You Gotta Have Faith With Balanced Mutual Funds
Balanced mutual funds offer a great way for investors to get away from the responsibility of investment management. After all, this is the very reason why so many people will choose balanced mutual funds — they are hands off, an “easy” and thoughtless way to invest. Indeed, a lot of financial planners will recommend that balanced funds are where to invest your money. And in theory, this makes great sense. Balanced mutual funds are either actively managed in terms of assets or in terms of asset allocation. Either way, a lot of faith is placed in the fund manager.
Here, let’s take a look at the risks to both. With a balanced mutual fund where the fund manager decides what to buy, what to sell and when, you have to believe that the manager really knows what he or she is doing. Why? Because if they are wrong, you lose. And the manager will either keep his or her job, not get a bonus, or have to find another job. Will the fund manager lose as much as you will? Probably not. Because fund managers make a lot of money, they can easily recover whereas all the money you have “gambled” on that manager’s bad bets will be difficult to rebuilt.
Now, how about balanced mutual funds where the assets are not so much a problem as the asset allocation model. That means that if you choose a balanced fund that stick to a particular asset allocation, you are trusting that this asset allocation will not only perform over the course of your time horizon but will allow sufficient growth in the equity class and enough security in the income class. Like stock-picking, determining a proper asset allocation model takes a bit of skill, particularly where destination (e.g. 2015, 2020, 2035, etc.) portfolios are concerned.
So, does a balanced mutual fund make sense for you? Probably. But which works best? One with an active trading strategy? One with a specific asset allocation model? One with a destination or fixed time horizon? You will have to choose which investment management style works best for you, your risk tolerance and your investment objective. But understand there are risks involved with each.
