White Paper: Optimal Portfolios for the Long Run
Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
Most investors view stocks as the high-risk portion of their portfolios, but some recent research contradicts that thesis.
Joining me to discuss that is David Blanchett, head of retirement research for Morningstar Investment Management*.
David, thank you so much for being here.
David Blanchett: Thanks for having me.
Benz: David, let's look at the research that you crunched recently. You found that if you're someone with a very long time horizon, stocks actually may be the least-risky asset of all. That's kind of counterintuitive. Can you explain?
Blanchett: It really is. People think about stocks as being volatile investments, because they are. 2008 was a very bad year for the stock market, and with this research, I looked back with two colleagues on historical returns in 20 different stock markets across the world.
What we found was that the longer you hold stocks, the safer they become. People think of cash as being a safer investment for longer time periods; stocks actually were a safer investment for someone investing for maybe 10 or 20 years versus cash or bonds.
Benz: You looked at a lot of different datasets. Can you summarize how you tried to be comprehensive and you also how you tried to be global in your research as well?
Blanchett: We looked at 20 different countries. We looked at time periods from one to 20 years, and different levels of risk preference. It's the most comprehensive empirical study on time diversification--this idea that stocks change in terms of their riskiness over time--of any study done so far.
Benz: Going forward, given how low bond yields are and the raw materials for good bond returns really aren't there, would you expect this finding to hold up and perhaps even strengthen over the next couple of decades?
Blanchett: As part of any investment story, you always say that the past is no guarantee of future results. So, I think this gives a great perspective on what might happen. However, I think that right now is a time to think about holding stocks because bond yields are at 0% to 2.5%. So, I think there is a lot of risk today holding bonds, and so equities do make a lot more sense for investors with longer time horizons.
Benz: I'd like to talk about the practical implications of this research. It would seem to suggest that if, say, I have a sufficiently long time horizon of X--what would that be?--and a pretty high short-term risk tolerance, does that mean I could just be all equity and generate a better return than I might have with some sort of blended portfolio?
Blanchett: You could be. This really speaks to the idea that the more time you have to invest, the more aggressive you can be. But an important part of that is how comfortable you are holding that portfolio for a long time horizon. If you were, back in 2008, going to panic and sell out of stocks, then an aggressive portfolio isn't for you. But if you're an investor who really can stomach these ups and downs, this evidence suggests strongly that holding stocks is a great long-term investment philosophy.
Benz: So, the behavioral piece is key here. If you're someone who thinks you might capitulate at the bottom, then an equity-heavy portfolio won't make sense for you.
Blanchett: That's right. Looking back to how you reacted in 2008, if you had this long-term plan, and you were OK with the market going down 40% and holding on, that's a good investor for the long haul for stocks. Someone who panicked and sold out in 2009 would not be a good investor for this kind of aggressive portfolio stance.
Benz: And certainly for people who are in drawdown mode, they absolutely need to have some investments set aside that they can use for liquidity purposes?
Blanchett: That's right. I think that throughout someone's lifecycle, stocks can really work for you. For some investors who are older, in retirement for example, they have Social Security, they have a lot of guaranteed pension income. So, if you take that 20-year plus picture of retirement, equities may seem a bit safer all things considered.
Benz: David, thank you so much for being here.
Blanchett: Thanks for having me.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.
* Disclosure
Morningstar Investment Management is a division of Morningstar and includes Morningstar Associates, Ibbotson Associates, and Morningstar Investment Services, which are registered investment advisors and wholly owned subsidiaries of Morningstar, Inc. All investment advisory services described herein are provided by one or more of the U.S. registered investment advisor subsidiaries. The Morningstar name and logo are registered marks of Morningstar, Inc.
“The information, data, analyses, and opinions presented herein do not constitute investment advice; are provided as of the date written and solely for informational purposes only and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Past performance is not indicative and not a guarantee of future results.”
