Your "Balanced" Mutual Fund May Be Off Balance
Posted by admin in Investing
© Brent and MariLynn
Many, many, many of us now have to think about investing and mutual funds these days. If you're not an individual investor, there's still a good chance that you have a 401(k) or IRA to deal with. If you're like most people, you have a hazy idea of what to do – diversify, have a balance between stocks and bonds that correlates to your age/years to retirement. Most of us don't want to think too hard about this, so we buy our mutual funds based on their names – growth fund, income fund, bond fund, international fund, balanced fund.
This post is about that last one – the balanced mutual fund. It sounds so safe, so secure, offering a little market exposure but balanced off with a little… well, we usually don't know, we just know that "balanced" sounds less risky.
And usually it is. But this article by Gail MarksJarvis tells us that balanced fund managers have plenty of leeway when it comes to how much balancing they actually do:
…investors can no longer hunt through a 401(k) and figure that the fund they see marked "balanced" will deliver that classic portfolio or buffer them against the risks in stocks. During the four years before housing problems started pulling the stock market down, many balanced-fund managers started taking greater chances by buying more stocks than usual, selecting riskier stocks than balanced funds had in the past and selecting riskier bonds.
That gave their funds extra return then but has worked against them recently. In addition, even the balanced-fund managers who have continued to operate as they have in the past have been caught in snares. A favorite investment for some balanced managers is financial stocks, but they are at the center of the current stock market storm – some falling more than 90 percent.
Consequently, respected funds such as Dodge and Cox Balanced have disappointed shareholders. Dodge and Cox was recently down about 17 percent for the year.
…
In addition, Culloton notes that the fund took a larger stake in stocks at a time when they have been dropping sharply. Rather than the more common 60 percent stake, it was holding 70 percent in stocks recently.
The article goes on to cite some other balanced funds that performed more poorly than an investor would expect.
This is not to say the fund managers had evil intentions. It's just to say that as investors we need to keep our eyes open and not invest blindly based on the labels that the fund companies use to guide us.
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