Morningstar - Q1 2023 - 58

Investors
And now if you go out to three-, five-, and
10-year returns, value's ahead of growth on the
three-year and close to growth on the five
and 10. It's a reminder that these things can level
up rather violently.
Balancing Risks
Lauricella: This speaks to the importance of
downside protection to long-term returns.
It's something that people don't think a lot about
in a big bull market.
Kinnel: Downside protection keeps you in the
market. Diversification is key because it
can help limit the downside. In 2008-09, a lot of
investors bailed because it was so gloomy, and
then they missed a very strong recovery.
The markets didn't wait for the economy to be
great again; they looked out at the future.
We may see that again. We saw the markets rally
on a good inflation number, even though
that's not going to stop the Fed from hiking.
But a couple more might.
The rallies are just as unpredictable as the
selloffs. Anything that keeps you in the
market is incredibly valuable. If you look back
at long-term performance, it doesn't really
matter so much if you were in a 65/35
or a 60/40 mix [of equities and fixed income].
Whatever kept you in the market led you
to a very respectable return.
Even in a market like this, where just about
everything's in the red, there's still value
in owning the stuff that lost less. Even when
things are rallying and you're having really
strong performance, you still need to think
about downside protection, because the future
is always harder to predict than we grasp.
Lauricella: How viable is the idea that you can protect
a portfolio against a spike in inflation?
Kinnel: It depends on how you define protection.
You can reduce the impact of inflation with
some inflation-protection strategies, but I don't
think the goal should be to inflation-proof
your portfolio. You might end up locking in very
low returns if you do that.
58
Morningstar Q1 2023
The largest warning sign [in 2021] was
where valuations were for both the broad bond
market and the broad stock market. They were
both very unattractive.
Marta Norton
The goal is, again, downside protection, keeping
losses from getting too far beyond what you can
stomach, rather than buying so much insurance
that you've locked out any upside.
Long-term TIPS funds may have disappointed
people who didn't realize there's also interest-rate
risk. And, of course, rising inflation and rising
interest rates often go hand in hand. Short-term
TIPS did very well. Bank-loan funds held up
well. If you held enough in commodities and
energy stocks, the big winners, they would have
limited your losses or maybe even allowed
you to make money.
Lauricella: Marta, how does Morningstar Investment
Management think about this?
Norton: I'm of a few different minds. If I take
a very investor-goal-centric approach,
ultimately, I'm invested in the market to meet
financial goals. I don't meet them if I
don't beat inflation. So, in one way, at the
Morningstar - Q1 2023

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