What are the pros of balanced funds?
One of the key advantages that balanced funds offer its shareholders is instant and equally distributed diversification among stocks and bonds. The typical stock/bond split of a balanced fund is 50%/50%. Most individual investors would find it very challenging to research, purchase and manage a portfolio of stocks and bonds. Another hurdle for an investor is trying to determine which securities to buy and sell as they deposit or withdraw funds from their portfolio. With a balanced fund, they get the comfort of owning a piece of hundreds of securities, the flexibility of buying and sell shares as needed, and the helping hand of a professional money manager to oversee the daily management.
What are the cons of balanced funds?
The biggest disadvantage to balanced funds is the current economic climate. As mentioned earlier, most balanced funds have approximately 50% of its holdings in bonds. This will attract many low to moderate risk investors, thinking they are getting diversification and feeling that their risk has been reduced. The problem is currently in 2019, these bonds are priced at nearly an all time high. I believe that there is as much, if not more, risk in the bond market than in the stock market. When interest rates start to rise, and they will, the bond holdings in the balanced funds will depreciate dramatically. So, the very piece of the balanced fund that is attracting conservative investors will end up being a Trojan horse.
How do they compare to target date funds?
Other than both types of funds holding stocks and bonds, the comparison ends there. By prospectus, a balanced fund must have at least 35% of its holdings in debt securities (bonds) thus insuring it will maintain a certain level of diversification. A target fund, on the other hand, is designed to flow along with your life. Meaning as you age and get closer to that retirement date, the target fund is tasked with the responsibility of reallocating itself to be lock step with you as your retirement approaches. The problem is in reality most target funds fail to reallocate the portfolio to reduce risk as the retirement date approaches. Leaving the investors with their retirement exposed to much more risk then they expected.
Should you have both balanced funds and target date funds?
In my new book Retiresmart, an entire chapter is dedicated to the pitfalls of target retirement funds. I prove that these funds are not as advertised, have layers of hidden fees and should be avoided.
What are some examples of balanced funds with low fees that are diversified with above average returns? Some larger fund providers include American, Fidelity and Vanguard.
There are many good balanced funds available to the individual investor. One of these is the Vanguard Balanced Fund (VBINX), however, a smarter way is to invest 50% in the Vanguard S&P 500 Index Fund (VFINX) and 50% in the Vanguard Total Bond Market Index Fund (VBMFX). This technique will give you more diversification and, just as important, save you 20 to 25% in investment fees. This approach can be used with all major mutual fund companies, such as Fidelity, T Rowe Price, American Funds, etc.
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