How to Build a Portfolio You Don't Have to Babysit

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. While day trading has made a comeback, many investors want just the opposite. They'd like to build a portfolio that could essentially run itself. Joining me today to discuss the virtues of hands-off investing and to share some ideas for how to build one of those portfolios is Christine Benz. Christine is Morningstar's director of personal finance.

Hey, Christine. Thank you for being here today.

Christine Benz: Hi, Susan. Great to be here.

Dziubinski: It does seem like heavy trading is a little bit back in style today, but you've for a long time been an advocate for a more hands-off approach to investing. Tell us a little bit about why.

Benz: Well, for one thing, we hear about these behavioral biases that investors fall prey to, where perhaps they're excessively confident when the market has been robust as it's been, or in weak markets, they might become excessively loss-averse. My view is that the less you're looking at your balance, the less you're doing that ongoing tinkering, the less likely it is that you'll fall prey to some of those behavioral traps. And then I would also say that even though I know plenty of older adults, plenty of retirees who really like to tinker with their portfolios and like to watch their investments on an ongoing basis, we know that cognitive decline is a fact of life for some older adults. I would say to the extent that you can build a portfolio that is streamlined and hands-off, it means that you're less likely to encounter a stumble if for whatever reason you are unable to manage your portfolio well on your own. I think this becomes particularly important later in life.

Dziubinski: Let's talk a little bit about how to get there, how to get to that hands-off portfolio. What are the steps you should be taking?

Benz: The key step, in my view, is to have kind of a vision statement for your plan. This might be an investment policy statement, for example, where you're spelling out how much you're contributing if you're still in the accumulation phase or what your withdrawal rate is if you're in the withdrawal phase, what your general asset-allocation parameters will be, what you're looking for in your investments, and importantly, you'll also spell out how often you will attend to your plan. And all of that should be outlined in your investment policy statement. Focus on creating something that's really quite streamlined and that in turn I think will lend itself well to creating a streamlined investment plan if you have that streamlined investment policy.

Dziubinski: For people who are still saving, you suggest that the next step is to automate your contributions, right?

Benz: Absolutely. We all know to the extent that we've contributed to a 401(k) plan, for example, we know how frictionless it is to make our contributions to keep that money coming in each paycheck. I would say do that with as many accounts that you're able to. And the good news is, if you're contributing to an IRA or a taxable brokerage account or a health savings account, you'll be able to turn on that automatic feature where you can have your contributions go directly into the account straight out of your bank account. So, turn that on. Try to remove those frictions. And the advantage is, in weak markets, you won't have that appetite to pull back. You probably will just let inertia take over and let those contributions continue to flow in, which it turns out is a pretty great way to invest.

Dziubinski: Let's talk a little bit about things at the portfolio level. What are some of the key investment types the hands-off investor should be considering?

Benz: Right. I'm a big believer in all-in-one type funds. They're certainly not all good, but I would say that a good target-date vehicle can be a tremendous aid to people who want to simplify their investment plans. So, if you're investing in the context of a 401(k), certainly you'll typically find one of these target-date lineups on offer, but you could also invest in a target-date fund inside of an IRA. When we look at the data on target-date funds, we see a really pleasing pattern where investors tend to make their contributions and then just kind of sit tight. I sometimes hear criticisms that target-date funds are too expensive or they're not right for everyone. But the good news is that when we look at asset flows to target-date funds, we actually see that the assets are really flowing to the very low-cost options. So, consider an all-in-one fund like that. If you're investing for college in a 529 college savings plan, you'll also typically have the option to invest in an age-based sort of plan that allows you to kind of extricate yourself from the maintenance equation, where the account is just gradually getting more conservative as your child gets closer to matriculation. Those are great hands-off options for people who really don't want to do any ongoing oversight.

Dziubinski: What about for investors who maybe want a little bit more control over their asset allocation than a target-date or another type of managed portfolio might offer? What should they be considering?

Benz: Here, I think, broad market index funds or exchange-traded funds can make a ton of sense. Taylor Larimore, who is one of the leading lights of the Bogleheads movement, wrote a whole book about the three-fund portfolio, which is total U.S. market, total international stock, total bond market. And the idea is that with those three basic building blocks, you can cover the total U.S., international, and bond markets. And so, I think that that is a great and elegant solution. You might consider adding a few additional components, maybe Treasury Inflation-Protected Securities, if you're retired. But definitely, those broad market index funds can provide a lot of diversification. Expenses are really, really low on the big ones. So, this is a terrific option for investors who would like to have just a little bit more control over their asset-allocation frameworks.

Dziubinski: And then, lastly, Christine, if you do want to have this sort of hands-off portfolio, how often should you really be checking in on it?

Benz: I think a good once-annual review is plenty for most investors, possibly twice a year if you want to be a little bit more active. But any more than that, to me, runs the risk of doing a little bit too much active management, a little bit too much active oversight. You can accomplish a lot in a great year-end portfolio review where you're checking up on tax matters, you're checking up on your contributions over the past year, your withdrawals over the past year if you're retired, you're checking up on your asset allocation. But I don't think you need to spend much more than a good once-annual review or possibly twice a year at midyear if you're so inclined.

Dziubinski: Well, Christine, thank you so much for your time today and for these tips about how we can all be a little bit more hands-off with our portfolios. We appreciate it.

Benz: Thank you, Susan.

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