When standing pat doesn't sit well

Editor's note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar.com. Amid ongoing market volatility, investors have probably heard they shouldn't do anything, just hang tight. But is that always the right advice? Joining me to discuss some situations when doing something might actually make sense, is Christine Benz. She's director of personal finance at Morningstar.

Christine, thanks for joining me today.

Christine Benz: Susan, it's great to be here.

Dziubinski: Now, the market has fallen quite a bit recently. And it's conventional wisdom, in these times, we always hear just hang tight, don't make any changes. Why is that what we hear all the time?

Benz: Well, because it's generally good advice. If you've taken the time to create an asset-allocation plan that makes sense for you given your life stage, you don't want to be monkeying with it in the midst of market volatility. Chances are you will make some changes that you'll later regret. And then, another key concept that we keep talking about and writing about is the distinction between volatility and risk. So, for younger investors, yes, volatility is there. We see these ups and downs in the market. Risk is actually messing around with your plan, maybe making it more conservative at an inopportune time and running the risk of falling short in retirement. So, it's really important to understand the difference. Understand that as a young investor with many years until retirement, the volatility is your friend, actually. It doesn't feel like it, but it truly is your opportunity to sit tight with a stock-heavy portfolio, potentially even add more to that portfolio. We're in the midst of IRA contribution season. What a great time to make new IRA contributions. Volatility is your friend for a young investor even though it doesn't feel like it.

Dziubinski: So, let's talk about some of the exceptions to the rules because there always are some in life. You've said in things that you've written and said before that often people should actually think about using volatility as a wake-up call to re-examine the portfolios, and one group that you suggest perhaps do that is young people. What would young people be looking for in their portfolios to possibly do in a volatile market?

Benz: Well, the key thing is, young investors can and should be saving for retirement. That's sort of one bucket of money, but also think about other goals that you might have. And my sense is that some young investors have been dabbling in stocks, individual stocks, in particular, with maybe short- and intermediate-term time horizons. They'd gotten lucky prior to this recent volatility, where some of these things have just been rocket ships. But I think it's a wake-up call if they do have nearer-term goals that they're saving for, they need to derisk those funds. So, if it's money that you expect to spend in fewer than 10 years, certainly in the next two to five years, derisk that money, get it into low-yielding but safer investments.

Dziubinski: Now, what about investors who are a little older and approaching retirement? Again, it's during a volatile market, what should they be thinking about with their portfolios?

Benz: Right. And the market has adjusted all of our equity exposures downward. But I do think that people at this life stage should take a look at their total portfolio's asset allocation or get the advice of a financial advisor to help them check up on what they've got. The long-running equity market rally I think tended to make us all a little inert about making changes. It was easy to be comfy when everything was going up. We've had a little bit of volatility. So, I do think that if retirement is within the next five to 10 years for you, think about derisking your portfolio if you haven't taken any steps to do so in recent years. You can use a target-date fund to help guide what might be an appropriate asset allocation given your life stage. Or really the gold standard for getting a professional read on your asset allocation would be checking in with an advisor.

Dziubinski: Now, what about investors who maybe don't have very aggressive portfolios? Maybe they're a little bit more conservative already. What should they be thinking about right now?

Benz: This is a surprisingly common portfolio. You would think, "Who would be still conservatively positioned?" But a lot of investors at various points along the way over the past decade have gotten themselves conservative for one reason or another. In some cases, it owes to someone having an infusion of cash into their plan, maybe an inheritance, maybe they sold a business--it never quite felt like a good time to get that chunk of cash invested. I'm not saying it's the perfect time to get that cash invested. But investors like that should use the recent volatility as at least an impetus to see, "Well, how about on a dollar-cost-averaging plan, if I move this money into the market, how many months would it take?" Set up a program for getting those funds invested so that you are in an asset-allocation mix that makes sense for you. Because even though having cash and safe investments feels good now as everything's been going down, I think you'll be feeling it if things head back up and they eventually likely will.

Dziubinski: Right. Christine, thank you so much for your time today. This is great advice.

Benz: Thank you, Susan.

Dziubinski I'm Susan Dziubinski for Morningstar.com. Thanks for tuning in.