Sometimes investors need to think big picture: how to build a smart portfolio, avoid mistakes, and access time-tested principles. Here to discuss investing ideas is Christine Benz, Morningstar's director of personal finance and retirement planning.
This interview has been edited for length and clarity.
Q: What are some signs that an investor might be taking on too much risk or playing it too safe with their allocations?
A: People can use age 50 as kind of a rough cutoff as to whether they should care about taking too much risk. I sense a lot of complacency among older adults. 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.
The last significant sustained economic downturn was 17 years ago. It makes sense to mentally prepare and to do that preemptively, to reposition within your portfolio to give yourself a runway of safer assets.
Q: 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 for the past couple of years, despite some bobbles earlier this year.
A: It's that recency, that tendency to want to believe that whatever we've seen in the market will continue to persist. Another mistake is crowding in whatever has been the hot part of the market. The AI-related companies and Big Tech names--there's a tendency to believe that their returns will continue to be phenomenal. They may be long-run great companies to own, but you need to be prepared for periodic downdrafts. The AI companies are a higher-quality basket of companies than we had in the late 1990s. Nonetheless, you want to protect yourself, and you don't want to be huddled in those companies at the expense of everything else.
Q: What tips would you have for investors who struggle keeping their emotions in check when investing, either when the market's going up or going down. Should investors really adopt that set-it-and-forget-it mentality?
A: Most investors 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. That's not my creation, but I love that metaphor--try to keep your hands off of your portfolio.
I 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. 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 an investment policy statement to guide your changes. Do a once-annual review where you look at performance. Look at whether rebalancing is in order, look at whether any tax-planning maneuvers might make sense, whether charitable giving or donating appreciated securities. Not spending too much time monkeying around is probably going to redound to the benefit of the long-term portfolio and plan.
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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to https://www.morningstar.com/personal-finance
Christine Benz is director of personal finance and retirement planning for Morningstar.
Susan Dziubinski is an investment specialist for Morningstar and co-host of The Morning Filter podcast.
