The author of Morningstar’s Mind the Gap research on why investors can benefit from simpler portfolios, less trading, and avoiding the temptation to chase performance.
Our guest on the podcast today is Jeff Ptak. He’s a longtime Morningstar employee and currently serves as managing director for Morningstar Research Services. He originally joined Morningstar back in 2002 as a senior mutual fund analyst. Jeff was one of the original two co-hosts of this podcast and regularly posts his thoughts on Morningstar.com, Substack, X, and LinkedIn. Ptak’s work really focuses on investor outcomes. One of the highlights from the podcast today was when Ptak talked about how such a small number of stocks tend to generate a disproportionate amount of the market returns and what that means for diversified actively managed funds. He also discusses what target-date funds get right for investors, as well as what some of them may be missing.
00:00:00 Mind the Gap and Investor Behavior
00:08:04 Crypto ETFs and Timing Mistakes
00:11:33 Active Funds and Letting Winners Run
00:23:00 Improving Investor Outcomes Through Lower Costs
00:30:09 Private Markets, SpaceX, and 401(k) Risks
00:34:15 Thematic ETFs, Speculation, and Fun Money
00:38:40 Market Timing Myths and Portfolio Construction
00:42:16 Is Tech’s Dominance Sustainable?
Read: Mind the Gap 2026
Leyla Kunimoto: Why Investors in Private Markets Need a Louder Voice
Will Danoff: ‘Be Very Careful of Unprofitable Companies’
Don Phillips: Encouraging Better Outcomes for Investors
If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com.
Follow Christine Benz (@christine_benz) and Ben Johnson (@MstarBenJohnson) on X, and Christine Benz, Amy Arnott, and Ben Johnson on LinkedIn. Visit Morningstar.com for new research and insights from Christine, Ben, and Amy. Subscribe to Christine’s weekly newsletter, Improving Your Finances.
If you want more Morningstar podcasts, check out The Morning Filter and Investing Insights.
Amy Arnott: Hi, and welcome to The Long View. I’m Amy Arnott, portfolio strategist for Morningstar.
Christine Benz: And I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Arnott: Our guest on the podcast today is Jeff Ptak. He’s a longtime Morningstar employee and currently serves as managing director for Morningstar Research Services. He originally joined Morningstar back in 2002 as a senior mutual fund analyst. Jeff was one of the original two co-hosts of this podcast and regularly posts his thoughts on Morningstar.com, Substack, X, and LinkedIn.
Christine, it’s always great to catch up with Jeff because his research sifts through so much data to come up with really insightful takeaways. One of the highlights from the podcast today was when he was talking about how such a small number of stocks tend to generate a disproportionate amount of the market returns and what that means for diversified actively managed funds. We’ll hear a bit more about that later in the podcast.
Benz: Amy, I love the conversation too. One of the things I appreciate most about Jeff’s work is his focus on investor outcomes. In the conversation, I loved the discussion of what target-date funds get right for investors, as well as what a couple of them, what some of them may be missing. I thought that was a great part of the discussion as well.
Arnott: I agree. All right, so let’s take a listen. Jeff, welcome to The Long View.
Jeff Ptak: Oh, thanks so much for having me.
Arnott: Well, it’s always great to talk to you. Jeff, you head up Morningstar’s annual Mind the Gap research on investor returns, and the most recent edition is actually hot off the presses today as we’re taping this episode. What would you say is the biggest takeaway from this year’s report?
Ptak: Sure thing. Yeah, so we did put out the latest edition of Mind the Gap this morning as we speak, and I would say there are a few takeaways. Some of them are recurring. They’re sort of familiar themes that we’ve sounded, but they’re important nonetheless. The first is, I would say, simpler strategies tended to exhibit smaller gaps; that is, investors earned more of their funds’ total returns than did more complex strategies. We can give some examples of what’s simple versus complex. Another theme that emerges is stand-alone options, things like multi-asset funds, target-date funds. Investors appear to have greater success using those than they did building blocks. Lastly, and this is something that’s shown itself quite vividly in previous studies, and it’s true of this year, is they struggle with more volatile funds. They push their buttons, and we see wider gaps between investors’ dollar-weighted returns and total returns in more volatile funds than we do in less volatile funds.
In terms of what trips people up, I would say the single biggest thing is probably extrapolating. They’ll see a fund perform in a particular way and they’ll project that into the future. In the process, they might wrong-foot themselves because perhaps performance will mean revert up or down. That’s the sort of thing that can give rise to gaps between one’s dollar-weighted returns and the funds’ total returns.
Benz: Jeff, can you expound on that simple versus more complex point? Also, I’d love to hear your take on what is going on with the all-in-one funds that they do tend to result in better investor outcomes, that investors tend to stay the course a bit better in them.
Ptak: For sure. I would say probably the quintessential example of a simple fund is something like a target-date fund. It’s designed for stand-alone use. It covers all the major asset classes. They mechanize rebalancing and adjust the asset mix over time, and so it obviates the need for the investor to take action. They don’t have to fiddle with it in any way. Contrast that with something like sort of a building block. It could even be a US equity fund, but maybe sort of an even better example would be something narrow, like a sector equity fund or an alternatives fund. That’s the sort of thing where you’re having to make sort of an ad hoc discretionary decision to put it into your portfolio, and then you have to maintain it over time. I think that’s a pretty stark difference. You’ve got one that is sort of truly no maintenance and then another one that requires you to take actions of various sorts.
The more we have found investors do, the more they transact, the more they struggle to capture their funds’ total returns. I think that plays a pretty significant role in explaining the difference between the amount of success that investors have had in more simple types of investments versus more complex types of investments. The other thing that I would quickly point to—and we can only infer this; we don’t measure it in the study—but it does seem that context, setting, circumstance are important to the type of results that investors realize. A retirement plan is a kind of gilded cage. It’s a more controlled, purpose-built environment. It’s not really built for ad hoc, discretionary transacting; contrast that with a self-directed brokerage account or even other types of IRA, what have you, where the investor has to go in and maybe it allows for more frequent transacting.
I think you see that express itself in some of the results that we see where some of these stand-alone options, which are more typically found in the context of a retirement plan, do considerably better than other things that are less often found in retirement plans.
Arnott: Having the type of freedom and flexibility that people kind of take for granted today with intraday trading for ETFs and no-cost brokerage platforms is not necessarily a good thing in every way.
Ptak: Yeah, right you are. Yeah. It’s “free” to trade. I’m sure that’s very liberating for a certain segment of investors, but I think that one doesn’t want to lose sight of other types of costs you can incur, including timing-related effects, buying high, selling low, as it were. I think it’s something that we all need to keep in mind.
Arnott: You mentioned more complex funds like sector funds and alternatives. Are there any specific categories that have had particularly wide gaps?
Ptak: We do look at particular Morningstar Categories in the study, but we look at the 10 largest categories by assets. What we found in this year’s installment of the study is that pretty much across the board, with the exception, I think, of maybe some of the international stock categories, you saw pretty narrow gaps among those largest categories. We didn’t drill down and look at particular sort of specialized categories like a given sector equity category, given alts category. What we can observe at the overall category group level, so sector equity alternatives, is that we have tended to see wider gaps in absolute terms there. Again, they’re more specialized. They tend to be used. It stands to reason in a more ad hoc, discretionary way. It creates the sort of environment where investors are going to have to make choices about when to add, when to subtract, when to prune, as it were.
That can cause some trouble, just given the fact that there’s lots of stimuli and they might not make the optimal choices at those various times. Again, these are not typically found in the context of a retirement plan, which is a more controlled setting. I think it creates an environment that’s even more conducive to over-transacting.
Arnott: You did add a section in this year’s report looking specifically at cryptocurrency funds, which have become much more widely available to average retail investors with the advent of spot bitcoin ETFs and spot ethereum ETFs. What were some of your findings there?
Ptak: Yeah, so we looked at it from the time the first batch of spot bitcoin ETFs launched. This is January 2024. We looked at it through June of 2026, and we found that based on our estimates, the average dollar invested in those crypto ETFs had lost money while the ETFs themselves earned a positive aggregate total return. There was a very wide gap. Again, the dollar-weighted return was negative. I would say it’s early days, and it could so happen that investors stay the course and crypto rallies, and the net gap will close, and dollar-weighted returns, one hopes, will improve. They’ll be positive rather than negative as they were as of June 30, 2026. It’s an early worrisome sign that money sort of flooded in after we had seen a burst from bitcoin. This was around the time they launched and soon after, only to see it roll over.
That explains why they have the poor dollar-weighted results. It’s going to be important to see them stay the course. One hopes the cryptocurrency itself rallies and that burnishes their dollar-weighted results.
Arnott: If I remember correctly, the gap that you found for the crypto-related ETFs was something like 14 percentage points, which is an enormous gap, and I think probably bigger than any other category that you might’ve looked at.
Ptak: It’s very wide. Yeah. We went narrower on crypto than we did in a lot of other areas of the study where we tend to keep it at a higher level. But you’re right that it stood out as a very, very wide gap.
Benz: In terms of how to improve these statistics, if you were designing an investment platform entirely around minimizing some of these behavioral mistakes, some of these timing mistakes, what features would you build into it and what common industry practices would you eliminate?
Ptak: I would say mechanize, mechanize, mechanize. It wouldn’t look that different from the way we auto-enroll defined-contribution participants into 401(k)s and then have them put their assets into a target-date fund, assuming it’s chosen as the default option, which it so often is. That’s a very simple and automated workflow. It reduces frictions. In terms of deletions, things that I would rather go away: very narrow strategies, thematics in particular. We’ve done some work on that previously and found that the dollar-weighted returns and those things are just putrid. We can talk about what might give rise to those poor results. But those are the sorts of strategies that I think really give investors trouble. I think probably outcomes would be in a better place, albeit thematics are still not the dominant investing forum, but I think that outcomes would be even better if there were fewer of them.
Arnott: You’ve also written several articles about active management, including a piece called “Have We Been Too Hard on Active Funds?” You found that active managers deserve more credit than they often get. What are some of your key findings there? What do you think are some of the limitations with research that has been done about that topic?
Ptak: Yep. In that particular article, I was riffing on some academic work that had been done. These academics were looking at, it’s a report called SPIVA. It’s put out by S&P, and basically it’s sort of a league table for active funds. They’ll go and tally up the number of active funds that have succeeded versus their costless benchmarks over some interval of time. It could be like one, three, five, 10, 15, even 20 years, if I’m not mistaken, if memory serves. These academics—and they did very thoughtful work—focused on the methodology of that study. Their conclusion was that SPIVA was painting sort of an unduly bleak picture of active funds’ success and beating their benchmark.
I would say the most persuasive part of their paper was that they said, in lieu of costless indexes, you should use something like an asset-weighted average of comparable passive funds. I could definitely get behind that. It didn’t change the results that meaningfully. There were a couple of other methodological adjustments that they suggested, but my overall takeaway was it didn’t change the picture that drastically. I mean, I think even after they applied these changes, still two-thirds of active funds in aggregate were lagging their benchmarks, the ones that they had chosen, this asset-weighted average of passives. That’s still not an especially encouraging result. And that’s notwithstanding some other sort of, I guess, quibbles I had with methodological choices that they made in their paper. For me, it was a very, very interesting paper in a lot of ways, but I didn’t find it very persuasive.
Benz: You had another article called “The Biggest Active Stock Funds Picked the Right Stocks. They Still Lagged.” In it, you suggest that stock selection wasn’t necessarily the core problem with these lagging active funds. Does this imply that portfolio construction and implementation are now more important differentiators than security selection?
Ptak: I think it does. That was one of my main takeaways from conducting this study. To kind of boil down what I had done as part of this paper, I aggregated these managers’ stockholdings into a single pool, and then I just let them go. I assumed that there were no changes made and then compared the results of that do-nothing portfolio to these funds’ actual aggregate results. I found that in the most recent year I had studied and then prior years and then the full 10-year period, this do-nothing version did a heck of a lot better than the actual funds did. It’s a credit to the stock-picking prowess of the managers of these very large funds. But it also, I think, points to an issue which you hit on, which is that they probably are not letting their winners run long enough and they’re selling their winners off too early.
I think it probably reinforces that the next frontier in portfolio analysis and manager analysis is focusing on some of the portfolio construction and trading decisions that they have made along the way. It doesn’t look like the missing ingredient is the stock-picking necessarily. Rather, it looks like some of the choices that they make in maintaining the portfolio over time warrant further scrutiny.
Arnott: Yeah. Christine and I interviewed Will Danoff at the conference a month or two ago, and one of the big keys to his success has been letting his winners run exactly as you said.
Ptak: Yep.
Arnott: You’ve also written about research from Hendrik Bessembinder and other academics finding that a relatively small number of stocks have driven a disproportionate portion of recent market returns. Does that sort of create a structural disadvantage for diversified active funds that have to manage things like liquidity and risk controls and limitations on their position sizes?
Ptak: I think it could create a disadvantage. It’s not hopeless. We still see plenty of active fund managers put up good numbers. Bessembinder, he’s done awesome work. I actually would recommend listeners go back and listen to an interview that we did with him a little while back. In the article, I was being a little facetious in suggesting that maybe the structure, the fund structure itself, conspires against managers’ success. But it’s hard to overlook the fact that this tremendous skewness of returns that Bessembinder’s research has found, it is somewhat incompatible with the fund’s structure because it stands to reason that you’d need to rely on power laws of the sort that you see more commonly in things like venture capital, where a handful of mega-winners kind of carry the portfolio.
But when that happens, you have all the associated concentration risk and volatility and scrutiny. Not only can that bump up against some of the operational regulatory realities, but then there are also the questions that you get from investors who maybe have been inculcated that you don’t let positions get that big, you don’t court that amount of volatility. I think there’s a bit of a tension there. I think it’s one of the reasons why it’s been particularly challenging for US stock fund managers over the past few decades.
Benz: Looking forward, what market environment would provide the strongest test of whether active management can truly add value after fees? We always hear from active managers that it’s like, “Oh wait, don’t look at me during a bull market. I’ll earn my keep in a weak market environment.” What should be the market climate that would show active managers, or would demonstrate whether they can add value?
Ptak: For sure. I think truly is the operative term there. I think that if we were putting our academic hat on, we would say for it truly to be sort of compelling, robust, it would have to be over a pretty long period of time. And that’s going to outlast most investors’ patience. The truth of that is. In more practical terms, I guess there are a couple of environments where I would expect active to do better and improve their metal. The first is down markets. I think that this does get overplayed by active fund houses in particular, that they do this heroic job of protecting the downside. There is truth that they do better against their benchmarks, largely for reasons of style impurity in down markets. We’ve done plenty of research on this that shows that. That’s one environment where I would expect them to earn their keep.
Another is when we see big stylistic dislocations. Probably the quintessential example of that would be a time like 2000, where you saw this big break between growth and value and large and small and domestic and foreign. There were all of these different dislocations, and that can create real opportunities for a manager. We can’t predict when that’ll happen, but when it happens, it’s the sort of environment that should set up a little bit better for active funds, and one would hope they would do better. Those are sort of two examples of where I would be looking for them to earn their keep.
Benz: Jeff, I wanted to ask about active fixed income. When I’ve looked at the data, it does appear that active fixed income looks a little better than, certainly, active large-cap equity. Are there spots where investors might reasonably select a low-cost active fund, and is fixed income perhaps one?
Ptak: I think so. Yeah. I think you’re on the money. When you look at the results for active fixed income, and our colleagues, I think, have written some pieces to this effect, they are meaningfully better than what you would see in, certainly, domestic equity, even foreign equity. I think that you can make a better case. Now, we can talk about some of the technical factors that might explain why active can be more efficacious in that realm than US equity. It’s probably beyond the scope of the conversation, but it’s an example of where, I think, to be circumspect, you want to give it a good hard look. I’m a very ardent believer in minimizing fees, but also I recognize that there are instances where it could make sense to maybe pay up a little bit, and that can be an example of where you can make a case for it.
We’ve also seen some other sort of niche areas where it looks like it can make more sense to use active if you’re really determined to get exposure to it. One that springs to mind is foreign small cap. There are ETFs and indexes that are out there, but that’s sort of a capacity-constrained, somewhat esoteric area to begin with. That’s the sort of place where maybe you would consider active, but you’re going to pay for it. Those are not cheap strategies. I think you would want to have the highest conviction before you made that decision.
Arnott: In thinking about my own journey as an investor, when I first started out in my early 20s, I had a very small portfolio, but it was pretty much all active with actively managed funds. Over time, the portfolio has gotten a little bit bigger and is much more tilted toward the passive side. I’m curious if you have also shifted more toward passive vehicles in your own portfolio over time.
Ptak: Yeah, that’s true of me as well, Amy. It sounds like my journey has resembled yours. I came into the firm back in 2002; I was covering active funds. I was certainly investing in our 401(k) plan, which was populated with index and active funds alike. I really was very enthused about investing with active fund managers. Those are still a part of my portfolio, but as time has worn on, it shifted increasingly toward passive. And then I can speak for other immediate family members who have their own investment portfolios; maybe I rubbed off on them a bit, but they are invested exclusively in index funds. I think that it’s probably born of experience. You can’t necessarily know in some cases that passive is the better choice in some of these circumstances. Maybe you’ve had a go with active fund managers and saw some of the limitations there.
Fortunately, we’ve got a great set of active funds that are on our 401(k) plan menu. I’m pleased to invest with those managers and continue to do so into the future. But yeah, I’ve gotten the fever for passive as well as time has gone on.
Benz: And tax implications, I think, figure into all of our thinking.
Ptak: 100%. Yep.
Benz: Yeah. I wanted to shift gears. You recently testified before Congress, and we’ll try to drop a link to that into the show notes, but you testified that investor success depends heavily on lower costs and greater transparency. If regulators could implement only one reform to make things better for investors, what would have the greatest positive impact on long-term investor outcomes?
Ptak: Yeah, it’s a great question. Though it wasn’t part of my testimony and, as a practical matter, it was a little bit peripheral to the hearing’s focus, I think the thing that would have the greatest aggregate impact on long-term incomes is wider access to high-quality, low-cost retirement plans. I know we pride ourselves on our system of, I don’t know if you want to call it rugged individualism. It no doubt has benefited many in our society, but we also know that there are many who don’t have access to a retirement plan at all. Just trying to think big picture, bringing them into the fold would have, I think, a huge positive impact. Our other message that we tried to convey through our testimony is, overall, the story that we’ve seen play out in the fund industry for investors is encouraging. It’s affirming. Costs have come down.
Investors have increasingly been embracing diversification and vehicles that deliver that, passive funds in particular. And we think that’s redounded to their success. I mean, it’s really helped them, but we wanted to encourage them to build on that, not to backtrack or water down. I know there’s one initiative in which companies will report less frequently. My own personal opinion is that is a step in the wrong direction, though opinions even within Morningstar vary on that. But that’s the sort of thing where I would hope we would redouble our commitment to transparency rather than take a step back, as I think we have in that particular case.
Arnott: You’ve written a number of articles highlighting costs as one of the most reliable predictors of future success. Are there any cases in which investors might want to deliberately choose a higher-cost strategy?
Ptak: Yeah, It’s a great question. We talked about fixed income. Active fixed income might be one example. I think there are some other cases where you might argue that you don’t want to make perfect the enemy of good. Probably the example that springs to mind, most readily to mind, is where maybe it’s a little bit more convenient for you. It removes some friction. Maybe it ensures that your dollar-weighted outcomes are going to be better than perhaps they otherwise would be if you were investing in, say, a cheaper fund that’s available to you in a particular way. To give an example, so think of, I mean, it’s a little niche, but ETFs are funds that ladder bonds for you. I can hear the howls from some quarters that, like, why would you pay a little bit more to do something as sort of simple and mundane as that?
Simple and mundane can be monumental to some, or there just could be frictions involved, and it can be worth it to do that sort of thing. Even more heretical, in some quarters, is a suggestion that maybe it can make sense in certain circumstances and stages of life to buy an annuity. There are certainly trade-offs that are involved in doing so. There’s no question about it. But for some who need the permission to spend, it can be the right choice. I know that you’ve had a number of guests on this podcast who have spoken about that dynamic. It’s another example where it can make sense. Even more heretical than that, I’ll just give you sort of an example in the ETF space because I’ve been looking at these things. Buffer ETFs, I would not recommend them for somebody that’s in the accumulation stage.
They cost a lot. They cut off the tops of equity returns because they’re built on options. That’s how you get the downside protection. However, I would say for a certain cohort of investors who are maybe approaching, at, or even in, retirement, they can make some sense. We’ve actually seen encouraging dollar-weighted results with buffer ETFs; that was part of the Mind the Gap study that we put out today. I would say there can be a place for that type of structure for a certain type of investor that’s in a certain place in their investing journey. Those are some kind of quick examples where you might want to think about paying up a little bit.
Benz: In general, we’ve seen a pretty benevolent trend where fees have come down in the fund industry. Investors have been selecting the low-cost funds, but advisor fees have been kind of stuck. Michael Kitces has documented this. The 1% AUM fee is still the industry standard for investors with average portfolio sizes. Of course, a well-qualified advisor can help investors get better outcomes. How do you think investors should assess whether they’re getting good value for money from their advisor?
Ptak: I think if it’s for supposed investing or asset allocation acumen alone, I’d be pretty skeptical. Very few professional investors beat their indexes by that margin before fees. I’m not sure why you’d expect your advisor to add at least that amount of value, especially if they’re allocating to funds. Beyond that, I think it’s going to depend on facts and circumstances, which I realize is a very wishy-washy answer. But it’s hard to say whether the advice you get will be worth at least 1% of your assets. I don’t use an advisor, but I guess a question that I might ask myself is more the counterfactual. Will you be more than 1% worse off without the help you get? Sometimes that can be the more salient question for someone who knows they need advice, but they’re not quite sure what sort of advice they need, let alone what’s a fair fee to pay for it. They should be asking themselves: Do I think I’m in a position where there are real gaps in my knowledge, or I’m just not sure how to navigate what can be a complex field? Especially if you’re approaching retirement.
If I don’t engage an advisor, whether that’s 1% or whether it’s 2%, it’s hard to say. I think it’s a valid model for certain relationships and circumstances. I think you also have done a great job on this podcast of bringing others who employ other models and provide terrific advice and planning to their clients. It could be much more economical and easy to predict what it is you’re going to outlay as the person receiving that advice. I think that’s a very valid format and model as well, as opposed to the 1% fee. Sorry, it’s short on specifics, but that’s kind of the way I would try to approach it if I were somebody that’s receiving advice.
Arnott: Oh, that’s helpful. Thank you. We also wanted to touch on private markets and some of the product innovations that are going on there, which you also mentioned a minute ago. You’ve written extensively about some of the vehicles that have SpaceX-related exposure and some of the challenges of packaging private assets into a vehicle that has daily liquidity. What are some of the key takeaways for investors from those examples?
Ptak: I would say it’s a careful what you wish for situation. As we have this conversation, I think SpaceX SPCX maybe traded up a little bit this morning, but as of the close yesterday, it was trading meaningfully below the IPO price. As a result, some of the products that took a stake in it pre-IPO were underwater on the position. That’s certainly not true of every one of those. I think for investors who are clamoring for exposure pre-IPO, that probably seems like a pretty foreign situation that they now find themselves in given the sheer amount of hype. And you’re right, there is a fundamental incompatibility, in my opinion, between the daily liquidity structure. This is an ETF, an open-end fund, though I think it’s more acute for ETFs, and something that doesn’t trade. I mean, ETFs are built for assets that one can readily value and transact in, and that is not how you would describe a pre-IPO name like SpaceX, or anything else for that matter.
Personally, at the risk of this sounding like a scold or a worrywart, it is a trend that concerns me just because I think you can basically have some real sort of complications that arise once you take a stake in one of these names in that type of wrapper.
Benz: I think I know what you’re going to say, Jeff, but I’d like to hear your take on adding private market exposure as an investment option for 401(k) plans, either separately or as part of a diversified target-date fund. It seems like private equity and credit are creeping closer to the retail channel. I’d like to get your take on that broad question and then 401(k) specifically.
Ptak: Were you going to predict I’d say I hate it? Because if so, you’re correct. I hate it. To me, it seems totally unnecessary. To be fair, target-data allocations have evolved over time. More has come into the fold. Retirement plan lineups have evolved. There are maybe more options that are available to investors. I could have taken that position 20 years ago and been like, “Oh, all you need is US stocks and investment-grade bonds, and you’re good to go, and we don’t need this other stuff.” But I think there’s a crucial difference here. We’re talking about liquid and illiquid, and you’re also talking about a retirement plan. This is a linchpin part of our system and ensuring that when people reach their retirement years, they’re able to enjoy them bountifully. I do worry about introducing something that is illiquid in the context of a retirement plan.
I think the least worst way to do it is through a target-date fund. It does not seem advisable at all for it to be a stand-alone option on a menu. That seems like a recipe for disaster. If they’re going to do it, one would hope that they do it tucked away within a target-date fund. In general, it seems like a solution in search of a problem. I think by every indication I’ve seen, while there’s plenty of work to do on our retirement system, expanding access and the like, it seems like investors are faring pretty well. They’re doing well on target-date funds, they’re capturing their returns, we’re getting them auto-enrolled, they’re even auto-escalating. To me, that’s a picture of success that we can build on. It doesn’t seem like they’ve been deprived of anything, let alone private equity and credit. So, I’m not a fan.
Arnott: You’ve also written extensively about thematic portfolios and some of the risks involved in products like an AI-themed ETF. Why do you think investors are still so attracted to these types of thematic products, even though we have pretty strong evidence that investor results have been pretty poor?
Ptak: It’s a great question. It’s the power of stories, I think, to a degree. People love stories. I think they find them especially compelling when maybe they confirm some of their priors. It’s intoxicating when the story that maybe taps into their confirmation bias is being validated in the market at that time. There’s some theme, and it squares with your intuition. You’re like, “Oh yes, absolutely, this is going to be huge.” Furthermore, you see a vehicle that purports to tap into that theme is doing really, really well at the time. I mean, that’s like ding, ding, ding. Those are three things that I think just really speak to a segment of investors. I think it explains sort of the enduring power of thematic strategies, drawing assets, notwithstanding the results, which, as I mentioned earlier, I found on a dollar-weighted basis have been really poor.
Benz: You’ve argued that investors should be cautious about products tied to the prediction markets. How do you distinguish between useful financial innovation and innovation that primarily serves speculative demand?
Ptak: Yeah, so I think it comes down to two things: time horizon and cash flows. The shorter the time horizon, like a single day, which is what leverage ETFs and the like are built for, the more dubious the proposition. I mean, that’s pure speculation because none of us know what’s going to happen in a given day. If there are no cash flows associated with a security, then I think that veers toward speculation too. I have to say, I’d lump crypto in with that, just given the fact that I haven’t really seen somebody convincingly demonstrate its financial utility. It certainly seems to have a kind of utility for trading and speculation and perhaps illicit purposes, but I haven’t really seen somebody identify what it’s really good for, in advancing certain sort of economic objectives of various kinds, or just sort of commerce as it were transacting.
Yeah, crypto, I would lump in there too. I think most dubious of all are, and they’re just a proposal at this point, though I did write about them, are prediction-market ETFs, which would basically use what are called event contracts and allow people—I think the initial batch were tied to the outcomes of various elections, the presidential election, control of either House of Congress. And they’re binary; they’re zero-sum. They serve no economic purpose whatsoever. They’re really the antithesis, I think, of what people should be trying to do with their investments. Hopefully those never see the light of day.
Arnott: For people who are excited about innovations in a given sector like technology or healthcare, do you think there’s any merit in setting aside a small percentage of their portfolio, maybe 5% or so, as play money? Or does that just play into the type of behavioral issues that can lead to bad outcomes?
Ptak: No, I think that’s fine. I realize for most of this conversation I sound like the world’s biggest scold, but I think it’s fine to do that. It’s like you say, you want to make sure that it’s in the margins. One of the tricks here is just ensuring that it remains on the margins of your portfolio and it doesn’t come to overwhelm the other, what ought to be core parts. The other piece of it is I think that you would want to make sure that you establish your core portfolio first. Let’s get that working. Secondarily, if you want a fun-money portfolio on the side, then that’s fine. You’ve got your priorities in order at that point, and that ensures that you’re continuing to strike a healthy balance.
Benz: You recently wrote a piece where you’ve been challenging several common market narratives. One was the idea that investors can meaningfully improve their outcomes simply by avoiding the market’s worst days. What do you think these ideas, these timing myths—why do they remain so persistent?
Ptak: Yeah, they won’t die. I think they’re simple. They’re very easy to digest and intuit stories, and they really cut through the complexity of markets. Just like you think about the miss-the-down-days narrative, and that’s one that’s been sort of rattling around for ages. If you just manage to miss the down days, you’re in great shape as an investor. As with a lot of these things, there’s a kernel of truth to it, and it’s very sort of simple and understandable to investors of all stripes. But the problem is it doesn’t tell the whole story because the market’s worst days and the market’s best days cluster. It’s virtually impossible to miss one and yet enjoy the other or vice versa. It’s an example of how I think narratives have real staying power. I think that’s a battle that we will continue to fight to dispel some of these notions.
We’ve done lots of research on things like tactical funds. As a group, they’ve been a disaster. They’ve done very, very poorly over long stretches of time that have included bull and bear markets alike. It just really, I think, should put to rest this notion that people can slalom around the market in the way some would suggest; it’s not the case. The data doesn’t support that.
Arnott: When it comes to portfolio construction, if you were starting out and building a portfolio from scratch, what are the asset classes that you would want to either include or exclude? Do you think investors should have exposure to things like REITs, crypto, gold, commodities, et cetera?
Ptak: I think if you invest in a target-date fund, not that people have to do that, but they can use that as maybe the prototype for where to try to get exposure and achieve diversification. That’s a pretty good starting point, and that’s going to span stocks and bonds, domestic and foreign developed and emerging markets. I think some of the popular target-date funds do also include exposure to things like REITs, and that’s fine. They are correlated with equities, so they’re not the super, super potent diversifier. I think Amy, you’ve done quite a bit of work on that, looking at that in particular, but it’s fine that they’re in there. They do exclude things; many of them exclude high-yield bonds. Again, I think that is forgivable given high-yield bonds tend to be quite correlated with equities. In many cases, we’re looking for that bond portion to provide ballast when equities get themselves into trouble.
The other things that you mentioned—crypto, gold, commodities—to me, those seem extraneous. They’re not must-haves. The one other that I would throw in there that I think in a number of leading target-date funds, it’s not present, would be TIPS. Having some exposure to TIPS, I think, is advisable. It’s a good complement to your core bond allocation. Throwing in an allocation to TIPS as well, I think that gets you largely to where you need to be.
Benz: Which current market narrative do you think has the shortest shelf life?
Ptak: Yeah, I’m terrible with this sort of thing. I don’t know about shortest shelf life, but I wrote a piece not too long ago, and it couldn’t have been more facile, but it was one in which I cast doubt on the sustainability of the tech sector’s returns. As we know, performance has been fabulous for a very long time in that sector. Based on the research that I did, I don’t think it portends very well for the future. I think I found that anytime a sector had a rolling 10-year return of 20% or more per year, it lost money over the next decade, every time. I think it’s become writ in some circles that tech will continue to lead the market as it has, but my analysis suggests you shouldn’t be so sure. That’s probably an example of what has become sort of a dominant narrative that I think people might want to question.
Arnott: If people are wary of tech stocks, especially those that have really high valuations, is there an area that you would tilt toward to offset some of that risk?
Ptak: Not really. This is me at my most defeated, but I think this is the paradox. We’ve gone through periods like this before where an area gets really, really hot. And while tech valuations are not blaring alarms at this point, given the earnings acceleration that we’ve seen across certain subsectors within tech, I think after you’ve gone in a run the likes tech has, I think there’s some reason to question the sustainability of that. But what you do tend to find in indexes is you’ll have another sector area that takes the baton and leads the market higher in its next phase, offsetting some of the weakness that you’re seeing in a sector that it formerly led. That’s what gives me some reassurance that this is the sort of thing that investors—diversified investors, index investors—in which tech is a big weight, will get through this. They’ll be able to withstand it. But I think it’s going to be tougher sledding for tech even based on this very, very facile analysis that I did.
Benz: Jeff, you are not a stranger to this podcast. You helped launch it with me back in 2019. As you reflect on the many episodes that you worked on with me, what were a couple of your favorites? You referenced the Bessembinder one, which was super good, but were there any others that stand out in your mind?
Ptak: Yeah. The episode with Longevity Researcher Laura Carstensen—that one is memorable to me. Meaning and purpose are so intrinsic to who we are, and I thought she did a great job of explaining why that’s especially true in retirement. That was a great episode. I also loved our, sort of more in an investing vein, I loved our conversations with David Giroux. He’s a great investor, and he doesn’t rest on his laurels. Another David, David Herro at Oakmark. I thought he radiated the same quality. He loves the game, and it really came across in our conversation with him.
Lastly, I know I’ve thrown out a few here, but the last one I would mention was Primecap. That was kind of, in a way, a career highlight for me. I had had the opportunity to cover them in a former life, but this was a chance for the world to hear from them. They’re pretty selective, I think, as you know about media appearances, public appearances. Just really grateful to have had the chance for us to speak to Joel Fried and Al Mordecai as we did. It was really cool to do that.
Arnott: You’ve also been a key contributor to our State of Retirement Income report in previous years. I’m curious if any of that research has changed your thinking about any aspects of retirement planning or personal finance.
Ptak: Yeah, the irony is I think it’s helped me appreciate how there’s a lot more to it than the number. You two and also John Rekenthaler, when he was one of our collaborators on the study a few years ago, I think you have just done an awesome job of helping retirees think about the various trade-offs associated with the different approaches. You’ve continued to add these different sorts of approaches. I think it’s really helped people to understand the levers that they can pull and the different sort of priorities that they might have to balance off when it comes to spending and maybe how efficient it is or how strong their bequest motive is and what might be the right approach to fit that. It’s really opened my eyes to those different dimensions and the different choices that one can make, so it’s really a tribute to the work that you’ve done.
Benz: We always like to ask about sources of inspiration, podcasts, blogs, and so on. Can you talk about some of your favorites? I know you’re an avid reader and consumer of podcasts as well.
Ptak: Well, I would say, at the risk of being a little corny, I would say in addition to the two of you and folks like John Rekenthaler, Russ Kinnel, who I think we might have mentioned earlier, others here at Morningstar who are such gifted writers and also very generous in sharing their wisdom with investors, and those who are facing various personal finance or portfolio construction questions. I would say there are a few luminaries who I’ve gone back to.
One, a very familiar name to all of us, would be Bogle, and Common Sense on Mutual Funds, I think, is a great book. It’s timeless. Diversify, minimize costs, avoid over-transacting; it’s kind of all you need. In terms of investing parables that I think will become even more relevant as time wears on, When Genius Failed by Roger Lowenstein, it’s a fantastic, fantastic story. Roger’s very learned. I think he does a good job not just of constructing the narrative, but also helping people to understand what the enduring lessons of the LTCM affair are.
Lastly, anything by Jason Zweig. Jason’s been on the podcast several times and deservedly so. Any of his books are worth returning to. Those three are about as good as it gets.
Arnott: Well, thanks so much, Jeff, for taking the time to talk with us today. It’s great to catch up with you on some of your research and your take on the overall market.
Ptak: Well, thank you so much. It’s been a real pleasure.
Benz: You are wonderful, Jeff. Thank you.
Arnott: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow me on social media at Amy Arnott on LinkedIn.
Benz: And at Christine Benz on LinkedIn or at @christine_benz on X.
Arnott: George Castady is our engineer for the podcast. Jessica Bebel produces the show notes each week, and Jennifer Gierat copy edits our transcripts. Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at thelongview@morningstar.com. Until next time, thanks for joining us.