Morningstar - Q1 2022 - 59

and passive instruments to get to a better
outcome overall.
Pacholok: What advice would you give a
young investor-someone who's 25 and starting their
portfolio-versus a 65-year-old?
Browne: This relates to how we structure
target-date funds. Early in the lifecycle
of an investor, early in the income-producing years,
you're focused on getting beta exposure
to the overall market. Being substantially weighted
in equities, probably north of 90%, is the right
position to be in, assuming that this is an
investment for longevity, where you're not going
to be beholden to the ups and downs of the
market. Try not to look at your portfolio every day.
If you're able to weather the storms, you
should be in a pretty good place by having a
higher equity allocation early on.
Inflation is the biggest risk that retirees face
at retirement.
Erin Browne
have an edge. If you can't find anybody with an
edge, just go passive.
Lee: I think that's right. The active/passive
debate stacks up all the active managers against
a passive benchmark, but that's not how
good investors invest. Very few institutional
investors are looking for the worst active manager.
Look at a set of active managers who have
built processes, resources, and fee levels in a way
to set them up for success. There's the opportunity
to add value in virtually any space. That said,
when you start getting into fee budgets and risk
budgets, areas that are more efficient are easy
opportunities to get simple beta exposure cheaply.
You can tilt your active risk budget to more
fertile opportunities. Fixed-income markets are
one of the key areas, especially as you move away
from more liquid markets. Whereas in equity
investments, it's easy to replicate the benchmark
and get it for a very low cost.
Browne: Wyatt stole my thunder. What he said
is consistent with our views: Spend your
risk budget prudently, taking into consideration
both cost as well as where you can source
beta exposure cheaply without giving up alpha.
Active management comes into play where
there is more differentiation across instrument
selection and where manager selection
can make a significant impact in terms of alpha
performance. You can blend both active
Green: My view, for both 25-year-olds and
65-year-olds, is to own more equity than you do
today. If you're 25, allocate everything to
stocks and don't mess with it, to Erin's point. If
you're 65, it's the same advice. I wouldn't
say 100% stocks, but chances are you've got
another 25 years to go, which obviously is a pretty
long time, so put a little more in stocks.
Lee: It's hard to give any advice for a 25-year-old
other than save as much as you can, invest
it for the long term, and don't ever look at your
statements. For a 65-year-old: Understand
your situation. If I'm a 65-year-old who's well
funded, I may be able to afford to take less equity
risk if I prefer a lower risk profile. But most
65-year-olds we see probably overestimate how
well prepared they are. They need more
equity exposure because they need that growth
to help their assets last.
Pacholok: Thank you for taking the time to speak with
us today and sharing your insights.
K
Megan Pacholok is a manager research analyst
at Morningstar Research Services LLC.
Photography by Christopher Lane, Matt Roth, and
David Zentz.
morningstar.com/products/magazine
59
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