Retirement plan decisions made easy
Drill Down: What about Balanced Funds?
A balanced fund may be one of your 401k options. A balanced fund is a mutual fund that holds both stocks and bonds. Since I recommend holding stocks and probably some bonds, this may sound like a good idea. But frankly, I don’t like it.
If you invest in a balanced fund, the fund manager is deciding on any given day what the split between stocks and bonds will be. I think that is a very important decision that should be made based on your personal circumstances, most importantly your tolerance for risk. I’d rather see you make that decision. I’m perfectly comfortable with letting someone else pick specific stocks, but not how much risk you can take on and still sleep nights.
The other objection I have is that the typical fund manager will swing the mix back and forth. Today he may prefer stocks, but tomorrow he will prefer bonds. The record shows that not too many managers are good at figuring out when to switch back and forth, so the manager is probably not adding value. But you need a good mix of stocks and bonds as part of your diversification to reduce risk. The fund manager may be working against your goals, without even knowing it.
This came home to me as an employee who wanted some bonds in my 401k. At the time, the company I worked for did not have an all-bond offering, so I bought the balanced fund. When I purchased the balanced fund, its most-recent report showed that 40 percent of its assets were invested in bonds. Taking that into account, I bought enough of the balanced fund to get the bond holding that I wanted. Six months later, I was wondering why the balanced fund had done so poorly. It turned out that the fund manager had sold a good deal of bonds in order to invest more in stocks. Then the stock market took a dive. I had sought bonds to protect myself from a drop in the stock market, but the fund manager thwarted my diversification efforts. Don’t let that happen to you.
Bill Says: Skip balanced funds. Instead, create and control your own balance by purchasing both stock funds and bond funds.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
» Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
Lesson 9: Your 401k, Your Other Assets, and Your Life
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