Sell-Off Creates Opportunity for Portfolio Checkup

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The shortened holiday week has been eventful so far with the major indexes falling into the red for 2018. I'm here with Christine Benz, she's our director of personal finance, to talk about what's driving the sell-off a little bit and also how it could be a good time to do a portfolio checkup.

Christine, thanks for joining me.

Christine Benz: Jeremy, it's great to be here.

Glaser: Let's survey the carnage a little bit. Technology obviously has been hit very hard. When you take a look at the market, what do you see as the big challenge right now?

Benz: Technology, as you said Jeremy, has been the epicenter of the selling. A spillover effect, especially for investors in mutual funds and ETFs is that anything on the whole growth side of the style box has been pretty hard hit. Healthcare stocks have gone down as well.

Another key area where we've seen a lot of selling has been in the energy sector, in part because we've seen declining energy prices, so that sector has been hit pretty hard. By and large, value stocks have held up better than growth so far in 2018 on the equity side.

On the bond side, investors appear to be gravitating to safety. We've seen a little bit of pressure on long-term bonds, to some extent corporate bonds, whereas short-term government bonds and bond funds have held up relatively well.

Glaser: As we head into the holiday weekend, you've suggested that maybe this is kind of a good impetus to maybe give a little bit of a checkup on your portfolio. Why is that the case?

Benz: This is a good time of year to do a good overall portfolio checkup anyway. Year end is a time where you can maybe make a few moves where you can potentially improve your tax situation heading into 2019. Year end is naturally when I would urge investors to take a little break and spend some time reviewing their portfolios.

The other thing is that many of us have an extra day or two this week, so a long weekend, and that gives you some time to maybe take a deep breath, survey the damage in your portfolio and think about what steps can you take to make your portfolio better heading into 2019.

Glaser: Let's talk about what that would look like. What would be the first step?

Benz: The first step of any portfolio checkup in my opinion is to do kind of a wellness check. If you're someone who's in accumulation mode, you want to check your balance where it is right now, but you also want to take a look at how much you are contributing toward that balance each year, because that is going to be by far the biggest determinant of whether you reach your financial goals. See what your savings rate is.

If you are a higher income investor, you'd want to be well over that 10% threshold that some people had thought was a good starting point. You'd want to be closer to 15 or even 20% of your salary that you're contributing to your retirement accounts.

It's also a good time to make some last minute 401(k) contributions. If you aren't on track to maximize your contributions and you have a little bit of leeway in your budget, here as 2018 wraps up, see if you can't perhaps push a little bit more into the retirement plan. You do have until April 15 to make additional contributions to an IRA if you wanted to fully fund an IRA for 2018.

If you are someone who is in decumulation mode, really your key metric to determine whether you're on track is how much you're spending from that portfolio. If you haven't revisited that recently, just take a look at whether you are spending at a sustainable rate. If you potentially are worried about your portfolio, see if you can't do a little bit of belt-tightening on the spending front to try to reduce your portfolio withdrawals.

That's especially important if you're someone who's just coming into retirement, because it can be really dangerous if you're overspending from a portfolio that's simultaneously declining in value.

Glaser: Let's talk about asset allocation. If this market dislocation has created some changes in new allocation, how do you know when it's time to actually rebalance or when do you let the market kind of do that rebalancing for you?

Benz: I think the people who should be especially concerned about this should be people who are approaching or in retirement, especially for retirement accumulators, people who are sort of like post age 50, but maybe getting within 10 or 15 years of retirement.

It's a great time to get in there and take a look at your portfolio's asset allocation. It's been very easy to be hands off as the market has been rising pretty steadily over the past decade. If you haven't made any changes recently, you still might actually be equity heavy relative to an appropriate target. Check up on that. Do a little bit of checking on your liquid reserves as well as the allocations that you might have to bond holdings.

The asset allocation checkup, I would say is relatively less important for people who have many years until retirement. If you're in your 30s or 40s and you think you have at least 20, 25 years until retirement, you should want to see these periodic market sell-offs because you want to hold a mostly equity heavy portfolio at that life stage. You probably shouldn't do a lot of shifting around in terms of your portfolio's asset class exposures. That's more important for people who are getting close to retirement or in retirement.

Glaser: You mentioned earlier that growth has been hit really hard, so within your equity allocation, do you need to worry about being tilted too far to growth or value?

Benz: I love the idea of using this opportunity to not only check up on your portfolio's asset class exposures, but also look at intra asset class exposures. And I think our X-Ray functionality is a great way to do that. You're taking a look at your portfolio, how it's arrayed across the style box. Also looking for any big tilts toward certain individuals sectors. You don't need to be completely style-neutral relative to, say, a total market index or the S&P 500.

But nonetheless, I think it's a good starting point, so check up on those allocations. The market has done a little bit of rebalancing for investors where it's taken money away from the growth side of the ledger and moved it perhaps toward value a little bit, but see if you might want to make some adjustments there as well.

Glaser: How about holdings? Is there anything you need--maybe worried about isn't quite the right word--but how would you check up on and making sure that that your holdings are in good shape?

Benz: I would not stop just at performance. I think that that's our gut reaction is just to see, OK, what's my worst performer in my portfolio? Spend a little bit of time reviewing your holdings fundamentals, whether you're an individual stock investor or a fund investor. I think our analyst reports are super helpful in terms of getting your arms around the whole picture at individual stocks certainly as well as mutual funds and ETFs.

Glaser: Any task considerations to keep in mind?

Benz: Definitely. This is maybe a small silver lining in a very volatile market environment, is that if you have taxable holdings that have declined in value since you purchased them, you may be able to sell them and earn a tax loss that you can use to offset any capital gains in your portfolios.

Another concept worth keeping in mind is what's called tax gain harvesting. This is for people who are in the 0% capital gains bracket currently. I've written about this topic on Morningstar.com. If you think that applies to you, just check up on whether perhaps you have some holdings that you could actually sell pre-emptively. It's not necessarily a downmarket strategy, but nonetheless something to consider at this time of year.

You may be able to do some IRA conversions if your balance has declined. These are all areas to get some tax help on. I also referenced the virtue of making those last minute 401(k) contributions in the last month and a half or so that we have in this year. If you are a retiree who's subject to required minimum distributions from your tax-deferred accounts, use those RMDs as an opportunity to maybe correct things in your portfolio that you wanted to change anyway. There's definitely a chance to knit in some tax strategy around some of these portfolio changes that you might want to make.

Glaser: Christine, thank you.

Benz: Jeremy, thank you.

Glaser: From Morningstar, I'm Jeremy Glaser. Thanks for watching.