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Hot Spots for Your Midyear Portfolio Checkup

Hot Spots for Your Midyear Portfolio Checkup

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. We're about halfway through 2021. And many investors may be thinking about conducting a portfolio checkup. What specifically should they be looking at this year? Joining me today to discuss the topic is Christine Benz. Christine is Morningstar's director of personal finance.

Hi, Christine, thank you for being here today.

Christine Benz: Hi, Susan, it's great to see you.

Dziubinski: One question that investors often have is how often should they be checking up on their portfolios and making changes?

Benz: I really think less is more from the standpoint of portfolio checkups. Once a year, twice a year, maybe every quarter at the very most, and you know, I once heard someone compare your portfolio to a bar of soap--that the more you touch it, the smaller it gets. So I think that investors should keep that in mind--that if they are in there doing tinkering, being really watchful of their portfolio, I think they're more inclined to get in there and make changes, which, in hindsight, they may wish they didn't make. So less is more, I think, a good maybe once, twice, four times a year review is absolutely plenty.

Dziubinski: And then what are the key issues that investors should really be paying attention to each and every time they conduct a portfolio checkup?

Benz: I always like to start portfolio checkups with a wellness check. Do a little bit of a checkup on how you're doing with your savings rate, year-to-date. Are you in a position to make your maximum allowable contributions to your IRAs and 401(k)s or at least put in as much as you possibly can, if you're still in accumulation mode? If you're someone who is in drawdown mode, if you're spending from your portfolio, take a look at your spending rate relative to your target withdrawal rate. See if you're on track, see if perhaps in the last six months of the year, you might be able to do a little bit of a course correction to get yourself back on track. So, start with that wellness check. Then you can move on to checking your portfolio's asset allocation relative to your targets. And then if your schedule permits, you can get a little bit more granular, looking at your portfolio style box exposure, looking at your sector exposures, doing a little bit of a dig on your portfolio holdings themselves, perhaps reading Morningstar Analyst Reports to see if we still like the funds and ETFs and stocks in your portfolio. Those things should be on your dashboard each and every time you check up on your portfolio.

Dziubinski: Now let's talk a little bit about some of the issues that maybe deserve special attention in 2021. You think it's important this year to maybe consider whether investors--their portfolios--have some inflation protection. What should they be looking for?

Benz: Well, I think that life stage is really important in this context. If you are a young accumulator with many years to retirement, recognize that you probably have a couple things built into your plan that are working in your favor to help protect you against inflation. If you're getting a paycheck, typically over a period of time, you do receive cost of living adjustments to help compensate you for inflation. They may not keep up with what you would hope they would be, but you do get some cost of living adjustments over time typically. Then with your investment portfolio, assuming you're a young investor, you probably have ample stock exposure. And if you don't, you probably should. Over time, one thing we know is that stocks do tend to outearn inflation. So you're relatively protected as a young investor--if you have that paycheck, if you have an equity-heavy portfolio.

On the other hand, I think retirees have more reason to take a hard look at their portfolios to make sure that they're protected against inflation. Retirees are typically receiving Social Security, which is an inflation-adjusted benefit. So you're protected with that portion of your income stream. But the portion of your income that you're withdrawing from your portfolio is not inherently inflation-protected. So that argues for you to have ample exposure to stocks and then to make sure that the safer portion of your portfolio, the bonds and perhaps cash investments, also have a little bit of inflation-protection. And so that's where I would suggest that retirees do think about making sure that they have Treasury Inflation-Protected Securities, or perhaps I bonds, both of which offer some direct insulation against inflation. When we look at professionally managed asset-allocation mixes for people getting close to retirement, we typically see in the neighborhood of 25% of that fixed-income exposure being in inflation-protected bonds. So that's just kind of a benchmark that you can think about with your fixed-income exposure, maybe having a fourth of that in bonds that are explicitly inflation-protected.

Dziubinski: Christine, what about categories, like commodities? Commodities in particular have performed really well recently, in part because of those inflation fears. Is it too late?

Benz: Possibly. I was recently looking at the performance of various commodities tracking investments. Many of them are up about 50%, or even more over the past year through mid-June. So that's a big runup. Commodities certainly had not performed well prior to this recent period. They had many years of lagging the equity market, lagging the bond market, lagging nearly everything in sight. The big risk to me for investors who are looking to commodities to provide inflation-protection is that there's kind of a mismatch with the risk/return profile of commodities relative to the thing that you're trying to address. So when we think about the risk that inflation poses to a portfolio, well, what it is, is that it'll take a slight bite out of your portfolio every year-- out of the purchasing power of that portfolio. The risk factor by adding commodities, which are a really volatile investment, is that, if you get the timing wrong, that you could turn around and lose a lot of your money right out of the box because you mistimed your purchase. So I'm not particularly compelled by the idea of adding commodities as an inflation-protectant. I think Treasury Inflation-Protected Securities are a much surer thing if your goal is to insulate yourself against unexpected shocks in inflation.

Dziubinski: And let's talk a little bit about bonds. Interest rates have ticked up a little bit in part because of those inflation fears, which has sort of damped the performance of bonds and bond funds. How should investors be thinking about bonds today?

Benz: Well, I do think that you want to have them especially if you are close to retirement. You want to make sure that you have that ballast in your portfolio that you could draw upon if we did have some equity market weakness. You certainly don't want to overdo your exposure to safe investments like bonds because some of the interest-rate risks that you alluded to, Susan, and also just the fact that we have very low yields on bonds today, which suggests that their return potential could be pretty constrained. With fixed-income exposure, my bias is usually to keep that portion of the portfolio pretty safe so to not overextend into some of the lower-quality fixed-income assets that might boast attractive yields. But instead, stick with high-quality fixed-income investments. Generally stick with short- and intermediate-term bonds but really not take too much risk with that portion of the portfolio, recognizing that you want it to be there to be something that you could spend through if you needed to in a period of equity market weakness. We've seen a really strong rally in some of the risky fixed-income assets already. I would be reticent to suggest that investors move into them in a really big way at this point in the cycle.

Dziubinski: And speaking of rallies, we've seen a tremendous rally in value stocks this year, which were quite unloved for a very long time. Is there anything investors should be doing in response to that?

Benz: Well, if investors haven't taken a look at their portfolio style box exposures for a while, they may still find that they are overextended into the growth side of the style box. When we look at performance any longer than one year, you still see very strong outperformance of growth stocks relative to value. So if you haven't looked at that recently, you may still consider adding to value, but both sides of the style box have now performed very well over the past year. And so there's probably not a lot of adjusting that needs to be done. Certainly if you're an index fund investor, this is really out of your hands. You're sort of leaving the market to make these decisions for you. But if you're someone who has more finely tuned holdings in your portfolio, you might see if you are perhaps still a little bit overextended to the technology stocks to the growth side of the style box.

Dziubinski: Christine, thanks for giving us a game plan for our midyear portfolio review this year. We appreciate your time.

Benz: Thanks so much, Susan.

Dziubinski: I'm Susan Dubinsky with Morningstar. 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. She is also the author of a new book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement (Sept. 2024, Harriman House). She 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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