Posts Tagged ‘tactical investment strategy’

Education savings plans have increased in popularity over the past decade or so. As people have struggled with savings for their children’s education, so too have they struggled with where to invest the money they set aside every week, month or year. But interestingly, they struggle less when it comes to the mutual funds that are part of an education savings program than they do with their own savings and their retirement savings in particular. Since most people will start with smaller numbers when saving for a child’s education, the natural start is with mutual funds; balanced funds in particular.

It is not so much about knowing where to invest than it is about how to invest.

And this makes sense. Balanced funds offer tremendous growth opportunities in the mid- and long-terms. A balanced fund that takes a tactical approach to investment management will do its best to get a lead on the markets, whether it is in bonds or equities or a tactical approach to both. Ideally, however, tactically managed balance funds will provide active investment management, something that many people cannot enjoy with investment values of $100 per month.

More importantly however is that people who decide on balanced funds are more inclined to “sit” on them during periods where market values erode, such as what was seen up until 2009. This becomes a strategic approach, then, so that it is not so much about where to invest than it is about how to invest.

Unfortunately, many investors who witness the type of portfolio erosion that most investors witnessed from the end of 2007 through to the first quarter of 2009 get nervous. They hate to see the type of devaluation that they undoubtedly witnessed. And where their education savings are concerned, the time horizon for that investment may not be as long-term as, say, their retirement savings; Junior will be going to college in two years and cannot wait the fifteen years that I can wait to see that education savings plan recover.

So they pull the plug. They drop that terribly depreciated balanced fund and decide against all wisdom, all historical evidence and advice that where to invest is actually in income-producing securities. Not high yield investments, either because all companies are going the way of GM, Ford and Chrysler or because they have become turned off anything corporate altogether. So instead of those high yield investments, they choose government bonds or, worse yet, term deposits.

And we all know where those rates are. They are low, they provide so little income that the purchasing power erosion combined with rising tuition costs will have a negative compounding effect on the actual purchasing power of the original investment. In addition, as those government rates start to rise to compensate for inflationary pressures, the value of those bonds will decrease (of course, TD’s will retain their par value, but at virtually 0% interest, they provide next to no liquidity… there is no getting out until the maturity date).

So where is the true logic in bailing at what could be ultimate low in that balanced fund’s market value?

That’s the thing, there is no logic. Emotions overtake logic.

This past year has illustrated that history has a way of repeating itself. And of course, those who bailed at the ultimate low have seen that markets do recover.

Statistically, people who invest in education savings are more apt to sit tight. And this is a good thing, as history has proven time and again.

In regards to knowing where to invest in an education savings program, realize that Balanced funds clearly provide the best overall option, particularly for people with lower dollar figures to invest (which would probably be most people). Not only do many balanced funds provide enough of a tactical investment management approach, allowing the fund managers to shift from one asset class to another in times of market turmoil, but they are normally managed by the best and brightest — and most of us are nowhere near as intuitive as they when it comes to investing.

And for those with larger amounts to invest. Consider a strategic asset allocation model.

Because knowing where to invest is often secondary to knowing how to invest.

There are times when, as an individual investor, I have to shake my head at some of the bonehead positions that even the world’s best mutual fund managers take. Whether it is an equity fund, a bond fund or balanced fund, evne those people who are known as the world’s “greatest” mutual fund managers make trade decisions that would make even the world’s “most novice” investor look like Warren Buffett.

But here’s the thing. Bond funds demand full (or close to full) investment in income-producing securities. A Bond Fund manager cannot sit on the sidelines and not take a position. The same goes for the biggest growth funds (and perhaps it is more-true for these growth fund managers than any other type of mutual fund manager) because sitting on the sidelines often means missing out on growth… even in times of economic uncertainty.

Tactical In Nature

This leads us to the topic of this post: Balanced Mutual Funds. As a balanced fund junkie, I am always amazed at how many different configurations these balanced mutual funds take. Unlike other funds, balanced funds are almost always tactical in nature. Their ever churning asset allocation reminds me of the ocean waves. When the tide comes in, so do the returns. Then they dump their overbought holdings and move into something with greater opportunity, whether that is income in nature or something else with a great P/E ratio or some other promising technical or fundamental indicator. Rinse and repeat (Note: Hedge funds will actually take aggressive short positions, something mutual funds will not do).

Dynamic Response To Market Events

Balanced mutual funds admittedly have one advantage over straight growth and bond funds; they can respond dynamically to market events. This means that periods of high interest rates allow balanced fund managers to dump low-dividend yield stock and get in deep with bonds that they feel will increase in value as rates drop and will consequently provide higher regular income over the duration of their holdings. Hussman’s Strategic Total Return fund is a fine example of how some balanced funds can defy gravity… and with just 31 holdings (as of January 19, 2010) it just comes to prove my next pont!

In fact, the way balanced funds can respond to markets is such an exciting benefit that balanced funds have over other classes of mutual funds that it makes one wonder why everyone does not have a least 25% of their portfolio invested in balanced funds.

Top Level Management… At Cheap Prices

In the case of the Hussman fund noted above, you will pay just 0.75% according to the Prospectus to employ John Hussman as the manager of your investment. And your minimum investment in this case is just $1,000. Of course, Hussman is just an example. Most fund companies empower only their best and brightest (or teams of the best and brightest) to manage their balanced funds, and all at rates comparable to those seen at Hussman (many are even cheaper). Last I checked, it costs more to refinance a mortgage and let the bank make some real money.

As evidenced here, there are some great benefits to investing in balanced funds. In no way is this list even complete. In fact, it deals exclusively with tactical balanced funds… and these days, there has been a growing interest and investments in these strategic funds, many of which offer specific “target dates.” Well, that’s food for thought on another day because those balanced funds are equally attractive.