Christine Benz on Mastering Investment Strategies and Navigating Retirement Planning Challenges

Unlock the secrets of savvy investing and retirement planning with Morningstar's Christine Benz, a distinguished figure with over three decades of financial acumen. Our conversation peels back the layers of Morningstar's analytical evolution, revealing the shift from a retrospective star rating to a predictive medallist rating system. Christine's insights into the pitfalls of chasing high-performing funds and the necessity of a shrewd rebalancing strategy are like a beacon for investors navigating the turbulent seas of fund performance and mean reversion.

Embark on a venture through the complexities of retirement decumulation and the crucial role of asset allocation with us. The discussion traverses the landscape of ever-changing market conditions, the uncertainty of longevity, and the specter of inflation, shining a light on the need for a well-fortified withdrawal strategy. Christine and I dissect the nuances of tax planning, the strategic timing of Roth conversions, and the potential of annuities to fortify retirement strategies, reinforcing the value of expert tax advice—a compass guiding you through the financial wilderness of your golden years.

Wrap up your financial education with a deep dive into the psychology behind retirement portfolios and personal finance decisions. We tackle the contentious debate of paying down mortgages versus investing and the implications of managing multiple retirement accounts. The conversation also ventures into the realm of passive investment strategies, their effect on market behavior, and the importance of broadening your horizons with international diversification. Christine and I unravel the misconception of diversity in ETFs, stressing the significance of investor cognizance in recognizing the real composition of their investment exposure. Join us as we chart the terrains of finance and retirement, ensuring you're equipped with the knowledge to craft your own path to security.

Nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. 

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Transcript

Speaker 1: 0:08

My name is Michael Guy at, Publisher of the Lead Lag Report. Join me for the rough hours. Christine Benz, Christine, introduce yourself to the audience and to me. Who are you? What's your background? Have you done throughout your career? What are you doing currently?

Speaker 2: 0:19

Sure.

Speaker 2: 0:20

Thanks, michael, for having me on first of all, and thanks to everyone for joining us for this.

Speaker 2: 0:24

I have been at Morningstar for 30 years, which makes me a little bit of a dinosaur in terms of sticking with the same employer, but I've had a lot of interesting roles. I was part of our investment research group for many years researching mutual funds, writing analyses on mutual funds, running data on mutual funds and eventually headed up our US Mutual Fund and West Team, but along the way became much more interested in matters of financial planning and retirement planning, so shifted my career in that direction. I went through the CFP program, the Certified Financial Planner Program, and got a good download of information through that avenue and have been kind of toiling in the financial planning and especially lately the retirement planning space, because there's just so much to discuss in the realm of retirement planning. I think accumulation is fairly straightforward. If you invest in something semi-sane and have a reasonably stock heavy posture throughout your savings years and you have a decent savings rate, you'll probably be okay. Retirement is just inherently a lot more complicated and, frankly, for me as a researcher just a much richer vein to explore.

Speaker 1: 1:39

There's a lot of different directions. I want to go with this, but I am curious, given that you've been at Morningstar for as long as you have and everyone knows Morningstar for their star ratings has the way that Morningstar as a company, kind of broadly speaking, has the analytical approach, the way that funds are analyzed? Has that evolved or changed over time? Or are these dynamics that you're rating funds off of fairly?

Speaker 2: 2:01

consistent. Well, it definitely has changed and evolved. You mentioned the star rating. That is probably the best known tool that we have. I think there's a lot of misunderstanding about what the star rating is. I understand a bold because we live in a world where a five-star restaurant or a four-star movie or whatever system you're using, usually means better. It means go do it.

Speaker 2: 2:25

In the case of our fund star rating, it's just a backward-looking snapshot of risk and reward how a fund has balanced risk and reward relative to its category peers. It's not meant to be forward-looking. We have a complementary rating system that is analyst-driven. It incorporates what we think of as forward-looking measures in an attempt to give people a sense of what funds and exchange-traded funds they should be investing in. The medallist rating, the more qualitative rating that is the one that people should anchor on if they're looking for what our best ideas are, as well as what we think people should avoid. It's important to note the inputs. Performance is one barely minor input into that forward-looking rating, because past performance we all know isn't an especially predictive data point. Instead, we put a heavy weighting on cost, because all of our data points to the value. Of cost is being probably the most predictive measure in terms of whether a fund will succeed or fail relative to it peers in the future. We look at other things like the manager tenure and the consistency of the strategy, and so forth.

Speaker 1: 3:45

You and I both know that the key disclosure past performance is not in big-factor results, although I will say two things about that. It's interesting because that's a term that 100% valid, accepts momentum as a factor is past performance and that may be being indicative of future results. But there's also, you can argue maybe, a meaner version aspect of past results. You may have seen some of these studies. They called the Morningstar curse. Right, the five-star fund over the last three, five years tend to be in the bottom-desire. The next three, five years, those that were in the bottom-desire last three, five years, tend to be in the top. There's kind of a meaner version aspect too, or cycle dynamic that comes to that side of it. Is there anything in your research that suggests that meaner version, the idea of lag or turning to leaders and leader turning to lag, or that actually generates alpha more than what's happening in the here and now?

Speaker 2: 4:34

I know that my colleagues have looked at this issue and definitely what you're saying is a phenomenon that we have seen in our research. So a lot of times what you see is that when a fund has performed really well, relative to it appears well, it's taking some risks that have been rewarded but then may eventually not be rewarded in the future. So a great example of that would be the fixed income fund, the bond fund, where the manager has a lot of active bets and maybe is tilting toward lower quality credits and this is really common tilt and active fixed income. Well, you see periods, long periods, where that will be rewarded. So the fund is getting paid extra in terms of interest because it's delving into lower quality credits, and then you'll have periods where that will completely mean revert overnight. So think of like the beginning of the pandemic four years ago, where everything went into risk off mode instantaneously.

Speaker 2: 5:35

So definitely it's a phenomenon that we see in our data, which is a key reason. When I see the fund with the performance, where everything's lining up over the past three, five and 10 year periods, where we've got top percentile rankings or top desile rankings or whatever it is, that's usually not place where I'm putting my additional funds at that point in time. So it probably would be using rebalancing to strip back on those positions. So our data very much do support what you're saying, that we see that mean reversion pattern. We see that risks that the fund has been taking oftentimes come back to bite it later on.

Speaker 1: 6:19

Which is, I think, quite frustrating if you're in the industry, because you and I both know wholesalers love to show the five-door funds. Everything closes a sale quite like a chart and quite like a star rating and you can argue that consistent with why most investors' allocators underperform. Investor returns tend to be worse because they're basically chasing and they like the confidence of up into the right and those five stars.

Speaker 2: 6:47

Yeah, no, and I love that you referenced our investor returns. People may not be familiar with them, but it's a set of data points we have that are meant to capture the average investor's experience in a fund Similar weighted returns, basically. So we're looking at when the flows go into a fund, when they leave a fund, and what we see is exactly that pattern that you referenced, that, especially with those really hot performers. I would say. Arc innovation is a terrific recent example, where assets flooded in when the strategy was about to encounter a rough spell, and so assets flow in, and then performance drops off, they flow out. We see this again and again. It's like rinse repeats, and we tend to see it in more narrowly focused categories, so investment types that are more specialized, more focused.

Speaker 2: 7:41

That's where we see that hot money flowing in and out, unfortunately in opportune times, and what we see is that, when we compare investor returns to the funds total returns, which assume sort of a buy and hold, or they do assume a buy and hold pattern what we see is that investors undermine their own results with those poor timing decisions. We also see, though, when we look at less volatile categories so I would say any sort of multi-asset category, like the balanced funds or target-tape funds, we see a much more benevolent pattern where investors, due to any number of factors, just tend to stay the course. They add their money A lot of times with a target-date fund. They're investing in the context of a 401k plan, for example, where their dollar cost averaging. What we see is that investors tend to capture very much of the fund's return because they're just sort of investing on cruise control, which turns out to be a great way to do it, rather than gravitating to the thing that's been hot in the recent past.

Speaker 1: 8:43

It is one of the maddening aspects from an industry perspective in that, as much as people claim to be long-term investors, they seem to only want to buy based on the short-term tops.

Speaker 2: 8:53

Well, absolutely. We saw that with a lot of the armchair investors who entered the market and that speculative frenzy that went on in 2020, 2021, where you had a lot of newbie investors. What gets me down is when you have professional investors who have been doing this maybe not as long as I have or we have but when you have professional investors who just don't bother to push back on the idea that well, they're selling this idea that this past performance is going to continue. We all know that even really great strategies have rough patches, usually one of the things I like about I own some active funds and passive in my portfolio. But if I have an active fund that's underperforming well, I know the manager as well because I am in touch with our analyst team that's usually when I'm a buyer and I'm stripping back on positions after they've performed really well, because we just do see this pattern again and again.

Speaker 1: 9:59

Yeah, I often say the role of a portfolio manager in communications to explain why a strategy works when it works. Most more importantly, explain why it doesn't work when it doesn't work, because that's really a function of the cycle environment. We're going to get into the retirement side, but I'm curious. Let's tease a little bit more on the investor return side. Etfs are an interesting vehicle because there's a lot of studies that suggest that investor returns end up being actually pretty poor with ETFs relative to mutual funds. A large part of that is because they're priced second by second, so there's a temptation for investors to over trade versus a mutual fund. That once a day. I think. Ibd had a study on this. They looked at an S&P mutual fund S&P of ever mutual fund same expense as S&P of already ETF and the mutual fund ended up having better investor returns than the ETF. How is the ETF explosion changed the way that you think people think about markets and think about having a real long-term view?

Speaker 2: 10:56

Yeah, the point you made about ETFs relative to traditional mutual funds was something that no-transcript Jack Bogle would often rail about one of the reasons why he was not especially supportive of Vanguard's decision to move into that space. His view would say it was just going to be too tempting for investors to take advantage of the intraday trading ability. The nice thing the sort of happy trend that I've observed in ETF space is that advisors seem to be moving their clients' portfolios into ETFs for mostly the right reasons, which is the tax efficiency benefit. So they are not taking advantage of that intraday trading. They're using ETFs to buy and hold, but also are using ETFs to capture their better long-term tax efficiency relative to traditional mutual funds even traditional index mutual funds. You see some tax efficiency benefit. So I think that the idea that ETFs are mainly being used by traders is our data would suggest otherwise that advisors are using them to build long-term strategic portfolios. They're not day trading them, and then investors mostly aren't either.

Speaker 1: 12:11

You said earlier, accumulation is easy certainly, yeah, that's right. It's really easy when you have a video, my favorite stock of all time. But the divesting part is where I want to focus the conversation, because I do think it's true that most people probably don't realize, between longevity and rising costs of capital and other cycles, that it's more than just how much you enter retirement with. It's about how much you spend after that with troll rates. So you had put a piece out and did a study on this how rising interest rates affect your retirement plan. I shared in the nest, you know, this point that you put on portfolio implications on the seismic shift and because I have a flare for the dramatic, I put that seismic shift in the same. Okay, first of all, layout. What's the objective of that study? Why did you, your team, want to put it out?

Speaker 2: 12:57

Yeah. So we've annually been putting out this research on safe withdrawal rate, figuring out how much you can spend during your retirement years, whether it's 25, 30, 40 years, 50 years if you're a fire person. It's arguably the most vexing problem in all of personal finance, in my view, because you are planning around so many unknowable variables, which you just referenced, michael, several of them. You don't know how long you'll live, you don't know how the markets will behave, you don't know what inflation will run over your time horizon, and so you're constructing a portfolio and creating a drawdown plan when you really are quite unsure about what might happen in the future. And of course, we have future. We have past returns that we can work at to help guide our decision making. And that's where the 4% guideline came from, where it looked back on market history and said, okay, what if you hit it exactly wrong and retired into the worst conceivable market environment? That is the William Bangan research that underpins the 4% guideline. And Bangan said, okay, so if you retired in kind of that late 60s period over modern market history, that would have been the worst time to retire, where you had a bad equity market in 73, 74. You had rising inflation, you had rising interest rates and response to rising inflation. He focused on that time period and came up with okay, if you used 4% as a starting withdrawal amount, that would have been sustainable over that whole 30 year time horizon. So past returns, past history is a beginning, we think, when looking at what's a safe withdrawal rate, but we think it's valuable to incorporate the current environment.

Speaker 2: 14:52

So where are we with equity valuations? Where are we with fixed income yields? When we first did the study back in 2022, a lot was looking pretty grim for new retirees because equity valuations, in our team's view, were on the high side. Bond yields were about as low as they could go, and so we argued that people who are just embarking on retirement should be pretty conservative, that they should be thinking not about 4% but maybe more like low 3s. And when we revisited that research in 2023, we came to a somewhat sunnier conclusion that people could really anchor on, say, a 4% starting withdrawal and then inflation, adjust that dollar amount thereafter, and they would probably be okay, taking into account the fact that yields have gone higher and that equity valuations, while by no means cheap, were still sort of okay. So it's something that we plan to continue revisiting annually and adding some additional flourishes in areas that we've been interested in. So annuities, for example, is an area that we plan to bring forward in our 2024 research.

Speaker 1: 16:09

I would think what are the real big variables as taxes on the retirement, and unless you're on the Roth side of things and you got ahead of it, how do you model in tax rates and withdrawals? I mean, that's going to depend upon the presidential cycle and mood. I mean what it was in the early 80s, I think, or then that yeah, at least on the very wealthy, was like 90% Right, something weird like that Right. So I've got to assume that the biggest variability and error maybe comes on that end.

Speaker 2: 17:10

Right, and we do not model in taxes explicitly, in part because the collection of each retiree's portfolio, with respect to it, the tax treatment of the subsequent withdrawals, is just going to vary so completely by retiree. So I think what we'll see in the decades ahead is more and more folks retiring with retirement portfolios that are predominantly composed of Roth assets Today, sort of the baby boomer cohort. You've got a lot of folks retiring with the vast majority of their portfolios in pre-tax assets, so assets where they will pay the full freight ordinary income tax on their withdrawals. They'll also be subject to required minimum distributions on those withdrawals. So we don't explicitly model in the tax implications but, as you reference, it's super important.

Speaker 2: 18:04

I would argue that this is one reason.

Speaker 2: 18:06

You know I'm an active person in the Bougalheads community and the DIY community.

Speaker 2: 18:11

But I do think that as people approach retirement, getting some help on the tax aspect of decumulation is absolutely critical because for a lot of folks, especially those pre-tax retirees, the baby boomer people who have most of their assets in a traditional tax deferred 401K IRA, those are the people who will probably, when they retire, have a good opportunity to take advantage of conversions of those traditional tax deferred assets to Roth and kind of that sweet spot after their income has ceased from their job and before those required minimum distributions begin at age 73 is a tremendous window to potentially consider taking some conversions.

Speaker 2: 18:59

And the reason is that their income at that life stage is much more within their control than was the case when they were earning an income. When we're earning incomes from our jobs, the income is what it is. We're not in a position to suppress it. But in those years following retirement that's an area where a time period when you have a lot of control over your income and unfortunately it coincides with kind of that pent up demand period of people's lives where when they're young retirees oftentimes health is good, they've got a lot of things that they want to do, a lot of heavy travel perhaps, on the agenda. So those are higher spending years. So keeping income down might not be quite as simple, but definitely an opportunity to explore with a financial advisor or some sort of tax planning person.

Speaker 1: 19:51

So the rule was always you know, the older you get, the more you want to have your retirement assets and fixed income bond funds or individual bond securities.

Speaker 1: 20:01

And I get the sense maybe I'm wrong that there's a little bit of a snake bite effect that might have taken place over the last three years where, because yields have risen and obviously the underlying on some of these bond funds have just gotten crushed on a relative basis clearly because that's how bonds work that maybe some older investors in your retirement say you know what I went through so much pain and bonds the yield are going to keep rising. Let me be in quote safer way to retire is with more stock actually, as opposed to more bonds or more fixed income. Talk through that. So let's move to that. Because as much as everyone ran so on the bond bear market, from what we've seen in the last three years listen, I can make an argument. We'd be in a bond bear market for way longer than that on a real return basis. I mean there was a time when negative real rates globally were at obscene levels.

Speaker 2: 20:50

Yeah, I wish I had my finger on what fun flows are telling us, but I think that you raise a really valid point where you have people who are moving into retirement with very equity-heavy portfolios.

Speaker 2: 21:04

To me, I think the real alternative they see to fixed income yes, they like their stocks and they've had a good experience in stocks, but it's really hard to pry people's hands off. Catch these days where money market yields are as high as they are, you could go online and get some sort of online high yield savings account that's going to yield 4.5% or something like that. Trying to convince someone to move into bonds with the interest rate risk that we saw in 2022 and a yield that is not even better than what you can earn on cash. To me, they're really tough sell these days, but we do know that over long periods of time, bonds should have higher post-inflation returns than you'll learn from cash. But I think that's the main area where retirees need convincing to move out of cash and into fixed income To some extent, as you say, to de-risk that equity portfolio, especially given how good their experience has been over the past 15 years since the great financial crisis.

Speaker 1: 22:12

Yeah, I've never understood the argument of all the being quote firepower, all the cash on the sidelines that will then go into equities and cause things to skyrocket even more. I'm not myself, I just haven't looked at it. At least I haven't seen any real evidence that, behaviorally, that's at all what happens to your point. If you love cash, you love short duration. You're not going to change.

Speaker 2: 22:34

I think a lot of retirees pre-retirees, I talk to do kind of like that barbell where they have their liquidity and their safety and they have equities. The point you make about flows and trying to figure out whether there's a lot of money sitting on the sidelines, I just think it's impossible to get our arms around. We don't know what people are doing. They might be saving for a second home or whatever the cash sitting and people's savings account. It's very hard to glean what the potential use of those funds, what that might be.

Speaker 1: 23:09

Just to reset the room for the remaining 20 minutes. Everybody, please make sure you follow Christine Venz here on X. If any of you want to come up and ask questions, click that bottom left micro quest button. As always, this will be a podcast under LeadLag live on Apple, youtube and Spotify. There is this narrative, or maybe it's a mood that people have, that retirement Ha, that's not gonna happen. I can't afford retirement. I'm gonna work till I'm dead and first, unfortunately, sadly, a big portion of the population. That, I think, is unequivocally true. When you look at you know, emergency funds and cash that people actually have on hand. A lot of us do with wealth disparity, obviously, but you get a sense of there. Is that that sentiment is really based on Reality? Or is it achievable, you know, at a moderate withdrawal rate to Legendally not outlive your asset?

Speaker 2: 23:58

Well, I like the idea of someone approaching Retirement holistically, where they're factoring in their social security, climbing decisions. For people of more modest means social security For all of us really, but especially people of more modest means, social security is a lynchpin of their retirement career and and oftentimes the best Approach there is to consider delaying social security with an eye toward Enlarging future benefits. The problem is that many people just simply need the money that they need to retire, for whatever reason. So I always get a little nervous when I talk to people where they tell me that they're that's their plan, that they can't make them the math add up for their retirement, so their plan is just to continue working in perpetuity.

Speaker 2: 24:46

The risk is, when we look at the data, we see that there's a disconnect between people's stated retirement dates and when they actually retire, that when we monitor those same retirees into the future, we see that people tend to Think that they'll be able to work longer than they are able to do, and there are a lot of reasons why this happens. We know that age is a mess of a thing in our culture. We know that people encounter health issues or their spouses or parents encounter health issues that make working, not a possibility. We also know that people have physically demanding jobs that are simply Difficult to do after a certain age. So a lot of factors conspire against People's plans to continue working longer, which is one reason why I often quotes Morningstar contributor Mark Miller, who always says it's a worthy aspiration, but it's not a plan.

Speaker 2: 26:10

If your only plan is to continue working in you're someone who's moving in your late 60s, investigate what your backup plan might be. Oftentimes, that's are you willing to consider some trade-offs from terms of lifestyle Consideration? So can you downsize your home? Can you potentially move to a cheaper part of the country? Obviously, those are huge lifestyle decisions, but for people with really tight finances where Working longer is their only backup plan, they should start looking at some of the lifestyle and the spending decisions that they might make had.

Speaker 1: 26:44

Maybe over a year ago I had Grover norquist on one of these spaces and he had mentioned, you know, how there seems to be this trend where a lot of states are gonna basically have very low to zero Tax rate. That because they're trying to attract all of that retiring money. Because, to your point, the trade-off is real but it's one that a lot of people probably have to make. I mean, retiring in New York City, where I am, is very different than retiring in Tennessee or Florida or Texas and it's a very hard decision because obviously then, yeah, what happens if you have kids, what that family and you're in your final stages? So you have to really make it very attractive right for that to be the case. But, of the sort of primary trade-off, is the state that you live in the biggest determinant of the likelihood of Outliving or not? I'm trying to get to sort of where does, where's the meat on the bone, right? We're trying to not outlive your assets.

Speaker 2: 27:32

Yeah, you know, I think that sometimes people focus too narrowly on that state Tax issue and they're not thinking holistically, because we're seeing an interesting phenomenon, obviously, where retirees seem to be moving to Sunbelt parts of the country, coastal areas when, yes, and some of those states, you have very, very favorable taxes for retirement but you also have skyrocketing property insurance costs. So I like the idea of people doing a full audit of what it costs to live in a given place, rather than being overly swayed by, you know, just the tax picture. Another thing is that, yes, there are the state tax rates and you may might have high tax states. Illinois, where I live, is one where, yes, it's a especially in the Chicago area state with fairly high property taxes and we have a flat tax, a flat state income tax, but we do not tax retirement income. So if I were not, if I were just focusing narrowly on what I pay in taxes, today I think, yeah, I want to get the heck out of Illinois. Maybe I still will, but I wouldn't have adequately factored in that Illinois Doesn't tax retirement income. So you get get your arms around the full myriad of expenses.

Speaker 2: 28:53

Oftentimes, I think a really great strategy is for someone to maybe stay within the same general Geographic area where they already live, where their support network is, where their kids are and friends are, but maybe just move to a cheaper home or a Cheaper location within that general general geographic area. So if you're someone who's retired and you're not commuting anymore into the city, well, maybe you can move way out on that train line where, yes, you can still get into downtown For doctor appointments or to go to the opera or whatever it is that you do, but you're not paying the really high property taxes that you were paying when you lived closer to that urban center. So I like the idea of people exploring the whole range of trade-offs as retirement approaches.

Speaker 1: 29:41

So here's the thing I don't know if people really even if they wanted to do a full audit Know what's involved with that, and I'm personally I'm cynical and skeptical of Attention spans. You know it's people would rather watch a cat video than read a prospectus, right, I mean? Let alone take a real full accounting and obviously their services Sure, five page planters that people can turn to, but you know that they're the cloth of that too. How do we get more people to be aware of the financial planning side? I always think about this in terms of what you can control.

Speaker 1: 30:11

So as a portfolio manager or somebody that's a trader, I can't control the value of my portfolio. Some people will say what do you mean, a portfolio manager saying you can't control the value of your portfolio? Of course, because if I can't control it, I'd never have a down day. I can't control the day to day or the weekly or even the very long term, and it is what it is. We take risks and hope it plays out, but you can't control your financial situation. But it requires a wholly different mind, mindset and effort. How do we get people to focus more on that rather than a chart?

Speaker 2: 30:43

I like the idea of and I sound like I'm a shill for the advice industry, but I really think that retirement is such a complex financial problem that even very savvy investors probably have some sort of a blind spot with respect to retirement planning. What I would say is that people need to understand that there are a lot of different ways to pay for advice. I shouldn't extrapolate my personal situation, but I am good at managing investment assets. It's what I did for a lot of my career. I'm fine managing my portfolio, but I need some help on the tax planning side. My husband and I hire a financial planner to help us with that. They raise some great points of ways that we can save taxes with our plan. We pay hourly for that financial planner. They're complete aces in terms of understanding tax planning. They have access to very high caliber software. We pay for that advice by to get help in areas where we don't have the skill set.

Speaker 2: 31:47

Other people may be more comfortable in other areas, but what I would say is this idea that you've got to pay an advisor 1% or 1.5% year in and year out in perpetuity, that's not necessarily going to be you to the right call for some people and you can pay for advice in different ways. You can pay from Vanguard to use a personal advisory service, which I think is like 30 or 35 basis points, where they'll keep your portfolio in a plain vanilla portfolio. They'll periodically rebalance you and give you some financial planning advice. That can be money well spent. It's not all in where you're paying an advisor to oversee your portfolio year in and year out. You can get advice more cheaply and I would urge people to explore that.

Speaker 1: 32:35

I wonder if you've maybe given thought to, if we are in this AI industrial revolution, so to speak, if that ended up being more pervasive in trying to help people understand their retirement situation. I am skeptical on that because, no matter how good AI is, they're not going to sue software. They're going to sue the individual giving the advice, in other words, the liability aspect, I'd argue. Actually, you want to go to the individual that you can sue, as opposed to software, which you can't, just from an accountability perspective. But any thoughts on that? It seems like I've seen some people make that argument that you're going to see an entire prospectus written by AI, an entire financial plan created by AI. Is that going to be a good thing or a bad thing? I almost feel like you need to have that human element, no matter what.

Speaker 2: 33:23

Yeah, I think that there will continue to be a value accorded to the human input, mainly because the behavioral part of this is so huge that we're all wired so differently. I was recently talking to a friend who's currently between jobs and has a decent size investment portfolio and also has a mortgage. I said if it were me and she has a fairly new mortgage, maybe 5.25% or something like that For me, I think I would probably take a portion of that portfolio and put it to. I would just pay off my mortgage. She was completely averse to that idea. It was so interesting to me. For me it seems like, oh gosh, at our age, given that she's probably I don't know how far from retirement not many years from retirement that's the first thing I would do and that would bring me a lot of peace of mind. For her, the response was completely different. She said well, that would blow this hole in my portfolio. I'd feel so awful. It's just so interesting how one decision that seemed completely like it would impart peace of mind to me would not work for someone else.

Speaker 2: 34:33

I think that there will always be an input or a place for that behaviorally sensitive advisor. The other thing I would say is just a logistical hurdle to AI really solving retirement decumulation is that most of us have several jobs over our career. We're carrying around these multiple retirement accounts. It's just difficult to get all of those accounts fed into a system that, in turn, could tell you what to do with those accounts. It's just a logistical impediment that unfortunately is here to stay because we have people's retirement accounts so tethered to wherever they're working. I think that creates a challenge for whether automated systems can truly solve retirement decumulation. Maybe there's something I'm not thinking of, but right now that's a huge pain point.

Speaker 1: 35:29

You use the word tethered, which I think is interesting when it comes to retirement accounts, because I'm on a side note, right, or separate note I get the sense that a lot of retirement accounts are tethered to vanguard passive market cap weighted strategies, that most people are indexed to something that effectively is the S&P 500, and why there might be a fund that Claims to be active because they're overweating or underweating Apple by 50 basis points.

Speaker 1: 35:53

In reality you are squared is still you know 99, right. So which, by the way, side note is why the whole passive active debate has always driven me crazy, because the the fee point is valid for active largely because the active is not really active in terms of active share. But that's a separate discussion. And given that you mentioned the active contribution on Bogle head side, I'm fairly sure before he passed a Bogle alluded to the idea that Path has gone too far. I wonder your thoughts on that, because there is an argument you made that you know if you don't have active players kind of goes to the growth and stick with paradox from the early 80s, you end up having actually a very inefficient market.

Speaker 2: 36:31

Yeah, it's something that I know our team has been watching closely whether there is the possibility that very strong flows to passive are kind of mutating the way that the market is behaving, and Assets and passive strategies did recently surpass more than half of the market. So I think that you know it's something that we'll be watching. But I have been wondering it. You know, the is the Ascendance of the magnificent seven, for example, the fact that that has coincided with Very strong flows to passively managed cap weighted products. Is there some interplay there? It's hard to convince me that there's not something going on, but I don't study this in depth in my day job, but it's. It's definitely something that I've considered.

Speaker 1: 37:23

Yeah, I've been joked, although I don't even know it's just jok anymore. But yeah, to the extent that market cap weighting creates sort of a self-fulfilling Concentration in a select number of large cap name, is then Even the narrative that the Fed saves the market really means that they're narrowly saving, just like number of stocks, which has all kinds of, I think, interesting Ramifications that that's the case?

Speaker 2: 37:43

exactly. And you know, one thing I would say is, even passive true believers, people who love passive cap weighted strategies because of their very low costs and the fact that you're not second-guessing anything I Think a great thing to revisit if you're one of those people is look at your international Waiting today, because if you have been just taking the path of let least resistance and haven't really been tipping any additional funds that into International passive so maybe you have Vanguard, total international stock market or whatever if you haven't been adding that, you've been, I think, inadvertently Tilting toward growth, tilting toward us. You obviously us mega caps, non us To me looks like a way to play value and a way to play some mean reversion. So that's something that I would be looking at, even if you're just sort of this three-fung person where you've got total stock, total bond, total International. Look at that us versus non us, because I think that's a way to Perhaps ensure that your portfolio isn't just fighting the last war.

Speaker 1: 38:50

Yeah, I was that. I look a lot of different ETFs I write about, on seeking alpha as an example, and I'm always blown away how ETFs that that Should not be an S&P 500 like fund or should not be a tech fund it's a top 10 names tend to be the same top 10 names, right, even though the name of the fund and the mandate would suggest it's something different. I don't know if people really I don't have a sense of that have really appreciate how Wall Street has created products that all have are meant to look different but in reality the drivers are all the same, meaning. You know the factor exposure to the idiosyncratic risk beyond pervasive at this point.

Speaker 2: 39:31

Well, absolutely. And you know I in my career it wasn't at all unusual to in a period like this and that when I was a fund analyst, sort of in that late 90s period when we'd look at ostensibly value funds and it's like whoa, hold on there, you've got like Dell at the top of your portfolio, you've got these, you know, technology stocks and and other stocks that hadn't traditionally been the domain of value managers and had performed very well. So you know, managers certainly do that type of performance chasing as well, so it's something to watch out for it. It's interesting that you say that you observe this in the passive space as well. It's crazy. People really need to know what's in their portfolios.

Speaker 1: 40:14

See, for those who want to track more your thought, more your work. I know you have a podcast as well, but talk with a different ways that people can find some of your content.

Speaker 2: 40:21

Sure. Thank you so much, michael. So I'm on morningstarcom regularly. I write columns, usually a couple types of times a week. I do videos and, as you mentioned, I do a podcast Called the long view, which is an interview format with a thought leader in Personal finance or investing or retirement planning. I'm on Twitter fairly frequently. I enjoy our fin twit community on Twitter, so I'm at Christine underscore bands there.

Speaker 1: 40:50

I have mixed feelings about the big twit community, but I'm with you on that. This is a great conversation. Again, folks, please make sure you give Christina follow check at her work and podcast. Thank you, christine, appreciate it. Thank you so much, michael. Cheers everybody.