As investors start to wonder if the stock market has rallied ahead of itself, Morningstar’s Christine Benz offers some insights into asset allocation techniques and identifies some 'hot' areas in the market.
The full transcipt can be read below.
Jason Stipp: I'm Jason Stipp with Morningstar. As stocks have had quite a run since March lows, a lot of market watchers are wondering if the stock market has gotten ahead of the economy, and we may be due for a breather. This leads a lot of individual investors to question whether their own portfolios may be a little over heated and could be due fore a downturn coming up.
Here with me talk about getting a handle on your own portfolio is Christine Benz. She's Morningstar's director of personal finance and the editor of Morningstar Practical Finance. Thanks for joining me, Christine.
Christine Benz: Hi, Jason. Nice to be here.
Stipp: If I'm looking at my portfolio, how can I begin to tell if some areas are heating up a little bit and maybe would be due for a downturn on a holistic level? Where would I start?
Benz: I think the last thing you want to do is do this based on your gut feeling about what may be overheated or not. You want to try to anchor it in the facts in whatever way you can.
There are a couple of ways to go about it. The first would be to check your portfolio's weightings relative to something else. Maybe that's your own targets for it. If you have an asset allocation framework, you would definitely want to check that. But maybe it's also relative to some kind of a market benchmark.
Maybe you have an asset allocation framework laid out for yourself. But you haven't specified, "Well, I want to have 10% in the large growth box," and so on down the style box. You might check your exposure versus a broad market benchmark using a fund like Vanguard Total Stock Market Index as a proxy for the market as a whole.
Stipp: To see if any of those in your own portfolio have an extra spurt of growth that might have put them out of line with what you were thinking, or with what a general market benchmark would show.
Benz: Exactly. Another thing I would say, you do that relative check. But also check how your portfolio appears to be valued on an absolute level. Morningstar actually has a couple of tools that I regularly use to gauge this very thing.
The ETF cover page has what's called a Valuation Quickrank, where you can quickly see whether the holdings within an exchange-traded fund are trading at a fair value or are relatively undervalued or overvalued according to our stock analyst teams. That's another great tool.
Stipp: Sure. And I also know, on our Stocks cover page, you can get a quick overview of sectors using that same methodology of the stock analysts to see if the services sector, the manufacturing sector, looks overvalued, undervalued, or fairly valued. So you might get a quick gauge on some of the major areas that your portfolio--by taking a look at those tools. [This is a feature that is currently exclusive to Morningstar.com. We are working on adding the feature to Morningstar.co.uk as our equity analysis coverage expands.]
Benz: Exactly.
Stipp: Right now are there any areas of the market that investors should keep on their radar as maybe being a little bit heated up?
Benz: A couple I would look at. Technology stocks have certainly been on a tear and they had a long way to come up after the drubbing they took last year. But I would look at technology. Anything in the growth column of the style box overall has come an awfully long way very quickly.
Then in terms of international holdings, I would take a look at emerging markets in Latin America in particular. That's another area that has come a long way very quickly. So you just want to make sure that those securities aren't hogging a disproportionate share of your portfolio right now.
Stipp: OK. Say that I do identify a couple of areas where I think I might want to make some adjustments. What are some ways to go about that? Should I actually make some sales? What are my options for that, to get my portfolio back in line?
Benz: I think it depends on the urgency that you've identified. If you see that your portfolio is 75% in the growth column style box, and that wasn't what you intended at all, it probably makes sense to some selling. But you also want to consider the tax consequences of doing that. So if you're holding that money in a taxable account, that may not be a tax-efficient strategy to sell all at once.
Certainly, if you know that you have money on hand that you'll be putting to work over the next six months to a year and you want to address some imbalances that have arisen in your portfolio, you may address that through adding additional money rather than selling.
Stipp: OK. Well that makes sense. Also, one last question for you. In thinking about a drawdown--if I'm going to be selling some securities out of my portfolio just to meet income needs, does it makes sense to incorporate some kind of valuation metric in that process, which I would be doing anyway? To maybe sell some potentially overvalued securities for that income I would be drawing out of my portfolio regularly?
Benz: I like that idea. A more traditional strategy for retirees would be to take money and move it into cash from the slightly less aggressive securities. You might move money from a short-term bond fund into cash to meet your living expenses. Certainly if you feel like you have a good framework for identifying what's over- or undervalued in your portfolio and you were preparing to sell anyway, I think that that's actually a descent approach.
Stipp: Great. Well, thanks so much for your insights, Christine.
Benz: Thanks, Jason.
