Would you rather be researching mutual funds or riding your mountain bike in the Boise foothills? OK, maybe slogging your way up the south side of Table Rock isn't your idea of fun, but "normal" people don't look forward to studying Morningstar mutual fund reports or figuring out how to rebalance their portfolio. Balanced, or asset allocation, funds are possibly a great solution for the person who has some money to put to work, but would rather invest their time elsewhere.
Balanced (or Asset Allocation) Funds
Balanced funds are often considered boring. Generally speaking, they are mutual funds on training wheels--designed to keep investors on-track with a sensible, diversified portfolio. They are a type of single fund investing solution, or all-in-one fund, that spreads the investors' money across various asset classes (e.g. domestic and international stocks and bonds) and within asset classes (stocks and bonds from many different issuers). In Part 2, we examined target-date retirement funds--single fund solutions that dynamically shift to more conservative asset allocations as the investment objective (retirement) draws near. Balanced funds are similar, however they provide an asset allocation that is independent of any time-based objective. In other words, it will not be shifting to more conservative allocations just because time is passing by. You can find balanced funds with conservative, moderate, or aggressive asset allocations, and these funds will presumably have the same or similar asset allocations 10 or 20 years in the future.
Some asset allocation funds have distinct portfolios of stocks and fixed income investments. Others, similar to most target-date portfolios, are funds-of-funds. This means that they consist of a number of underlying mutual funds that invest in various parts of the stock and bond markets. Sure, you could probably go purchase all the underlying funds yourself, but buying the balanced fund makes the initial and subsequent purchases easier. And, no matter how the balanced fund is constructed, it is the fund manager's job to keep the fund's portfolio in-line with its asset allocation target. This relieves the investor of the burden of rebalancing, an important investing discipline that keeps helps control the level of risk in your portfolio and offers the potential of marginally increased returns. This automatic rebalancing, along with the increased tendency for balanced fund investors to buy-and-hold the investment through market cycles, helps them realize a larger portion of potential returns.
Although balanced funds are simple investments to buy-and-hold, there are a large variety of these asset allocation funds available in the marketplace, and this can make the initial selection daunting. Here are some of the considerations to be aware of in searching for the right fund for your preferences and situation.
The sweet spot for balanced funds is in that moderate allocation category, with about a 60% stock and 40% bond allocation. However, be aware that not all balanced funds are targeting this moderate profile.
As is often the case with any type of automatic or "simple" solution, when you look under-the-hood things are a bit more complex. Hopefully, considering the factors discussed above will help you in selecting a balanced fund that meets your needs. Ultimately, choosing to go with an all-in-one fund, whether it is a target-date or balanced fund, is a decision to go with a "good enough" plan that will be executed very well. This is opposed to the perfect plan (e.g. your brother-in-law's 30 fund portfolio) that runs a substantial risk of poor execution. As stated in this recent Morningstar article on investor returns: "Balanced funds may not be entertaining, but if they keep you from doing stupid things you could learn to love them."
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