a good time for investors to sort of take stock of the risks that might be in their portfolios now?

Benz: Well, I think it is. And I would have said this a year ago, I would have said this two years ago, but I do think that this is especially important for people who are getting close to retirement, I would say within 10 years of retirement or in retirement. If you haven't taken any steps to derisk your portfolio in recent years, I don't think it's a terrible time to do it. Stock valuations aren't cheap, they're not egregiously high, but they're not cheap. And we just know from experience that markets tend to revert, and we see categories and asset classes that have performed really well suddenly sink. So, I wouldn't expect to see--I wouldn't be surprised to see some volatility in 2020. And I think it's only reasonable especially if you are getting close to drawdown mode to add more to cash, add more to bonds, don't go crazy, still maintain equity exposure, but get a little bit defensive and make sure that you have your near-term cash needs lined up.

Dziubinski: Another takeaway, which is related a little bit more to subasset classes is that you know, despite a little uptick and fall, value has really continued to underperform growth as a strategy.

Benz: That's right, value has done well, certainly in absolute terms, but relative to growth, I think it's underperformed. So I do think that, in addition to checking your baseline asset-class exposures, one takeaway for a lot of investors from what we saw in terms of market action last year is to take a look at your sub-asset-class exposure to look at how your portfolio is arrayed on the value to growth spectrum. Large growth was the best-performing style-box square in 2019 again. Small value was not as strong. So, you might think about doing a little repositioning on that grid. I think it's also worth looking at your foreign relative to U.S. allocation, especially for younger investors. I think it's really important that they think about having fully globalized portfolio. And generally speaking, we have not seen foreign stocks perform as well as U.S.

Dziubinski: Now, inflation has sort of been benign this year, kind of a nonissue, but you know, your advice is to still be prepared for it and keep an eye on it.

Benz: I think so. And again, this, I think, is dependent on life stage, how concerned you are with this. If you are someone who is employed and you're getting a paycheck, well, you probably getting cost-of-living adjustments that will address inflation. If you're retired, it's a bigger deal. I think if you're withdrawing a portion of your portfolio and you have assets in fixed-rate investments, I think you do want to be careful to ensure that you're providing a little bit of inflation insulation. And another thing we know is that older adults do tend to have higher healthcare costs. That's a category where even though we've seen inflation come down a little bit, so it's not crazy as it once was, we have seen healthcare inflation historically run higher than the general inflation rate. So be mindful of your own spending categories. If the stuff you're spending your money on is inflating much higher than that very benign-looking CPI that you see, make sure that you are building in some insulation in your portfolio against inflation. So that might mean plain-vanilla Treasury Inflation-Protected Securities, it means holding an ample allocation to stocks, which aren't correlated to inflation but nonetheless tend to outearn inflation over time. So, look at categories like that.

Dziubinski: And lastly, Vanguard founder Jack Bogle passed away early this year. And one of the key takeaways would be just how pervasive his influence continues to be.

Benz: Exactly, he has left just an incredible legacy for investors. And I think we see that in all different parts of our financial-services industry where we continue to see asset flows going to the very low-cost providers, very low-cost funds. The passive funds that Jack championed continue to receive the lion's share of inflows. And we're also starting to see fee pressure become a major topic of discussion in other parts of the industry, specifically in the financial-advice space, where there's an increasing discussion about how much consumers are paying their advisors, how they're paying their advisors. Jack didn't really have a lot to say on that topic during his lifetime. But I think his legacy is that investors are listening to his broader ethos about the importance of fees, and I think we'll continue to see pressure there. And I think it's great for consumers.

Dziubinski: And it's one heck of a legacy.

Benz: It is, it is, Susan.

Dziubinski: Christine, thank you so much for being here. Happy New Year. Thank you for all the time you spent with us, educating us, and helping us this year with our investing.

Benz: Same to you, Susan. Happy New Year to you, too.

Dziubinski: Thank you.

Benz: Thank you.

Dziubinski: I'm Susan Dziubinskifrom Morningstar. Thanks for tuning in and Happy New Year.