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Volatility Is Here to Stay. Here's What to Do.

Christine Benz explains what investors should do amid market turbulence.

Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Susan Dziubinski: Hi, I'm Susan Dziubinski from Morningstar.com. Volatility has returned to the market this year. Here to talk with us about whether we can expect that volatility to persist and to share some ideas of what we might do with our portfolios in these volatile times is Christine Benz. Christine is Morningstar's director of personal finance. Christine, thank you so much for joining us today via Skype.

Christine Benz: No problem, Susan, great to be here.

Dziubinski: Now, can we talk, briefly, a little bit about some of the sources of volatility that are gripping the market today?

Benz: Well, yes, a few key things. One is the coronavirus worries--the sense that this could be something that might be more widespread than was originally thought, and concerns that it's going to affect more economies than just China's, and, even if the effect were just a China effect, China's fortunes are very much tied to the rest of the world, so that is a near-term worry. Longer term, there are concerns about the volatility related to the election. There's a fair amount of uncertainty going into this one over who the eventual candidate will be on the Democratic side, the balance of power in Congress, and so forth, so, that's another potential challenge for the market. And, finally, I would say the big overhang, Susan, is just that equities have enjoyed such a long-running rally. They're still not inexpensive, despite the near-term sell-off. So, during periods of not cheap equity evaluations, equities tend to be more sensitive to external events, like coronavirus, and they can't just shake them off. So, I would expect the volatility to, not necessarily be persistent but will be something that could be with us for a while.

Dziubinski: So, don't be surprised by it if we see several days, maybe months of a little downmarket performance, necessarily, right?

Benz: That's right, and I think investors have to remind themselves: We've come through an extraordinarily tranquil period. Stocks have performed so well for so long, and bonds haven't been bad either. So, it was bound to happen, and no one might have guessed what the specific catalyst would have been, but, nonetheless, something that we were probably bracing ourselves for.

Dziubinski: We’ve talked about volatility, of course, in the past, many times before, and that you say that how one responds to volatility should depend on your life stage in investing and where you are and your risk capacity. Can you talk about that a little bit?

Benz: Absolutely, I think that investors should let that be the main driver of how concerned they are during periods of market volatility. Your proximity to needing to spend your money. So, retirees are top of mind for me. I was just speaking to a number of retirees, and retirees are actively spending from their portfolios, most of them, so they're reasonably concerned about near-term market volatility. I think it makes all the sense in the world for them to make sure that they have enough in safe assets, like cash, like bonds, to tide them through periods of equity market volatility. On the other hand, younger investors who have many years until retirement, probably shouldn't be as worried because they will not be spending from their portfolios anytime soon, but some of them do have near-term spending goals themselves, so they might have home down payments or college tuition or whatever it might be. For that part of the portfolio that they expect to spend within the next couple of years or even in the next 10 years, I would de-risk that portion of the portfolio.

Dziubinski: And the challenge, right, is that bond yields have come down, cash isn't yielding anything too spectacular by any stretch. So, what should investors be doing if they want to keep their near-term expenditures a little bit more secure and out of harm's way?

Benz: I think investors shouldn't get too hung up on the fact that yields are as low as they are, in part because yield or income isn't really the main reason that you're owning bonds in this case. You're owning them for their diversifying potential, their ability to hold their ground, maintain stability in periods when your equity holdings take a dive. So, I think it does call for a readjustment of expectations, certainly with bond yields as low as they are. That doesn't portend great returns for bond investors or cash investors over the next decade, but if you're thinking of those holdings as the shock absorbers of your portfolio--the money that will stay safe even as your equities are undergoing volatility--I think bonds serve that role really well. The key is just to not overdo it so you're not upending your total plan-- you are just parking enough in cash and bonds to help you meet your cash flow needs over the next five to 10 years.

Dziubinski: Let's talk a little bit about retirees, specifically. They’re often using dividend-paying stocks to help pay some of those expenses in retirement. What advice to you have for them, today, for those dividend stock investors who are retired?

Benz: Right, and many retirees do love their dividend-paying stocks, I would say a couple of things. One is just think about how comfy you are with the volatility that can accompany stocks in general because, even though dividend-paying stocks have had a history of holding up better than the broad market in periods of turbulence, nonetheless, they'll feel it when the market is falling. So, just do a little check-up, think back to the financial crisis, for example. If that was your strategy then and you sailed through it and you were comfortable with that volatility, well, that's a good thing. On the other hand, if you haven't used this strategy in your drawdown period before, you would want to augment your dividend-paying stock holdings with some safer securities. You also want to check up on the stability of those dividends because one thing we saw in the financial crisis is that financial stocks, in particular--which had, historically, been a big source of dividends in the market--financial companies, banks in particular, cut their dividends, so just check up on the stability of your dividends, as well.

Dziubinski: And what about those investors who are still saving for retirement? Those who are a little younger and have some time. They could very well be spooked during these periods of volatility, too. What would you say to them?

Benz: I would say volatility like this is your friend. That, generally speaking, if you have the wherewithal to get money invested during periods of market volatility, that's a great time to do so. I love really automating the whole process if you're a young investor, so, using a dollar-cost-averaging program, where you're not really overthinking these market ups and downs. And then I also like making sure that you're in some sort of an age-appropriate investment mix. For young accumulators, I can't think of a much better way to go than using some sort of a target-date vehicle that is, generally speaking for younger investors, pretty equity-heavy. But you've kind of taken the guesswork out of the asset-allocation question for yourself. I think that's also a great strategy.

Dziubinski: Christine, thank you so much for this perspective. We especially need it during turbulent market times. We appreciate your time.

Benz: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski from Morningstar. Thanks for tuning in.