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Should Your Portfolio Shift When the Economy Slumps?

Should Your Portfolio Shift When the Economy Slumps?

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 with The U.S. economy has officially entered a recession. Many investors may be wondering what that means for their portfolios and if and how they should respond. Joining me today to discuss that topic is Christine Benz. Christine is Morningstar's director of personal finance. Christine, thanks for being here today.

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

Dziubinski: Now, before we get into any specifics about how you might upgrade your portfolio in the face of a recession, let's take a step back and talk a little bit about what are your thoughts regarding whether people should be thinking about their portfolios and making changes to them in terms of where the economy is?

Benz: Well, I think you want to be careful about being too reactive. Certainly there's a lot of scary news about the economy, lots to still be worried about despite the market's recent rally. But I think you do want to be careful about basing your portfolio adjustments too much on what we see going on with the macroeconomy. Because the fact is prices in certainly a lot of categories that are deemed more economically sensitive are really factoring in pretty bad news. So, bank stocks are factoring in the notion that interest rates are going to stay down for a really long time--that's typically not good for banks. Energy stocks have also really struggled with the expectation that demand for various energy products will stay low because of low economic growth. So, a lot of bad news is already priced into the market. I think you do want to be careful about being too reactive, and this applies to every market environment, good and bad.

Dziubinski: Now that being said, there are some things that you think investors could be doing or thinking about it at the fringes of their portfolios today. One of those things being: paying attention to the costs of their portfolios.

Benz: Right. This is an evergreen sort of piece of advice that we often give investors, but really, I think the time could not be better to take a look at your total portfolio, look at all of the expense ratios that you're paying on any funds or ETFs or anything else in your portfolio and see if you can't bring those costs down. And the big benefit, of course, is that you have the potential to improve your take-home return. And I think that's really valuable given that, when you look at return forecasts from the major shops, not just for the near term, but for the longer term, what you see are pretty muted return expectations, certainly for fixed-income investments, as well as for U.S. large-cap equities.

So, whatever you can do to trim your portfolio's cost load, I think, is time well spent. You can find an expense ratio for funds either on your fund company's website or certainly on also has a helpful one-word explanation of whether a fund's expense ratio is lower, above average, or whatever it might be, and so you can quickly get your arms around where your portfolio's problem spots are. I would say that's a great starting point for investors who are just trying to improve their portfolio's long-term return potential.

Dziubinski: Let's talk a little bit specifically about the bond sleeve of an investor's portfolio. Is now a good time to be considering improving the credit quality there?

Benz: Well, again, I think you want to be careful about being too reactive because we have seen quite a flight to quality through this period of economic uncertainty. But I do think that investors who are getting close to retirement or in retirement should just really take a closer look at their fixed-income exposure to make sure that it delivers appropriate ballast in an equity market shock. Look back to that period in the first quarter. Look at how your holdings performed during that period.

Generally speaking, high-quality bonds did an OK job of holding their value. Nothing held up quite as well as Treasuries during that period. I think it's reasonable, especially if you are expecting to begin to spend from your portfolio, certainly within the next five years or so, to make sure that you have de-risked your fixed-income exposure. To the extent that you have higher-risk, higher-returning, higher-yielding, fixed-income types, I think you'd want to make sure that you have a longer time horizon for them and that you have also balanced them with higher-quality holdings.

Dziubinski: And let's turn to equities. Does it make sense with our equity portfolios to think a little bit more defensively or think a little bit more about quality, or are we a little bit late for that?

Benz: Yeah, I think here you do want to be careful about being too reactive. Investors are often a day late and a dollar short when it comes to these moves. But I would say again for people who are getting close to retirement, especially for those who have been unnerved by some of the market volatility that we've experienced, you could potentially look at giving your equity portfolio a little bit of a higher-quality cast and plan to keep it there throughout your retirement years. One strategy that I know our team really likes in general is kind of a dividend growth strategy, so as opposed to a strategy that anchors on high-yielding equities, I think the idea here is that you're looking for companies that have had a history of growing their dividends over time. These tend to be highly profitable companies. They're often what we call "wide moat" stocks at Morningstar, and so what we see is that they tend hold up a little better during equity market shocks.

That's what you may be looking for in retirement. Vanguard Dividend Appreciation is one we like. Vanguard Dividend Growth is another that we like. T. Rowe Price also fields a terrific dividend growth fund with this same type of strategy. The basic idea is that you will have a higher-quality cast to your equity portfolio. I would also caution, though, you want to make room for diversified exposure in your portfolio. We've seen a long-running period of underperformance in value stocks. You want to make sure you have exposure there. You also want to make sure that you're not completely missing out on some of the high-flying tech names that at various points in time paced the market such as in 2020. Diversified exposure is what you're going for, but for people who are getting close to drawdown and feeling more uncomfortable with equity market volatility, I think a dividend growth strategy can be a nice addition to that portfolio.

Dziubinski: That's great. So, never forget diversification?

Benz: Right.

Dziubinski: Christine, thank you so much for your time today.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski with Thanks for tuning in.

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About the Authors

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

Susan Dziubinski

Investment Specialist
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Susan Dziubinski is an investment specialist with more than 30 years of experience at Morningstar covering stocks, funds, and portfolios. She previously managed the company's newsletter and books businesses and led the team that created content for Morningstar's Investing Classroom. She has also edited Morningstar FundInvestor and managed the launch of the Morningstar Rating for stocks. Since 2013, Dziubinski has been delivering Morningstar's long-term perspective and research to investors on

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