In Volatile Markets, It's OK to Chicken Out

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. In the face of concerns about the economic impact of coronavirus, the markets have been churning. Joining me to discuss why she thinks investors should avoid grand gestures and, in her words, "chicken out" is Christine Benz. Christine is Morningstar's director of personal finance. Christine, thank you for joining me today.

Christine Benz: Of course, Susan. Great to be here.

Dziubinski: Now the first question is, What exactly do you mean by "chicken out"? Should we all be starting to get conservative and flee to safety?

Benz: Absolutely not. So this isn't blanket advice to de-risk your plan. In fact, if you had a well-laid asset-allocation plan that made sense for you a couple of months ago, chances are it still does now. But the basic idea is that if you're making any changes to your portfolio, think about doing so gradually rather than taking grand gestures and really upending your plan.

Dziubinski: So that's really just another way of, say, diversifying, right?

Benz: It really is. And I'm a big believer in bringing a healthy dose of humility to managing our financial plans, to really admitting all of what we don't know. And really, that's what you're saying when you build a diversified portfolio. You're saying, "Some of these assets will go up, some of them will go down. Together, they will diversify the risks of one another."

And I think you should take that same diversified approach to any timing decisions you might make. Rather than saying, "OK, here's the night where I go all to cash," or "Here's the night where I move all of the money that I had for safe investments into stocks," really make these decisions more incrementally. I think that time diversification is something that we all need to be considering right now.

Dziubinski: Let's talk about investors who may be spooked by what's going on in the market. What are some small moves that maybe they should be considering or looking at making right now?

Benz: Well, if you're feeling defensive, I think it's a good idea to map out a plan to reduce your equity stake, say by a few percentage points during each of the next several months, rather than making a big radical shift to cash. I think many investors, quite realistically, people who are getting close to retirement, are perhaps a little overly aggressive in terms of their equity exposure. Rather than saying, "I'm going to take this all down in one fell swoop," get a plan to do so over a period of months rather than trying to do it all in one very large shift.

I would take a similar tack with individual stocks and funds that may be performing really badly right now. I think there's a general tendency if you have some of those holdings, and we all do right now if we have diversified portfolios, there's a tendency to just say, "I'm cutting this thing. I'm getting out of here altogether." Well, a funny thing happens on these days or in months when the market reverses itself. The things that were the most terrible during the downturn often are the ones that perform best in the future. So, avoid all-or-nothing moves there as well. Think about maybe cutting the position a little bit perhaps if it's really causing you discomfort, but don't cut it all together because it may be something that you regret that you don't own later on.

Dziubinski: Now, let's take a look at the opposite type of investor, maybe the one who is seeing this market rout as an opportunity. What would you suggest there?

Benz: I've been seeing a lot of people saying that they, in fact, think it's a pretty good buying opportunity right now. The thing to remember is that it's really difficult to catch the absolute bottom of the market. Even the likes of Warren Buffett hasn't been able to do it consistently, although he's been directionally close historically.

So again, if you are inclined to do some buying, put in place a program to move the money in in smaller increments rather than in one fell swoop. And the same goes for individual positions. You may be looking, and kind of licking your chops if you're a value buyer, at some parts of the market that have been really hard-hit, maybe energy stocks or bank stocks or emerging markets. Maybe take a lighter version of some of those investments. So rather than investing in a bank sector ETF, for example, maybe look at a value fund that gives you more diversified exposure to some of the downtrodden parts of the market.

The same goes for investing in emerging markets. Rather than looking at an emerging-markets value fund, for example, maybe just look at a good value-leaning international fund that will have plenty of exposure to emerging markets. Take more diffuse bets rather than taking those really concentrated bets where you are buying into a holding that's going to give you a lot of volatility on an ongoing basis.

Dziubinski: Christine, thank you so much for sharing some of these lighter touch ideas for us to pursue during these turbulent times.

Benz: Thank you, Susan. Good to be here.

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