Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. This year, we've seen a lot of younger investors take an interest in the stock market. But Morningstar's Christine Benz urges them to remember that the keys to financial success are actually a little boring. Here today to discuss them is Christine. Christine, thanks for joining us today.
Christine Benz: Susan, it's great to be here.
Dziubinski: So you've told a story before about how... You have many friends, I assume. But this story was about one particular friend who asked you to take a look at his portfolio, because he was a little bit concerned about it. And when you did that, you thought, well, the portfolio is fine, but there are some other issues here that are actually more important. What were some of those issues?
Benz: Well, it was interesting. He had gotten some advice from a financial advisor who thought, wow, your portfolio is really lacking in small caps. This advisor also thought he needed a variable annuity, which is a separate matter. But when I dug in, what I found was that there really wasn't a portfolio problem. His portfolio was pretty neutral relative to what I would think someone at his age should have. But the real problem spots were, unfortunately, that I thought he was under-saved for retirement relative to where he should be at this life stage. And he's also a contractor, so I just didn't think he had enough of an emergency cushion to protect him in case he had some period of extended job loss. So my advice to him was, "I don't really think that we can solve your issues at the portfolio level. But I do think that there are some things that you can do that are, maybe a little bit more boring, maybe less fun, but some ways to improve the overall health of your plan."
Dziubinski: One of the things that is, as you say, a little bit mundane, but it's really crucial in the process, is having an appropriate savings rate and sticking to it. What are some recommendations you have for people if they're trying to establish what the right rate is for them?
Benz: Yeah. This is something that I think is so dead obvious that we tend not to talk about it a lot in financial-planning circles. But it's really important to make sure that throughout your career, you're maintaining a healthy and appropriate savings rate. So one of the best ways to do that is just to make sure that you are nurturing your earnings power, which is sometimes called your "human capital" in the investment world. So making sure that you are just making yourself as valuable as you can be as an employee. So staying employed is one of the best things that you can do for the long-term health of your financial plan.
Also, setting a savings target. In fact, I sometimes think investors get overly granular in terms of looking line item by line item through their budget. Instead, maybe just start by saying, here's the amount of dollars I want to save each month and then retrofit your budget accordingly. And upgrade that savings target as your earnings power grows. I also think it's tremendously important to marry someone or have a partner who is compatible with you from the standpoint of recognizing the value of long-term savings. We did a discussion in Morningstar's Discuss Community a few years ago, where we asked our readers what were some of the most impactful secrets to their success. And one thing that came back to us, again and again, was the value of marrying someone or partnering with someone who's really compatible with you financially.
Dziubinski: Another key thing that you say is important when saving for retirement and other goals, is to make sure that you're playing good defense. How might you go about doing that?
Benz: Well, I think it's like everything in life, Susan. It's wise to hope for the best and plan for the worst. So a couple of key things that I think about in the realm of defense would be, making sure that you have the right type of insurance coverage given your life stage. So obviously you want the basics, like health insurance, like disability insurance, life insurance certainly if you have dependents as well as some of the property and casualty coverage. It also relates to emergency funding. So right-sizing your emergency fund. If you're a contractor, like my friend, you'd want to have a larger emergency fund. Because sometimes, those periods of job loss can be longer than is the case for people who are fully employed. Also, protecting your credit rating and being judicious about using credit. Those are all things that I put in the category of playing good defense, and they can set you up for good financial health down the line.
Dziubinski: And what about from a portfolio standpoint? What are some keys to success when building a portfolio?
Christine Benz: Well, as you know, Susan, I'm a big believer in keeping things quite simple at the portfolio level. The biggest determinant of how your portfolio will behave over time will be your baseline asset allocation. So your ratio of very safe assets relative to assets that have more growth potential, but more volatility. People who have very long time horizons to retirement can take more risk in their portfolios in exchange for the prospect of higher returns. But people getting closer to retirement need to take some risks off the table. So just making sure that you have an appropriate asset-allocation framework. If you don't have an appropriate asset-allocation framework, or don't know where to begin getting a target, a target-date fund can be a great starting point. Also, that would entail taking advantage of all the tax-sheltered vehicles that you have available to you and automating your contributions on an ongoing basis. So making it really easy and painless to save, those are all things that can contribute to long-term financial success.
Dziubinski: Christine, thank you so much for your time today and sort of these get-rich-slow tips. We appreciate it.
Benz: Thank you, Susan.
Dziubinski: I'm Susan Dziubinski for Morningstar. Thank you for tuning in.