Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar.com. Investors often hear that periods of market volatility provide them with an opportunity to buy. However, whether you should be buying or not depends on a lot of different factors, including your life stage and what type of investor you are. Here with me to discuss if you are inclined to buy and if you are the right investor to do that is Christine Benz. Christine is Morningstar's director of personal finance.
Christine, thank you for joining us today.
Christine Benz: Susan, It's great to be here.
Dziubinski: Now let's start with a really general question. Is a downturn a buying opportunity for all investors?
Benz: Well, no, and this is one of my pet peeves. You sometimes hear people say, "No one should sell anything when the market goes down." My view has been, actually, for people who are getting close to retirement, many of them had been reticent to de-risk their portfolios during the long-running bull market that we have enjoyed for most of the past decade. Some investors should still actually be thinking about lightening up on stocks. You probably don't want to be doing that in the depths of a market panic, but I think you do want to take a step back and take a look at your asset allocation and see what sorts of changes might be an order. Some investors are probably underweight the safe stuff relative to their proximity to needing to spend their money.
Dziubinski: Now, there's a difference between how a hands-on investor might approach market volatility and taking opportunity there versus a hands-off investor and how he or she might take advantage of that. So let's start with the hands-off investor. What are some ideas or things a hands-off investor could be doing right now or thinking about?
Benz: I love hands-off investors because, in my experience, they often do just as well as investors who are more hands-on. So a couple of ideas would be to think about getting some professional guidance. I think junctures like this where you do see a lot of market volatility might spook people who were otherwise feeling confident in their abilities, so either pay a financial advisor to look at the totality of your plan. That can be money well spent.
On the other hand, you might look at some sort of DIY solutions. So you might look at a target-date fund or a balanced fund. And the nice thing with solutions like that or hiring an advisor is that you're delegating the decision about what you should be doing to a professional, and the nice thing about some of these products that do it for you is that in periods of market volatility, they're rebalancing into the weakness. So even though you might not feel like buying stocks, they're stepping up and buying stocks for you. So we see that investors in these all-in-one type funds tend to do really well on a dollar-weighted-return basis, meaning that they just add to their funds over time, and that nets out to be a pretty good take-home return.
You might also think about upping your allocations, so increasing your contributions to your 401(k) plan or to your IRAs. Down markets are a great time to think about increasing contributions. You might also think about taking advantage of a solution that's built into a lot of 401(k) plans these days, which is an automatic-rebalancing feature. So if you haven't chosen the target-date fund in the plan or if you haven't chosen a managed account or something like that, the auto-rebalancing actually takes care of that rebalancing process for you. So those are some really neat solutions that hands-off investors can look to today.
Dziubinski: If hands-off investors are trying to make some decisions here, do you have any resources that you'd recommend that they consult?
Benz: A few that I like. One would be Morningstar's Instant X-Ray tool that looks at your portfolio's current asset allocation. Then you can compare that to some kind of a benchmark to see if you're in the right ballpark. A resource for doing that would be Morningstar's lifetime allocation indexes, or you could look to Morningstar's target-date series report that's on the website that shows asset-allocation mixes for various target-date series. My model portfolios, I think, are also a decent starting point for people who want to set an asset allocation and not spend a lot of time hovering over it over time. So we've got lots of different portfolios for people at different life stages. Those would be all good starting points for hands-off type investors.
Dziubinski: So, let's shift over now and talk about the more hands-on type investor, and here maybe you want to start by talking about some traps to avoid for those investors who tend to be a little more hands-on.
Benz: One I would say, Susan, is just resist the urge to engage in sort of all-or-nothing investing. So perhaps investors might be inclined to retreat to cash until this whole pandemic thing clears up. The problem is that tactical asset allocation is very difficult to pull off. By the time investors do start gaining comfort and getting back into stocks, the good news may have already been priced in. So I think you want to be careful with sort of all-or-nothing asset-allocation scenarios. I think it's also wise to resist the urge to make a play on very narrowly focused parts of the market.
You and I have talked about how we've seen energy stocks really hard-hit, financial stocks. Rather than back up the truck for maybe a sector-specific fund focusing on those very hard-hit areas, why not just think about having good value exposure in your portfolio? If you have a broad-based value fund, your manager can do some selective buying perhaps in those sectors, but they're not going to necessarily have the whole portfolio in those hard-hit sectors. I think that you want to resist the urge to be really narrow with your investments. We tend to see investors undermine their results with some of those narrowly focused funds.
Dziubinski: If that's some of the things that the hands-on investors should avoid, what are some things that the hands-on investor could or should be doing?
Benz: Well, again, I think rebalancing is important. So take a look at your portfolio's current asset allocation relative to your targets. If you don't have a target for your asset allocation, it's a good time to get one. So start there with asset allocation because ultimately that will be the biggest determinant of how your portfolio behaves. Stepping up contributions is also a great idea for hands-on investors, and then I think they can take advantage of a lot of the resources that we have on Morningstar.com to help really pick their spots. So we have certainly a lot of great articles on the site throughout the week, but we also have our analysts doing the bottom-up work on individual equities as well as funds and ETFs. So rolling up your sleeves, reading those Analyst Reports. I know our analysts have been very active in terms of reviewing funds, reviewing stocks, engaging with fund managers, and so you can pick up on a lot of that intelligence just by reading the reports.
Dziubinski: Any particular, perhaps, tools or other specific pieces of content you'd recommend for people to look at?
Benz: A few that I like, Susan. One is our price/fair value graph, which is available on the Markets tab of Morningstar.com. So you can see whether the stocks in Morningstar's coverage universe in aggregate are trading cheaply or expensively. Right now, prices are a little bit depressed, and you can drill in and see which sectors look relatively more or less attractive through this turbulence. So that's been one of my go-to tools for years. I also like the premium screening tools where you can screen for companies that have 4 or 5 stars, wide moats, whatever other features you like to look at. And then I think another piece of intelligence for hands-on investors would be this compendium of market forecasts that we periodically put out, and that details what firms, both inside Morningstar, our investment management team at Morningstar, as well as external firms, are thinking about in terms of market returns over the next, say, seven to 10 years. That's another way to think about kind of how you might be positioning your portfolio at this point in time.
Dziubinski: Well, Christine, thank you so much. It's terrific food for thought, and we all have a little bit of a portfolio examination that we can now do, whether we're hands-on or hands-off.
Benz: Thank you, Susan.
Dziubinski: I'm Susan Dziubinski from morningstar.com. Thanks for tuning in.