Susan Dziubinski: Hi. I’m Susan Dziubinski with Morningstar. I interviewed Morningstar’s director of personal finance and retirement planning, Christine Benz, in early August for a special episode of The Morning Filter podcast. Here’s an excerpt from our conversation.
Are You Playing It Too Safe With Your Portfolio?
Dziubinski: What are some signs that an investor might be taking on too much risk or maybe playing it too safe with their allocations?
Benz: Well, again, I think it comes back to time horizon, Susan, and people can use age 50 as kind of a rough cutoff as to whether they should care about taking too much risk. I do sense that there’s a lot of complacency among older adults. They’ve had a great run in the stock market. And it’s kind of a perverse thing. As we age and we become more battle-tested in terms of the ups and downs, we feel more risk-tolerant, but our actual capacity to absorb risk has gone down.
And the last significant sustained economic downturn, gosh, it’s 17 years ago. We were all 17 years younger at that point. Chances are it’s going to feel different to us if we do experience a sustained drawdown. I do think it makes sense to mentally prepare and to do that preemptively, to do a little bit of repositioning within your portfolio to give yourself a runway of safer assets.
Why You Shouldn’t Let Recency Bias Determine How You Invest in the Market
Dziubinski: Talk a little bit—we hear a lot in the financial media talking about behavioral mistakes that investors make. Again, you’ve done portfolio makeovers, you do a lot of public speaking, you speak with investors all the time. What do you think are some of the mistakes that investors could be making? Particularly when we’re in a bull market like the one we’ve been in, let’s be honest, for the past couple of years, despite some bobbles earlier this year.
Benz: Right. So, it’s that recency, that tendency to want to believe that whatever we’ve seen in the market will continue to persist, and then another one is kind of crowding in whatever has been the hot part of the market. So the AI-related companies, for example, the Big Tech names at the top of the index, I think there’s a tendency to just want to believe that their returns will continue to be phenomenal—and they may be long-run great companies to own, but you do need to be prepared for periodic downdrafts in those companies. And by all accounts, the AI companies are a higher-quality basket of companies than the last period that we had, the late ’90s period of pets.com, etc. This is a better group of companies, real companies, but nonetheless, I think you want to protect yourself, and you don’t want to be huddled in those companies at the expense of everything else.
Your Portfolio Is Like a Bar of Soap: The More You Touch It, the Smaller It’s Going to Get
Dziubinski: What tips would you have for investors who maybe have a little struggle keeping their emotions in check when investing, either when the market’s going up, market’s going down, whatever. Are these investors who really should adopt that set-it-and-forget-it mentality? Is that still valid today?
Benz: Well, for most investors, I would say you want to keep in mind the idea that your portfolio is like a bar of soap, and the more you touch it, the smaller it’s going to get. And that’s not my creation, but I love that metaphor—try to keep your hands off of your portfolio. And this is not self-serving for Morningstar, but I happen to believe that a good once-annual review of a portfolio is plenty. You might pay attention to some of the performance going on in the market. And of course, we all live and work in the economy, so it’s hard to tune that out.
But to the extent that you are making changes in your portfolio, try to use some kind of an investment policy statement to guide the changes that you make. Do a once-annual review where you’re looking at performance. You’re looking at whether rebalancing is in order, you’re looking at whether any tax-planning maneuvers might make sense, whether charitable giving or donating appreciated securities. But I think that can be accomplished in a good once-annual review. And not spending too much time monkeying around is probably going to redound to the benefit of the long-term portfolio and plan.
