What Should Be on Investors' Radars in 2020

Susan Dziubinski: Hi, I’m Susan Dziubinski for Morningstar. As 2020 dawns, what should investors have on their radars? Joining me to discuss that topic is Christine Benz. She is 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 take a step back and look at 2019 for a minute. It was a very good year for investors.

Benz: Certainly was.

Dziubinski: And it had some volatility along the way but was mostly placid and ended quite strongly. But you think that investors should brace themselves for a little bit of volatility going forward.

Benz: I do. Although I would say, too, Susan, if we were having this conversation a year ago, I would have said the same thing. And yet, it was pretty smooth sailing for investors in 2019. But I think 2020 could potentially be a little rockier for a couple of reasons. One is simply that we often see a little bit of reversion to the mean after a period of really strong market performance. Valuations are higher, which tends to make testing those new highs a little higher. We might see some volatility related to valuations and concerns about that. And then, the elections, I think are a wild card, too, where we might see some volatility related to the news flow from elections. I think investors could be feeling a little bit skittish about that. So, I do think that investors should not expect the smooth sailing to necessarily continue in 2020.

Dziubinski: So, if I am expecting a little bit of volatility, what should we be thinking about or doing?

Benz: I think it comes down to life stage. So, I know that we have a lot of people who are retired or thinking about retirement who are regular visitors to Morningstar.com. For them, I think they want to be carefully thinking about derisking their portfolios. Many people at this life stage have been, frankly, I think, a little bit complacent. Because the market has been so good for so long, it's easy to forget how bad it felt when we last encountered serious market volatility.

The other thing is, as you get into drawdown phase from your portfolio where you're actually spending from it, the last thing you want to do is put yourself in a position where you are spending from assets that are simultaneously declining. So, I like the idea of lining up at least a few years' worth of living expenses in very liquid assets. And then kind of stepping out on the risk spectrum from there, lining up maybe another, say, five to eight years' worth of bonds in your portfolio. That way you're kind of building yourself a bulwark against needing to invade your equity assets. You're giving them a lot of lead time to recover if the market is volatile and if it goes down and stays down.

For people who are much further for retirement, much younger people, I think they have less reason to be worried about volatility. In fact, if you're at that life stage, volatility is usually your friend. You want to try figure out a way to increase your contributions to equities if they encounter a period of turbulence.

Dziubinski: And what about equity holdings? What should people be thinking about specifically with that portion of their portfolios?

Benz: Well, I think, it's a good time to give a relook at your portfolio's style-box exposure. We've seen dramatic outperformance among the large-growth names, the technology stocks, some of the high-flying healthcare stocks--they've performed really well. So, even if you've been hands off with your portfolio, probably see more concentration there simply because those holdings are taking up a larger share of your portfolio. Smaller stocks, value stocks generally haven't performed as well. International equities haven't performed as well as U.S. So, in addition to taking a look at your portfolio's baseline asset-class exposures, also assess the underlying exposures, the complexion of your equity holdings.

Dziubinski: Now, one story specifically with funds in 2019 was related to fees and the fee wars and zero-cost funds. What do you expect to see on the fee front, more of this in 2020?

Benz: I think we will see more of it, Susan, because when you look at where flows are going, that's where the action is. It's all going into the very low-cost, very plain-vanilla products. So, I think we'll continue to see the big providers--whether Vanguard, iShares, Schwab, Fidelity, they're all in the mix--fighting for market share for these very big, sort of, broad market index funds that have been getting all the flows. So, I think we'll continue to see fighting for fees there. And I think investors should stay mindful of that, but don't go chasing around for the very lowest-cost product. As our colleague Ben Johnson has pointed out, really pay attention to how you are actually paying that firm for your services. You may be getting a great deal on your index funds and paying for it over in some other part of your account, the cash accounts, for example. So, just keep an eye on the total picture of fees. But in general, I think we will see that pressure on fees. It's generally good for consumers. But remember that these companies are in business. And so, they will be charging you somewhere.

Dziubinski: I think Ben said in an interview with you a couple of months ago, "Free is never really free."

Benz: Exactly.

Dziubinski: So, remember that. And then, there are some changes coming to the retirement planning landscape this year. What should investors be on the lookout for?

Benz: Right. So, Congress passed a package of retirement-related reforms at the end of 2019. A couple of the big ones affect required minimum distributions. So, unless you turn 70.5 in 2019, you'll be able to push your RMDs out until you're 72, which is a good development for affluent retirees who don't need their RMDs. We're also expecting to see more of what are called multiple employer plans come online. These are plans that small firms can participate in. Small firms that don't have the wherewithal to field their own retirement plans can band together with other employers to offer their employees some sort of a retirement plan. So, this is a good development. I think we'll expect to see more action there as well.

Retirees who are still working--and that's an oxymoron--but older adults who are still working will be able to fund their IRAs post age 70.5. That's, I think, a good development given kind of the new complexion of retirement, which is that more and more people are working even though they are of retirement age. So, those are some of the things to keep an eye on.

We're also expecting to see some action in terms of company retirement plans offering annuities within the company retirement plan confines. I wouldn't expect to see really rapid uptake of this. But certainly, when you look at the academic research about annuities, annuities--these are the very plain-vanilla low-cost annuities--tend to be underutilized as a tool, especially among retirees who do not have pensions to rely upon because they're a source of lifetime income. So, watch that space. I think that this package, this legislation should have some significant repercussions for certain people who are thinking about retirement planning.

Dziubinski: Great. Well, happy 2020 to you and happy investing.

Benz: Happy 2020, Susan. Thank you.

Dziubinski: Thank you. I'm Susan Dziubinski for Morningstar. Thank you for tuning in.