Check Your Portfolio s Risk Exposure Now

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“I m christine benz for morningstarcom. We re nearly 10 years into the current market market expansion and morningstar s director of global etf research. Ben johnson thinks it s good time for investors to revisit their portfolios risk exposures. He s here with me today to share some specific strategies for doing that ben thank you so much for being here thanks for having me.

Christine ben in the latest issue of etf investor. You spend a lot of time talking about risk. And you noted that you think. It s a good time for investors to check up on their portfolios.

Risk exposures. We ve seen a little bit of volatility in the market so far here in 2018. Why do you think it is an opportune time to be looking at risk that might be lurking in portfolios well christine quite simply put it makes sense to repair your roof. While the sun s still shining before it starts raining and what we ve seen is that conditions in the market.

The market climate has been generally quite sunny since we touched the very bottom of the market in march of 2009 in the midst of the global financial crisis. I recently took a look at some data and i graphed the trailing three year standard deviation of returns for the s p. 500. Going all the way back to march of 1939.

And what we see is that at present were in the third longest streak ever of below average volatility in the us equity market. The next longest streak ended in may of 1962. So this period of relative calm is unprecedented in most investors lifetimes. So there s no better time now.

While the stun still out before clouds are beginning to form to take a look at your roof and make sure that there s no holes that you need to be patching. Because these periods of relatively placid market performance. Don t last forever that we inevitably will see some period of volatility do not last forever. I m absolutely okay so in the issue of etf investor.

You laid out some specific things that investors should be thinking about when thinking about troubleshooting risk in their portfolios. Top of the list was asset class exposures. Checking up on that why is that so important asset allocation is huge driver of your long term returns..

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It also is a way to optimize for good behavior. Which i would argue matters more than anything else matters more than asset allocation matters more than security selection. So if you were to just have a simple 60. 40.

Portfolio. 60. Invested in us. Equities.

Say through the vanguard. Total stock. Market. Index.

Fund. And 40 invested. In us. Bonds through the vanguard total bond market.

Index. Fund take that portfolio invest in that portfolio. In march of 2009. At the very bottom of the market and fast forward to today.

What you would see is if you left that unattended if you did not rebalance you would have 84 percent of your assets invested in us stocks now this is an extreme scenario. But what i would guess is that many investors have been enjoying what have been very favorable conditions in the stock markets that they ve been happy to be invested in stocks. And in many cases overweight stocks now i would argue as a fantastic time to revisit your asset allocation and have a gut check and understand whether or not you have too much. Equity risk in your portfolio.

Especially given. How long in the tooth. The current bull market has become well that s obviously a huge topic..

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How to set the right asset allocation. But in terms of some coaching that you can provide on how investors should approach that question. Where should they look for advice about how to set their asset allocation. I think you need to look externally you need to look at the data you need to consult with a professional.

If you need to phone a friend. If you need that help you need to look internally as well and understand what is your willingness. What is your ability to tolerate various levels of risk not just today again while the stunt sun is still shining. But is your asset allocation.

Today. Something you will be comfortable with should markets take a turn for the worst should. So would it be the kind of thing that you could live live with and hank absolutely okay another thing. You wrote about is looking at your issue selection looking at your security selection and seeing if there aren t some ways that you might shave shade.

Things over to less volatile securities. Within both equities as well as bonds. So let s start with tech widdy s if i m looking at my equity portfolio. Today and i m thinking well i still want to maintain maybe an equity heavy posture.

But i want to make sure that i m not in the most volatile stocks how can i think about doing that well fortunately. For investors. There are a wide variety of tools in the funds. Toolkit and in the etf toolkit in particular.

So an example in the equity space would be the ishares edge msci minimum volatility. Usa etf. The ticker for that fund is usm. V.

That fund has a morningstar analyst rating. Of silver. And what that fund..

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Does is it looks to build a portfolio of us stocks that is going to be inherently less volatile. It s not going to draw down as deep lease you re not going to participate in bear markets to the extent you would if you just don t abroad us equity index fund by way of paying for that if you will you re not going to participate in the upside as much as you would otherwise as well. This is an interesting fund for investors who want to maintain an equity allocation. But don t necessarily want to have a scenario where they re participating fully in the downside in the event of any downdraft in the stock markets in the united states how about on the fixed income side you mentioned to me before we got rolling here that there has been just this torrent of assets into short term bond.

Ultra. Short term bonds is that the way to do it. Or do you think maybe. Investors are overdoing the duration managing duration risk.

How should investors approach that i think. It s a way to do it. So people have been worried about rising rates. You know as long as the bull market and equities have been going on now.

And you know the fed looks keen to continue to raise rates at least into the back half of this year. So in the short term people are very concerned about this and this is manifest itself on a year to date basis in the form of 14 and a half billion dollars of investors money going into etfs in the morning. Start ultra short term bond category. People are worried about interest rate.

Risk. Whether rightly or wrongly. Certainly in the immediate term rising rates will negatively impact the value of any bonds over the long term. I would argue that these fears are somewhat overblown.

Especially. If you re someone who is currently in retirement and saving or rather. Spending your way through retirement rising rates are a long term good thing. Because earning one and a half percent on your savings is far inferior than earning two and a half percent or three and a half percent or what have you so in the near term.

I think investors are probably in many cases overreacting to rising rate fears in the long term. I think investors especially those spending their way through retirement should see this as a positive trend. Okay so i might want to avoid the very longest duration bonds given..

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What we suspect could could happen to interest rates in the years to come. But sort of the core intermediate term. And maybe short term products. Those still make sense is a good bulwark in my portfolio against equity risk.

Absolutely. That s absolutely the case and the further out the curve you go the more risk you re going to take. And if you get all the way out on the curve you re going to see a level of volatility. That s going to look like stock like volatility okay and you ve mentioned a couple of times.

The sort of behavioral risk. The chance that if my portfolio is too volatile that i ll do something really rash with it maybe switch everything to cash and then be sitting there watching the market start to creep up so do you have any guidance on how investors can manage their own behavioral risks. It sounds like kind of addressing at the portfolio level. The the volatility is one way to do it any other tips that you can provide well.

I think the greatest risk. We all face is the risk that we look at it in the mirror every morning in the risk manifesting itself in making the wrong decisions. Absolutely the wrong time so the best advice. I could possibly offer would be to manage the first two items.

We ve discussed so that has to do with asset allocation and security and fun selection or the best behavioral outcome. Possible find a plan and asset allocation. Find a set of funds or individual securities. That you are most likely to stick with through thick and through thin.

Because ultimately. It s the time in the market that matters more so than anything and far less so and that s far easier to control than how you might try to time various market exposures or when you might try to dial up or dial down. The risk of either your asset allocation or the funds and securities. That are within your portfolio.

Always great to hear your insights. Ben thank you so much for being here well thank you for having me thanks for watching i m christine benz for morningstar calm ” ..

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