Christine Benz is a globally recognized name in finance. As Morningstar's director of personal finance and retirement planning, not only is she a repository of knowledge, but is also a brilliant writer and articulate speaker.
In all humility, she often talks about the trouble spots and errors committed during her investment journey. I have selected a few of her reflections on the subject. The links (for a more detailed read) are mentioned at the end.
In her own words, here are some of her biggies.
Succumbing to the narrative
In 1993, when I started at Morningstar, I was sitting at the Morningstar Investment Conference listing to Mark Mobius, who was at Franklin Templeton at that time. There was a lot of enthusiasm around emerging markets at that time.
I got carried away and decided to invest in an emerging markets fund. I was married for a year and had some money from wedding gifts. I am not saying that it was a bad investment, neither was it a lot of money. But, I had no business just ploughing money into a such an investment without giving it substantial thought.
My husband and I wanted to buy a house in the near future, and this investment did not make sense for us. Instead, we should have been looking to invest in something of a shorter term duration.
While it was not a debacle, it certainly was a performance chasing rookie mistake.
Holding too much employer stock
Over allocating to company stock is such a rookie mistake. If you already have a lot of your financial wherewithal riding on your employer via your ongoing paycheck, the argument goes, there’s no need to double down on it in your portfolio. And yet here I sit, with an uncomfortably large stake in my own employer’s stock. I’ll spare you the specifics, except to say that it’s a higher percentage of my husband’s and my total portfolio than the 5% or so that you often see bandied about as a reasonable upper threshold.
I understand the tax implications, that I might as well sell each lot of restricted stock units as soon as it vests because there’s no tax benefit to hanging on longer.
Instead, the key culprit here is inertia, plain and simple. It’s easier to let winners ride than it is to pare them back. There’s a little bit of tax dread mixed in, too, as some of the long-held lots have racked up big gains since vesting and at this point would trigger a big tax bill upon sale.
I wouldn’t rule out that there’s an element of “mad money” swirling in here, too. In contrast with investments that have resulted from savings, the employer stock feels a little more like a windfall and therefore less serious. (On the plus side, I can more readily give myself permission to spend from these funds than I could with other accounts. Mental accounting is a funny thing.)
I’ve been in the process of divesting from company stock for the past several years, but the allocation is still higher than it should be.
Reluctance to invest cash
When I find myself with a lumpsum influx of cash, such as a bonus, and the market seems kind of expensive, I hold back. While I eschew market-timing, it never feels like an especially great time to move the money into long-term investments. (And yes, I realize that’s a form of market-timing.)
I've been slow in putting the money to work in part because of the rapidly rising market that we've enjoyed over the past decade. It never seemed like a great time to do so. But from a long-term perspective, it would have made complete sense to move the money into the market.
I gave into the temptation to second guess my move, but investing sooner rather than later would have been the right call. Being too clever by half has been a drag on my portfolio returns.
Holding too much cash
Carrying too much cash has been the biggest detractor to my portfolio’s performance over time. Cash yields drifted steadily downward for decades, but even when rates are higher, as they are today, inflation is still gobbling up most of the interest. My husband and I haven’t made a deliberate effort to hoard cash; rather, it has tended to stack up in our account following bonuses or other windfalls, or during fallow spending periods like 2020.
Perhaps most important, having cash on hand confers valuable peace of mind. I like knowing that almost anything could happen, whether an income disruption or a surprise expense, and we’d be able to cover it without touching our long-term investments. Cash may be a loser on an inflation-adjusted basis, but I think of it as one of my luxury goods; at this life stage, it’s more valuable to me than a designer purse or expensive car. In contrast with the employer stock problem, this is not an issue that I’m in a big rush to address.
Not holding much in bonds
Whereas the cash holdings give our portfolio a conservative tilt, we’re much less conservative with our long-term investments. The standard asset-allocation advice would call for my husband and me to have a good slug of our retirement assets in fixed-income investments at our life stage. But our portfolio is oddly barbelled, with a healthy dose of cash alongside a long-term portfolio that’s mainly invested in equities.
In a way, I think the cash and the equities work together from a psychological perspective, with the liquid assets giving us peace of mind to stay the course with stocks through thick and thin.
The lack of bonds isn’t deliberate; Inertia (again) is probably the main reason. Cash tends to build up organically. Meanwhile, we set up our long-term portfolios with heavy equity allocations in our 30s, and we’ve never really wavered from that positioning; stocks have performed well, and we tend to sit tight with our portfolios in good times and bad. We both have some fixed-income holdings in our 401(k)s, and we make ongoing contributions to Vanguard Intermediate-Term Tax-Exempt in our taxable account. But our overall fixed-income weighting is probably lower than it should be given our ages.
This is something that I’d like to address as retirement approaches—adding not just more in bonds but more nuance to our bond holdings: short-term bonds, Treasury Inflation-Protected Securities, and intermediate-term bonds.
There were others too, but I found the above to be relevant to an Indian audience. You can access it all from the below links.
My failings as an investor, 2023
Podcast with Christine Benz, 2022
Learning from my financial mistakes, 2019
