Christine Benz posted about a few big picture lessons she's learned in conjunction with her 25th anniversary at Morningstar.

She started out making a point that I've been seeing a lot lately, that I have been making forever which is that savings rate is likely to be a larger determining factor for whether you have enough when you need it (presumably for retirement) than will investment returns to which I would add unless you make some sort of truly catastrophic error like putting half your money into a lottery ticket biotech or selling after a monumental decline and then watching the market recover from the sidelines.

The way I first made this point was in a post about Health Savings Accounts. If you opened an HSA last year and fully funded it, you'd have put in $6750 (if you were under 55). If you put it in at the start of the year and bought the SPDR S&P 500 (SPY) you'd have made about 20% or $1350. Great return but January first came around again and you added $6900 which increases the account by 85%. You can play around with a spreadsheet but it will be a few years before returns matter more than contributions on a consistent basis.

Christine is a fan of keeping portfolios simple and while I agree, simple is in the eye of the beholder. No matter what your portfolio looks like, some people you would show it to would say that is too simple and others would say that it is too complicated for them. Focus on what is simple for you. I would tell anyone to keep in mind that a simple index fund, an adequate savings rate, proper asset allocation and avoiding big mistakes will very likely get the job done. In that light what is the reason for anything you do beyond that? My answer to that question is trying to smooth out the ride for clients by owning assets with different attributes that hopefully don't all react to market events in the same way. The reasons for this have to do with reducing the odds that any clients panic and also to manage how they pay for life events. Someone who thinks they have to buy a $100,000 car could do real damage if the purchase is timed coincident to the bottom of a large decline. If I can be successful in reducing the drawdown by a significant amount then the purchase would be far less damaging.

She is rightly skeptical about new products, making sure investors take the time to figure out whether they or the product sponsor stand to do better from some new product. Clearly there are plenty of new funds that either don't deliver as advertised or don't do what investors think they will do (meaning investors don't necessarily always understand what they are buying). A great example could be all the inverse VIX funds which blew up in February. They did what they were supposed to in terms of what was spelled out but there was arguably a lack of full understanding of the mechanics to the products. Some new funds/strategies though can be very useful which is why I spend a lot of time trying to understand things like hedge fund replicators, risk parity funds and so on. I study many many more funds than I actually ever use. Plus, it is interesting/fun to learn about these types of things.

One big point that I disagree with is her belief in target date funds. I would tell people to run screaming from the room with their arms waving frantically above their heads. Too much? That was too much but there are issues related to funds having different glide paths. If you look at 2030 Target Date funds from four different providers you're very likely to see four different glide paths. In terms of looking forward there is no way to know which glide path will be best. Ten years from now some number of funds will be viewed as having been too conservative if the market keeps rocketing higher or if we have something worse than the financial crisis there will be a bunch viewed as having been too aggressive.

They also do nothing for The Dreaded Sequence of Returns which I have written about a few times. If someone has hit their number now and they know they are retiring in 12 or 18 months, they might want to consider reducing exposure now while the market, and likely their portfolio, is close to its all time high. I wouldn't push back on the idea that this is an attempt to time the market but I think of it more as retirement plan preservation. If you know you're retiring in Sept, 2019, could your retirement plan stand up in the face of a 40% drawdown in the equity market? My point is you may not want to stick around to find out. In doing something like this I would devise some sort of strategy for getting back in and I wouldn't sell down to zero equity exposure either. For that matter a larger weighting to an inverse fund could get the job done realizing that if the market does rocket higher, the inverse fund would be a big drag but you would still have some upcapture.

As an anecdote, an acquaintance who was responsible for putting together their company's 401k selected a suite of target date funds for the plan a few years before the financial crisis and sure enough they turned out to have an aggressive glide path and he felt tremendous guilt over having included them in the plan.

Great discussion from Christine, congratulations on 25 years.