July 23, 2020

Podcast: Christine Benz — Morningstar & 25 Years of Personal Finance

Podcast: Christine Benz -- Morningstar & 25 Years of Personal Finance

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Podcast: Christine Benz -- Morningstar & 25 Years of Personal Finance Episode 43 of the NewRetirement podcast is an interview with Christine Benz — author and Morningstar’s director of personal finance — and discusses the big financial and life lessons Benz has picked up over her 25-year career at Morningstar. They also talk about Benz’s works, 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and also Morningstar’s Guide to Mutual Funds: Five-Star Strategies for Success.

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Steve: Welcome to the NewRetirement Podcast. Today we’re going to be talking with Christine Benz, Morningstar’s director of personal finance and author of the 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and also Morningstar’s Guide to Mutual Funds: Five-Star Strategies for Success. I met Christine a few years ago at our time at INCOME conference in Chicago and I’ve been a follower of her work since then. We’re going to dive into the big financial and life lessons she’s picked up over her 25 year career at Morningstar. And so, with that, Christine, welcome to our show. It’s great to have you join us.

Christine: Steve, it’s great to be here. Thank you for asking me to be on.

Steve: Yeah, no, a lot of the folks in our Facebook community are excited to have you join us. You’re a known person out there. So, I just want to get a little bit of backstory on how you got into personal finance and into Morningstar. I saw that you originally worked editing or working on educational videos for children. And so, that seems like a big jump to go from there to now you’re one of the 100 Most Influential Women in Finance, so congratulations on that.

Christine: Well, thank you. That was a nice honor, I know. And it was a circuitous route for me for sure, into my current role. I was a liberal arts person, studied political science and Russian language, actually, for about a decade I took Russian language courses, starting back in junior high. So, by the time I got to college I was like, “Well, I might as well double major,” because I had been taking Russian for quite a while. And it’s interesting, this was in the 80s. And this was an era where in bigger high schools Russian was still one of the main languages or was an offering in high schools. Now, certainly no longer the case. But it was not atypical for high schools to offer Russian.
So, I was a liberal arts person, definitely much more into reading, analyzing, explaining things, not really into the financial side, not into the numbers side. So, I had a few jobs in publishing upon graduating from the University of Illinois. And my dad was actually an early adapter of Morningstar products. He was a mutual fund investor. He was a stock investor as well. But he really liked what Morningstar was doing, he liked the company. I think he was subscribing, because at the time we had some books that described and talked about mutual funds. And so, he encouraged me to apply there and I did and was initially hired as a copy editor. So, like reading the analyst reports.
And it all began to sink in a little bit and Morningstar had a really good internal training program where there was a series of books, even for copy editors, not necessarily people who were producing content. And so, I was really able to learn and absorb a lot along the way and became more interested in the whole topic. This was in the 90s, early 90s. Active fund management was still very much in vogue with the hotshot managers at Fidelity and Janice and elsewhere.

Steve: Right, like Peter Lynch, was he still …

Christine: He was not. Peter Lynch had retired at that point. But still Magellan was a huge thing. We were Magellan watchers at Morningstar. And so, I just became much more engaged with the whole topic, not just the investment management piece but later especially really recognizing how selecting investments is such a small piece of whether someone succeeds or fails on his or her financial journey. And so, that’s really what drove me to want to focus on personal finance and more in the financial planning realm and to really try to build out Morningstar’s offering, especially for what we have for individual investors in that area, to make us a go-to resource in the personal finance and portfolio planning type of content.

Steve: Got it. So, first you were doing copy stuff and then you became an analyst and then you got in, circled back to becoming an educator and personal finance advocate?

Christine: Yeah, yeah. I eventually headed up the U.S. analyst team, the fund analyst team, and really liked that job. I didn’t love the management piece of the job just because I’ve realized that I very much like to spend my days doing my own stuff, nothing against the analysts, they’re wonderful, but I really decided that I wanted to work on personal finance. I remember actually I was working on Morningstar.com and dipping my toe into the personal finance, financial planning space and went through the CFP program. The idea was definitely germinating in my head that this was the type of stuff I was interested in working on.
So, I transitioned to my current position at that time, which was more than a decade ago. And it’s been a really happy home for me, just because there are such a diverse set of things that I get to work on, where I’m not … not that I would be fighting with colleagues at Morningstar, but I’m not having to battle anyone for this turf. It’s really like I have a lot of room to maneuver in a lot of different topics that I can talk about.

Steve: Oh, that’s awesome. Yeah, that’s great to hear. So, as we dive in here, I wanted to cover a couple of things. So, one is the main lessons that you’ve picked up over your career from the finance side, and then also on the life side too. Because I’ve seen in your writing, you’re starting to talk to us a little bit more of the personal side and your reflections as you get further into your career. And then we have a couple of questions from our users. But just on the financial side. So, what do you think are the … Well, actually, before what are some of the best and worst things you’ve seen over your career in financial services, just practices?

Christine: Yeah, so, starting with the best in terms of products, which is maybe a logical place to start, I think that the development of target-date funds, that’s the single home run in my career, if you ask me, in terms of helping really simplify some of the things that investors struggle with. So, how do you asset allocate a portfolio in a sane way given your proximity to needing your money? How do manage that portfolio on an ongoing basis? One great thing about all-in-one products, or someone who uses a financial advisor to manage their assets is like in a first quarter of 2020, when it was really easy to be paralyzed by … there was so much coming at us so quickly. And a lot of us were absorbed with a lot of different things during that period, like ensuring our health and safety, transitioning to working at home.
It’s so great to have some sort of a product that’s doing rebalancing back into equities in that period when they’re down. So, I think target-date funds have just been a tremendous step forward for individual ambassadors, many of whom can’t afford a good quality financial advisor and aren’t in a position to understand these issues or sort them out for themselves. So, I would start there. I think exchange-traded funds have been another great innovation.
I don’t use ETFs myself, we have index funds in our portfolio, but I think that it’s hard to ignore the tax management advantages that come along with ETFs, even relative to traditional equity index funds, which are pretty tax efficient themselves. So, I would say those are probably the two big product innovations. And then I would say more broadly, I love that the whole evolution of the discourse is moving more toward a discussion of financial planning and taking the weight off of investment management, so not just selecting active fund managers but just what value jockeying within a portfolio can bring to the table, relative to some of these other ways we might spend our precious time.
So, do we focus on counseling people on what’s the right savings rate that they should be using? Are we talking to them about tax management and minding some of these behavioral pitfalls that we see investors fall into? So, I just love that the dialog really, at least among sensible financial advisors, seems to be shifting away from the value that they can add with portfolio management. And I think that’s all for the better. Yeah.

Steve: No, I think that’s awesome. Have you seen a good evolution or any evolution away from practices that you thought were less aligned for the consumer?

Christine: Yeah, so, I guess the increasing discussion of expense has certainly been huge. And I have to say I like to think Morningstar has had a role in evolving that and pushing that forward and that we’ve been very, very attuned to the virtue of low costs for many, many years. But it seems like it’s a combination of the marketplace of investors being more aware of the role of cost. So, it’s good to see that change happening. I would say that that’s probably the key positive development that I would point to.

Steve: Yeah, I totally agree with that. I think that the people are getting more visibility into what are the underlying costs for funds and for advice fees. And also I think just more transparency and how people are paid, the movement toward fiduciaries and who’s a sales person, because financial services is also full of sales people and has been historically. Now it’s a little bit clearer, hopefully, to people. I don’t think it’s-

Christine: Yeah, we hope. I don’t-

Steve: Yeah, we hope.

Christine: I agree. Part of the I think focus on … I feel like too much of the focus in the cost realm is on product costs, like what are you paying for these funds, and I feel like advisors maybe a little too eager to shift the discussion away from any costs that they maybe bringing to the equation. But I would expect that that’s the next frontier, where already there’s much more dialog around how should you pay a financial advisor? What’s the optimal weigh in, I guess it completely depends on the investor. But I’m just glad to see more discussion in that area.

Steve: For sure. Yeah. No, that’s awesome. So, if you could go back in time and say, “Okay, here’s some key lessons for my 25 year old self,” or whatever, what do you think those big lessons would be?

Christine: Yeah, I think a few and one would be, I guess, to not be afraid to ask questions, not be afraid to ask all my dumb questions. Because a lot of times those are really good questions when you’re coming to something fresh, so you’re not trying to act like you’re cool and you’re part of the discussion. You really need to say, “Wait a minute. How is this risk parity product … ” or something like that, ” … going to add value relative to a very plain, vanilla portfolio?” So, that I think, that learning evolved for me over time. But now, I’m just much more comfortable. I think asking questions as they occurred to me, assuming that I’ve done my homework on the topic but really pushing back. So, I would say that’s one learning, is just to feel comfortable asking all of your questions.
Another one is just how much I’ve come to embrace simplicity, especially with respect to investment management that I really do think for the vast majority of investors, really simple portfolios can be incredibly effective, it can help them figure out the fewer moving parts that can help you figure out where your problem spots are, it can make management so much simpler, can certainly make tax management so much simpler. So, I really like the idea of simplified portfolios. I think that that’s another key thing that I’ve learned over time.

Steve: Definitely there’s been more talk of three fund portfolios or four fund or one fund. So, we’re seeing more of that. Do you think users are going to that themselves or are we early in the movement?

Christine: No, I think they are. And I think when you look at the flows into exchange-traded funds and exchange-traded funds and index funds have been the name of the game in terms of attracting new assets, really for several years running now, we see they’re not going to the gobbledygook, they’re not going to those strategic made-up products by and large, they’re going into the very vanilla products. So, I think that there is an increasing awareness of some of the benefits of keeping things simple from a portfolio standpoint. I think you still hear pushback, people pedaling more complicated solutions. But I think there’s a widespread recognition that less is more when it comes to portfolios.

Steve: Yeah, no, that’s great. I’m also doing some work with the FI, F.I.R.E. community and they’re all out to educate people and getting folks to take a longer term, “Hey, you can get to financial independence, it might take you 15 or 20 years, but save money, build your emergency fund, invest in low cost funds, keep it simple, rebalance, keep investing no matter what the market’s doing, up or down, and just stick with that.” And I think they’re seeing people have success in sharing it inside the community. So, it’s cool to see younger people embracing some of this stuff.

Christine: Totally. I have been so enthused by F.I.R.E. actually. And I have to say I was initially a little bit dismissive, mainly because I was like, “What? Retire early?” I have loved working and I love the mandatory intellectual stimulation that comes along with my work, but I also recognize not everyone has that and people who don’t find joy in their work should be doing something else. But I guess more importantly, I’ve just been so enlightened by F.I.R.E. because I have seen that so many of these people are focusing on being mindful about how their allocating not just their financial capital, which has been my main preoccupation for so many years, but how they’re allocating their time capital. Which I think I guess has become a bigger deal for me as I’ve aged I think more about, “Well, how am I allocating my time on this earth?” And I think the earlier you start thinking about that, the better off you are.
So, I loved getting to know F.I.R.E. and I love that overall focus on frugality, but also finding things that you want to spend money on that give you value. Like I was talking to Jeff Ptak, my cohost on our podcast, we’re talking to Mamula, who is a F.I.R.E. proponent and a really smart person, and he said, “Oh, I’ve been to every continent.” And I’m thinking, “Gosh, I’ve traveled a lot. I’m not F.I.R.E.-ing and I have not been to all of the continents. And I liked that he and his wife had really made a priority of travel in their lifetimes, even though they were pursuing the F.I.R.E. goal as well. So, I think that finding that balance is really valuable.

Steve: Yeah, what I see for a lot of these folks is, they want to get independent, financially independent, and then they’re still working hard, it’s just they’re working on things that they want to work on.

Christine: Exactly.

Steve: But they do have to be thoughtful, because I think it’s also any retirement, where you need to have something you’re going to. It’s just the next step in your journey. So, if you haven’t thought that part through, then people are going to be like, “Well, okay, I had this big goal. I want to summit the mountain. Here I am and now what’s next?” And then they can get depressed and unfocused.

Christine: Exactly. Exactly. It’s all about balance for our lives, I think. And so, one of the joys of leisure is if you’ve worked hard, leisure feels so much better. And I think that even in retirement, retirees, early retirees, later retirees need to find that balance.

Steve: For sure. So, when you deal with people, what do you see them … Well, actually, let me jump ahead. What would you say are your biggest mistakes? That you made.

Christine: My biggest mistakes?

Steve: Yeah.

Christine: I wrote an article where I took stock of some of them and they evolve over time and I would say this is usually a joint effort, my husband and I save together and are on this journey together. But a couple of things, one is that historically inertia has been a force in how we’ve done things. So, one thing that we’ve ended up with, it’s a high class problem to have, is sometimes we’ve ended up with a lot of cash in our taxable account, whether from bonuses or whatever it might be. And I have to say maybe knowing a little bit about the market is dangerous and that it never feels like a super great time to put a bunch of money to work in the market. So, you’re always like, “Ah.” And then it also feels good to us to have a very large emergency cushion, I don’t know why.
Because we actually have a lot of stocks. We have a barbell where we don’t have that much in bonds and a lot in cash and a lot in stocks. So, I would say that that certainly has been a drag on our portfolio’s longterm return, it’s provided us with peace of mind but getting money invested has been an issue. And a corollary of that is that we’re usually … I’m always telling people, “You should fund your IRA right at the beginning of a calendar year, when you can first do it.” And I have to say I’m often one of the people putting it in in March for the year that just passed.
And honestly, it’s as simple as taking money from my cash account and moving it within the same company to the IRA, it’s just a couple of mouse clicks. But still it’s something that we have dragged our feet on. Another one, and I would say I hope this not to be an issue in the future, we initially had some tax inefficient assets in our taxable account. So, until this backdoor Roth IRA opened up as an opportunity for us to at least get a little bit of money each year into an IRA, it was really our 401(k)s and our taxable account were our main venues for investing. And so, we had an active fund, we still have a couple of active funds but I hope they won’t be too terribly tax efficient, but we had one terrible tax inefficient fund in our taxable account and it wasn’t performing that well. And we were paying capital gains on it every year.
And finally, I looked at the cost basis, and because when you have these big capital gains distribution from active mutual funds, it effectively bumps up your cost bases, as you … I don’t want to get too in the weeds on tax accounting or mutual funds, but it means that when you eventually sell, it’s like you’ve prepaid your taxes on any gains that were due. So, we found that we actually didn’t owe that much to just cut it loose. And I’m hoping we’ll be more tax efficient going forward. So, those are a few things that I think in hindsight we would have done differently. But a lot more has worked out for us than not, I would say.

Steve: Right. Yeah, well, you’re in a good company. There’s a huge amount of cash on the sidelines.

Christine: True.

Steve: There has been for a while.

Christine: Earning nothing.

Steve: Yeah. Earning steadily less and less, now a zero and maybe soon negative.

Christine: Right.

Steve: Yeah. So, I’m similar. We’re a barbell like super risky, startup-y thing here, some equities, too much cash, when’s the right time? It’s so funny because we’re in the space, it’s like we know the best practices, which is just plowed in. But it shows you how strong these biases, these behavioral biases we have. I talked to Allan Roth about this stuff and Jon Clements, and it’s hard to get out of your own way. And this is where I see the value of financial advisors and other people in the mix, where it’s you get a third part, if they’re completely aligned with you hopefully they can help you do the right things. And also automation. Can you automate your savings?
That’s what a lot of the F.I.R.E. folks do is essentially they get educated and then they build a system where it’s like, “Hey, money comes in, I auto save 20% and then it gets auto invested. I do not think about it.” That’s the more sophisticated ones. stuff go to my expenses and I have it all budgeted out and it’s all fully automated so I don’t have to think about it. It’s like, when we think about it, we get in our own way of like, “Oh, well, the market just corrected 30% but then it came back.” But hey, the economy is terrible, the market is way up, that doesn’t seem to make sense. But the Fed is printing money, so, where is this going to end up?

Christine: Right. And I will say that this correction in the first quarter was one time where I was pretty active, not only did I get our IRAs invested for 2019, but I did 2020 as well. We have been buying this Vanguard International fund for our IRAs. And I had no compunction about moving the money in during the first quarter. I was like, “Okay, the timing on this feels really good.” So, I still haven’t done the conversion that I need to do on the traditional IRA contributions. And I was looking and the fund has performed so well since I made those contributions, it will actually owe a little bit of tax on the conversion, but it’s not a big deal.

Steve: It’s almost like people have to be ready. So, one thing we saw with our users is, okay, market tank, people don’t want to think about it. But people who were thinking about it were like, “Oh, it is a great time to do Roth conversions. Cost bases just came down, let’s get the money out, let’s throw it in the Roth.” But you have to be ready to go, if you want to do that tax play. Because then the market comes back and you’re like, “Okay, well, that window closed.”

Christine: Right. I still think that conversions are an attractive opportunity but less so because of market being down, more so because of secular tax roles may change where I think we’re in a pretty favorable tax climate relative to where we’ll be in the future. So, I think the longterm case for conversions is still there.

Steve: Yeah. A lot of our users for our planning software, we do essentially a lifetime tax forecasting for you based on expected returns and RMDs and so we’re showing you these illustrations, federal and state, and people are saying, “Ah, look, this is going to … this is really material for me. So, it is worth it.” And I think a lot of people believe that taxes are going to have to go up going forward, so …

Christine: I think so too. Yeah, I love that idea of year by year retirement cashflow planning as well as some tax planning related to that. I think that’s so powerful and I would say that I just think financial advisors can add so much value at that life stage because as much as I’ve tried to write about demystifying retirement decumulation, gosh it’s complicated. And it’s really hard to not only write articles about it but create any software program or anything. I know you have one, but it’s really hard to systematize this process of retirement decumulation because we’re all dragging such different assets and situations into retirement. So, I think an advisor can add a ton of value at that life stage.

Steve: At the end of this I’ll have to give you a little demo, you can try to might be helpful for you. Okay, well, cool. Well, this has been super helpful on the finance side. So, let’s jump into some of the life lessons that you’ve taken away. One of the things I saw is that you did a six week mini retirement and you had some takeaways from that. And just as a comment, I feel like for a lot of us, with this whole pandemic, it’s been like, “Hey, everyone gets to be trapped at home, I can’t really see people. But you can’t really travel.” So, we’re knocking stuff out. But it’s a little bit of a preview and I think some people are like, “Okay, I’m going to have to be pretty thoughtful about what I’m going to do with my time.”

Christine: Right. No, I think it is. I think that’s a good analogy. And yeah, I had, back in … I guess it was 2017, I took a sabbatical and we have these sabbaticals at Morningstar every six years worth of employment you get … Sorry, every four years, you get six weeks off and it’s a really nice program. The nice thing about it is that you really want to help your colleagues do theirs because you know that you will have your time to do one as well. So, in this particular one I think my husband and I, we had just celebrated our 25th wedding anniversary, so we spent some time in Spain and Portugal and we love both those places, and then I had four weeks at home. And I was thinking about it, just as a preview. And I have to say I had aging parents who have passed away.
But prior to that, I had been super immersed in their stuff. And they lived close by and I adored them. So, I was happy to be there for them. But this was just a time where it was totally my thing. And yeah, it was an interesting preview of what retirement might feel like. I’m really not planning to retire anytime soon. But I did realize again, and I’ve said balance I think is so important, but I realize that balancing tasks and jobs with my leisure time was really beneficial, even when I wasn’t working in my job. So, just making sure I had stuff to get done everyday helped me enjoy my free time that much more. And I believe that we all need to find that balance, that full-time leisure probably isn’t a great idea.
So, I think even when I retire from my job I think I’ll continue to be involved probably in my community in some fashion, more involved in my community and still working in some way. So, that was a takeaway. Another one was just a funny one like the stuff I was spending money on prior to this period, I would look at my closet and it happens now too, it’s like, it’s the Smithsonian in there. It’s shoes that I haven’t worn for months and blazers and dresses and things that I just don’t wear anymore. And I found that during sabbatical too, whereas my workout clothes were … I like to exercise a lot, but I was exercising everyday and it was summer and it was that stuff was always in the wash. So, I realized I would need to reprioritize how I would wardrobe myself during retirement.
I also found that I had a chance to focus, which was so lovely, whatever I was doing. And there’s so much research about this, about pursuing your tasks mindfully, whether you’re plating in your garden or cooking something or whatever it is you’re doing, just to be able to engage your whole brain with it, or as much more of your brain. Yes. I just saw the huge value in that. And so, I’ve tried to take some of these things away, I guess. You try to learn these lessons and you try to incorporate them into your life going forward. And I do think what we’re all living through with this pandemic is a good chance for a lot of us to explore some of these issues where we don’t have some of the same demands on our time that we did before this.
Of course parents with little kids have maybe some big demands, where I don’t know how they’re doing it. But I think for some of us who don’t have those day to day demands, it can be a good time to take stock.

Steve: Yeah, you have to be careful, I saw that you also noted that you were watching your news consumption.

Christine: Oh my gosh.

Steve: I saw them myself, I was like, “Oh, yeah, now I’m on Twitter,” and oh my god, that’s a black hole.

Christine: It is. It is. And I’m a news junkie, I’m a political junkie. And so, it’s very easy to get sucked in. And Twitter is a time suck. Even though as great as it is in many respects, it can really rob your day of some hours.

Steve: Right. I think your comment on work is interesting. Because it feels like the nature of work is going to change pretty dramatically where we’re living longer, people are engaged and if you have a really rewarding job, you have a really rewarding job. And you meet interesting people, you influence tons of folks. It would be hard to go from that to, “Hey, I’m done.” But we want to make room for the next future generations, how that looks and what that looks like I think is going to be very different over the next couple of decades. People, I think they’re going to be working longer but part-time and with much more control. Focus-

Christine: I agree.

Steve: … on things they want to do but maybe it’s 20 hours a week or something like that versus-

Christine: I agree.

Steve: … 50, 60 or whatever it is.

Christine: Yeah.

Steve: So-

Christine: No, I know. And it’s pretty bifurcated because you see people who don’t have jobs that allow them to stay at home, it’s completely different. But I think for us with the luxury to have jobs that are in-home or jobs that we can largely do at home, I think there’s the opportunity to do some thinking about what it’ll look like for us going forward. So yeah, I completely agree with that.

Steve: Yeah. All right, I actually want to jump forward to we have a question from one of our users and also I just I wanted to get your opinion on some of this industry stuff that’s happening. But from one of our users, Tom M., he had a question, more a technical question but is there a preferred asset location mix as you enter retirement or through pre-retirement? Mix being defined as percent in tax deferred, percent in Roth, percent in taxable. I just want to know if you had any best practices around that.

Christine: That’s a hard one. Ideally you would house your more tax efficient assets in your taxable account. But it really depends on the specific mix that someone’s bringing to retirement. I think that’s why one size fits all retirement planning advice can be so difficult to dispense, because we’re all going to be carrying our own separate set of stuff into retirement. But I really like the idea of thinking about once required minimum distributions kick in, thinking about being strategic about where you draw your RMDs from and using them to improve the portfolio on an ongoing basis. I’m an big evangelist for that idea that rebalancing, all the academic literature would point to it being in the category of nice-to-have in the accumulation years.
But in retirement it seems like it just becomes such a valuable tool that I think is underutilized, I think people talk too much about trying to generate income from their retirement portfolios and not enough about how to extract cashflow from their portfolios. And I think that the low yield environment is forcing everyone to reconsider the role of income production and retirement plans. So, I guess that’s a non-answer but it’s really hard to address, not knowing a specific individuals asset mix.

Steve: No, I agree with you. I think the challenges, and this is the challenge around decumulation, is that well, one, people have different piles of money, they have different views about how long they’re going to work, when they want to claim social security, how much income they need, what they want to leave for an estate and also taxes. So, if you’re facing a really high tax load in the future, that’s going to affect how you position yourself leading in retirement. And that’s what we start to think about with our software but it is hard. It’s a much more complicated problem than accumulation. The whole financial service has been focused on accumulation, decumulation is like 20 times harder. There’s just so many more moving parts so …

Christine: Exactly.

Steve: Yeah.

Christine: Exactly. And I’m glad to see the industry is starting to focus more on decumulation, creating products and services for decumulation. What we need is … and granted, it maybe can’t be productized but we need a retirement decumulation system or a product where someone, we just make a turnkey for them, similar to a target-date fund. Because there’s so much about just saying, “Okay, you’re 65 or you’re 68 or whatever, here’s your pile of money. Figure it out.” Which is what we’re doing now. And so the only choice for someone at that juncture is to seek out an advisor and they may or may not qualify for good quality financial advice, people really need the help so I’d love to see more innovation.

Steve: Yeah. Yeah, and even with advisors, if they’re still paid on accumulation or on assets on their management, they’re still incented to have you have more money. That’s one of the challenges and one of the things that I have an issue with, with that payment model, just like one of our users was like he went to three advisors and he was like, “I want income.” And he’s like, “I’m thinking about SPIA, Single Premium Immediate Annuities, and I’m thinking about taking a third of my money,” which probably I think for him is millions of dollars, “And plunking it here.” And all of them who are fiduciaries were like, “That’s a bad idea, we could deal with a bond letter,” we’ll manage the money and give it to you.” He’s like, “Well, yeah, but I still want to do this.”
And he did it himself but he couldn’t get anyone to even really engage in the conversation with him about it. So, he had to do all the analysis himself-

Christine: Exactly.

Steve: Anyway …

Christine: Exactly. Yeah, no. It’s a problem that there are a lot of conflicts that on the other side of the fence is the very complicated, expensive annuities too where certain advisors are all too eager to steer consumers into those. So, it’s really difficult landscape for consumers to navigate.

Steve: Yeah. So, I love your commentary on … we touched on certainly but we’re in this low, zero, negative environment and you recently wrote an article about how you diversify in that, and any commentary on your point of view with what’s happening?

Christine: Yeah. We have this data on Morningstar, actually in our direct software which is for institutional investors, but you could come up with these correlation matrices where you are looking at the extent to which various asset classes are correlated with one another. So, I’ve been running this data periodically and it keeps coming back to some familiar conclusions accentuated during the first half actually, so treasuries look really good from the standpoint of diversifying equity risk, probably not a surprise from that standpoint. The Bloomberg Barclays aggregate index is also halfway decent, in part because they’re so heavily weighted toward treasuries and other government bonds.
I guess a question is, especially with respect to the treasuries is whether given how low yields are today, where I think the … we’re talking today, the year on a 10 year treasury is, what, between 60 and 70 basis points, really low. It’s an open question is whether treasuries will be that kind of in future equity market cracks, maybe. Maybe. I looked at other asset classes as well, the interesting thing is we have a couple of categories, intermediate term core and intermediate term core-plus bonds, so those would be the main bond categories that we have at Morningstar, where most of the fixed income assets are actually, if they’re in funds.
And it’s interesting, the Core Plus in particular, these are funds that hold some of their assets in riskier, fixed income segments, their correlation with equities was really higher than you’d like to see, I think. Probably pretty intuitively the hold some higher risk stuff, some junk bonds, emerging markets bonds and so forth. So, I think that’s an interesting takeaway, that if you’re owning a PIMCO Total Return or a MetWest Total Return, as capable as those people are in terms of fixed income management, in some cases you’re getting some sympathy to what’s going on in the equity market. So, I think that that’s one interesting takeaway. Cash actually looked pretty good, from this latest data run.
Its correlation with stocks, it’s just flat because as you know, cash doesn’t do anything besides deliver you income so you won’t have fluctuations in your principal. But cash actually looked a little better in this data run. In part because I think what we saw in the first quarter was that extreme flight to liquidity and safety where cash benefited at the expense of nearly everything else. So, I guess another broader takeaway is that a lot of things that might be sold as good diversifiers like the whole category of alternative investments in my mind just hasn’t made a great case for itself.
From a correlation standpoint we see that … And of course these are really different products but I don’t see a compelling case for them especially given the fact that their costs can be high, often over a percent per year for performance that oftentimes falls between stocks and bonds. So, I think that to my mind that’s probably a group of assets that investors can reasonably cross off the list if they’re looking to simplify.

Steve: Yeah. I know, it’s tough though, because people are out there, especially as they’re aging and they’re looking for yield and there’s no yield out there. So-

Christine: No.

Steve: … it’s you have to take risk and there’s real risk out there too, there’s real volatility that comes with that risk. So, you have to be ready to have a large drawn perspective on this stuff.

Christine: Totally, I was thinking about something … You were probably too young to remember Garanimals, but it was this thing with tops and bottoms that would match each other. Like if the tag was blue, you would match it to some blue pants. It was this brand of products. I was thinking about that with respect to fixed income, like if the yield is under 1%, match that to your one to two year time horizon. If it’s 2% maybe that’s a three to five year time horizon. But I think that a higher yield is so instructive as a way of thinking about risk. We don’t talk about it enough as rather than examining credit qualities, examining duration, look at the yield. It is telling you everything you need to know about the risk of that product because there’s no yield hiding in plain sight, right? I mean-

Steve: That’s right. They’re not going to give it away, right? It comes at a cost.

Christine: No. Everything’s so picked over.

Steve: Yeah, right. Yeah, it’s crazy. There’s just a ton of liquidity out there but it’s looking around for how to be efficiently put to use and … anyway, a question from Morning Star, as you look forward and you’re thinking about planning and income and decumulation, does Morningstar have any big initiatives in this space?

Christine: Yeah. We have a couple of things that we’re working on in this area. Certainly we have Morningstar Investment Management that does a lot of work, mainly in the defined contribution space, working with 401(k) plans, for example. And I think that’s a big part of the discussion internally, especially as we’ve seen the secure act, for example, which allowed for annuities to be part of 401(k) plans or if there’ll be a safe harbor in 401(k) plans. So, we’re thinking a lot about this issue. I think we recognize that we have to contribute to the discussion. And I think because we have a lot of researchers working in this area, I think we have a lot to add. So, I think that it’s definitely something that we’re focused on.

Steve: Awesome. Yeah, there’s going to be a ton of, I think, innovation in this space and just a lot more focus, you’re starting to see it. I see it in the venture community, there’s been lots of Fintec investing, now there’s a little bit more of a bias towards planning and a little bit more thought about decumulation and stuff like that, which is good.

Christine: Right.

Steve: All right. Well, this is good. So, as we wrap up, just a couple of quick questions. I was curious how your podcast is going since you’ve launched this thing and it’s a new thing for you and Morningstar.

Christine: Yeah. I’ve been doing this podcast with my colleague, Jeff Ptak for about … I guess we started in maybe April, early May I think last year, of 2019. And so we’ve been doing it weekly, which it’s a lot. But the good thing is Jeff, he heads up our manager researchers, globally, so our fund analyst teams globally. And so, he has a pretty different set of interest relative to me. He’s much more interested, I would say, in investment management overall than I am, whereas I’m more interested in some of the stuff we’ve been talking about, the financial planning and the retirement planning. So, it’s nice in that I source different types of guests than he does and I’ll try to do most of the work on those episodes, so we’ll try to divide and conquer from that standpoint.
But it’s been really fun. It’s made me busier. I was talking to my husband, I’m like, “Why am I so busy?” And it’s the podcast, because it’s been a new source of work. But honestly it’s been so enjoyable to have the luxury of sitting down with these amazing people for a whole hour once a week I’ve been learning so much and finding reference points in other parts of my work. Even another fun thing is they have been listening to each other and so, we had someone on the podcast talking about financial education, he reached out because he had listened and he said, “Oh, can you put me in touch with Carol in McLanahan who focuses on a lot of different aspects of financial planning but especially healthcare planning. And so, those two connected. And so, it’s been really fun from that standpoint to make connections, but also just to be able to spend an hour listening and asking all my stupid questions.

Steve: Yeah, yeah. I get it, I like it. I mean, I could see podcasting more but it is serious work, getting ready, also it’s good, it makes me read more. Like Morgan Housel was going to come back on, he has a new book coming out-

Christine: Oh, great.

Steve: So, I’m like, “Okay, I’m going to read this book, got to prep for that, ask him smart questions. But, yeah-

Christine: Yeah, he’s fantastic. He was one of our first guests, actually. And we did a live session with him in our Morningstar investment conference. And he’s amazing.

Steve: Yeah, bright guy. All right. So, any resources that you think our audience would find beneficial? Like people you follow on Twitter or a podcast you listen to or sites or things like that?

Christine: Yeah. Good thought. Of course I have to shout out for my Morningstar colleagues, we have a lot of great free research on Morningstar.com and all my stuff is there and my model portfolios. And speaking of my Morningstar colleagues, Ben Johnson heads up our ETF effort. I think his Twitter handle is MstarETFUS or something like that. He’s terrific, Jeff Ptak, my colleague who I do the podcast with, his Twitter handle is syouth1. Sonic Youth, the band, one. And so, he’s a good follow as well, especially if you like data.
I would say a person who’s just been … Well, several people have been super influential and helpful for me. Michael Kitsis, going way back, has been just such a tremendous resource for me. He is a machine, but-

Steve: I know, I don’t understand how he does what he does. I asked him, I was like, “How do you crank out all these articles and podcasts?”

Christine: It’s crazy. He’s got some helpers now, Jeff Levine, who works with Michael is just fantastic too. But I think that the work that those guys put out on their blog, on the Nerd’s Eye View blog, I really would be hard pressed to think of anything that is an in depth as what they do. So, for people who want to do a deep dive on planning topics I would point them there. Bogleheads community is certainly, you mentioned Allan Roth and that group of people, I’m on the Bogleheads board or the board of the John C. Bogle Center for Financial Literacy. And so, with Rick Ferri and Allan Roth and Bill Bernstein, some of my favorite people in this whole investment world and some who might not be familiar to your audience but some great people there as well. And I would say just Bogleheads.org is one of my favorite resources, just such a high level of discourse about the things that really matter-

Steve: I know. That’s an amazing community that is so in depth. And I think there is a pretty big opportunity for … I don’t know, like make it more accessible. The work is incredible but it feels like it could help so many more people if there was a way to make it easier to get … Not that the group isn’t welcoming and super helpful, because it is, but I think it maybe comes across as a little daunting, I don’t know. But when I’ve been in there … I’m not an active contributor but I’ve done some reading and it’s people are just next level … they all could be CFPs, giving guidance to other people about what to do and answering questions and stuff like that. So …

Christine: Right, no, they’re absolutely terrific. And honestly, it’s a good resource. I’ve just seen things like, “Oh, I’m looking at high end SUVs, can you help me figure out the best … not that I’m looking for a high end SUV, but even the level of discourse there on a topic very consumer focused, very plain vanilla, it’s terrific. But maybe there is some work to do in terms of making it more accessible. Because I-

Steve: I’m not trying to, I’m just-

Christine: … think they should reach more people, yeah.

Steve: Yeah. Yeah. Okay. Awesome. Well, this was great. So, I’ll just close it up here then. So, thanks, Christine, for being on our show. Thanks-

Christine: Thanks, Steve.

Steve: Yeah. It’s been really good. Thanks Davorin Robison for being our sound engineer. Anyone listening, thanks for listening, hopefully you found this useful. So, our goal at NewRetirement is to help anyone plan and manage their retirement so that they can make the most of their money and time. And if you’ve made it this far, hopefully you will follow Christine on Twitter or check out her writing at Morningstar. And some of the folks we mentioned, we’ll link out, we’ll provide links to all those things. We’re also on a private Facebook group for our community. You can also see us on Twitter @NewRetirement and then you can also check out our software. And finally, we’re trying to build the audience for this podcast. So, if you could leave us a review anywhere, iTunes or Stitcher, that’ll be super helpful, we read the comments and we try to make it better and better over time. So, thanks again and have a great day.

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