Should You Increase Your Stock Exposure?

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

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar.com. The stock market has staged quite a comeback since hitting its market lows in March. Here with me today to talk about how investors should be thinking about their stock allocations is Christine Benz. Christine is Morningstar's director of personal finance. Christine, thank you for joining us today.

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

Dziubinski: Now, let's take a step back and talk a little bit about the surge we've seen in the stock market during the past several weeks. What do you think is behind that?

Benz: Well, a couple of key things. One is obviously that investors are looking forward and assuming that we at some point will emerge from the pandemic and that the economy will take off. So stocks have been bid up accordingly in large part because of that overall sentiment. Another thing that is in play, and it has been in play for several years now, is what's been called the TINA Hypothesis, the T-I-N-A Hypothesis. And the idea is there is no alternative to stocks. And that's accentuated given how low we've seen yields go. In an effort to stoke the economy, the Federal Reserve has brought yields way, way down and that leaves investors who want to earn a positive return on their money on an inflation-adjusted basis with few options besides stocks. So I would say those two factors have been central to stocks' ascent recently.

Dziubinski: Let's talk a little bit about that effect in these very, very low yields we're seeing. Given where we are today, what can investors expect from their safer investments like bonds going forward?

Benz: That's a problem because, historically, starting yields have been a really good predictor of what you would expect bonds to return over the subsequent decade. So where we are today, where you're barely wringing out a positive return, that portends very meager returns for bond investors over the next decade. So investors need to be careful about overdoing safety, given that the return prospects for bonds, for cash, are so, so low over the next decade. That's not to say that you can extrapolate that into perpetuity. At some point we may see yields pop back up, especially if the economy improves, but that may be accompanied by inflation. So investors, again, do need to be careful about overdoing the safe pieces of their portfolios.

Dziubinski: Given those very low expectations for safer securities going forward, is that a vote then to go, sort of, all in on equities?

Benz: I think it depends on your life stage. So for younger investors, I do think that they probably, to the extent that they don't have near-term expenditures, they probably would want to steer the bulk of their investment savings--their retirement savings, certainly--into equity assets. Older investors, though, I think need to be more careful. They need to take some steps to right-size their equity exposure. And the main idea for them is that if we do experience more volatility in the market, and I think that's realistic to assume, that they would want to have a portion of their portfolio that they could draw upon if they needed to so that they weren't having to withdraw from depressed equity assets. So I think it really does depend on your life stage.

Dziubinski: If investors are looking for a guide post about, "OK, given where I am at my life stage right now, what should my stock/bond asset allocation look like?" Where would you direct folks for some ideas on that?

Benz: I think a financial advisor can certainly help you custom-craft a sensible asset allocation. I think investors who are just starting out might reasonably look to target-date funds. They might invest in target-date funds or just use them as a benchmark for what's a reasonable stock/bond mix given their life stage. If you look at target-date funds for people who are just starting out in their careers well into their 40s, you see very heavy allocations to equities in the range of 90%, 80% maybe for people in their 40s, so equities stay quite high. For people who are getting close to retirement, obviously the bond piece picks up a little bit, but it still remains high. I was recently looking at equity allocations for people retiring in the year 2030, actually giving some guidance to some friends, and what I saw were equity allocations in the range of 65% to 70%.

I think that's a good starting point. Once you get close to retirement, I like the idea of really custom-crafting an asset allocation using starting portfolio withdrawals to guide how much you allocate to cash, to bonds. If you are someone who's just embarking on retirement, I like the idea of having roughly 10 years' worth of safe assets--some cash, mainly bonds--that you could draw upon if stocks encounter a downturn that's more sustained than the one that we've experienced recently.

Dziubinski: But overall, it looks like, despite the comeback in the market in stocks, it's still a place for especially those savers to be today.

Benz: Definitely. I think that savers need to look at all the levers they can pull, but one of the best ways that they can make sure that their portfolios are in line to meet their eventual retirement goals is to have an ample equity weighting.

Dziubinski: Christine, thank you as always for the thoughtful insights today.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.