This week, Morningstar's 25th Annual Investment Conference featured an excellent lineup of topics and discussions among analysts, mutual fund managers and retirement industry execs. It's an opportunity to hear the investment intelligentsia discuss where the opportunities lie in the current marketplace -- a chance to learn firsthand their outlooks on sectors, securities and portfolio strategies.
A couple of different themes rose above the cacophony of diverse opinions. Though "2008 happened five years ago, it feels like five minutes ago," says Steve Wymer of Fidelity Investments -- a sentiment expressed several times over the past three days. Bill Nygren of The Oakmark Funds agrees: "The important lesson (from 2008) is to stick with a discipline. Set an asset allocation that makes sense, and stick with it."
Morningstar analyst Scott Burns emphasizes the importance of staying invested. He enumerated two ways you can fail: 1) Don't save, and 2) Leave your money in cash.
"It's all about keeping in the game," he says. But scars run deep, evidenced by the thousands of investors who fled the market in 2008 and watched the market rebound as they stood on the sidelines.
Discussions about Fed policy dominated the "Exploring the macro landscape" session. Several fund managers candidly complained about the struggle to find bonds with yield. "Nothing stands out as a screaming buy," says Michael Mendelson of AQR Funds. "Low real return is a problem for all of us."
To deal with the tough total return environment, Mendelson allocates assets by risk such that "everything in the portfolio matters," but "nothing matters too much." James Montier of GMO funds says he's holding a lot of cash -- "dry powder" that he's waiting to deploy as opportunities arise. "Holding cash is painful," he admits. "But it's less painful than doing something stupid." He says his firm gets fired regularly for holding cash, but tells his clients, "You're paying me not to do something daft."
More complaints about low yields were voiced in the session on "Multiasset solutions to the yield conundrum." When Fed policy reverses course, the question is, "How abruptly will that spring unwind?" says Anne Lester of JP Morgan Asset Management. The magnitude of the loss in bonds won't be the same as the 2008 stock market rout if you do the math, she says. "People will feel betrayed by the safe part of their portfolio," but equities will balance things out. "A total asset allocation portfolio will be fine."
Fran Kinniry of Vanguard reminded the audience about the 1994 bear market in bonds. When all the dust settled, the bond market lost 4 percent to 5 percent that year.
3 train wrecks
Highlights of the conference included a general session with Vanguard founder John Bogle, who calls the impending retirement crisis "three train wrecks" waiting to happen.
Train wreck No. 1: Social Security is underfunded. That could be fixed with a change in the way the cost of living allowance is calculated, he says -- "simple things that end up being completely controversial.… It can be fixed, and all it requires is political will."
Train wreck No. 2: Defined-benefit plans -- both private and public -- are "grotesquely underfunded," he says. States use an unrealistic 8 percent return assumption in their calculations. "They're not going to get 8 percent," he says, even if they hire hedge fund managers, because while it may be possible for some managers to get that return, it's "impossible for all of them to do that."
Train wreck No. 3:This is the defined contribution system -- the 401(k), 403(b), 457 part of the universe. "The problem with that is we've taken a thrift plan and turned it into a retirement plan."
A thrift plan was originally designed to supplement other sources of retirement income, such as a pension and Social Security. Bogle's main beef with the defined contribution plan is that it's too easy for people to get money out -- to borrow for frivolous reasons or to cash out when they switch jobs. "It's a system that has too much flexibility," he says.
There's so much more to tell, but I'm supposed to keep this post short. I'll share one other conference highlight: Erik Wahl, author of "Unthink," challenged participants to nurture their right brains, the source of their creativity, and not to be afraid to do so. Fear, he says, is an acronym for "false evidence appearing real."
While he was mainly addressing the financial advisers attending the conference, that bit of wisdom applies to everyone doing retirement planning.
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Barbara Whelehan is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It is available at Amazon, Barnes & Noble, iBookstore and other e-book retailers.