'Balanced' is no longer a certainty
Want a no-brainer approach to investing as you try to survive this stressful stock market? It generally has been simple to get the job done with a single fund - a good, old-fashioned balanced fund.
Want a no-brainer approach to investing as you try to survive this stressful stock market?
It generally has been simple to get the job done with a single fund - a good, old-fashioned balanced fund.
These funds have been a solution for the person who wants one-stop mutual fund shopping - who doesn't want to choose between stocks and bonds. The idea is to stay put in the stock market, even during times of stress, by choosing a fund that invests about 60 percent of your money in stocks and 40 percent in bonds.
That heavy bond allocation tends to take the sting out of an awful bear market, a period when stocks fall 20 percent or more. You still have losses when the market is down, but they tend to be relatively mild and allow you to recover faster and start making money again.
During the last bear market, between 2000 and 2002, balanced funds worked well. If you had $10,000 in a balanced fund with that allocation just before the market downturn, you would have had about $8,000 remaining at the low point, according to Ibbotson Associates Inc.
By the beginning of 2004, you would have recovered and had your original $10,000 back, according to the Ibbotson data. And by the end of August this year, you would have had roughly $12,500 - simply from leaving your $8,000 in the market during the worst of the bear market.
That is definitely not making a killing in the market, but it beats stocks alone. With $10,000 invested in only the stock market at the beginning of 2000, your investment would have eroded in the bear market to about $5,700, according to Ibbotson. And you would not have recovered all you lost until October 2006 - almost two years longer than in a balanced fund.
In fact, now, after taking another thrashing in the most recent bear market, the $10,000 investment you made in the stock market in 2000 would be worth only about $10,000 now. Despite all the ups and downs in the market over eight years, you ended up right back where you started.
Clearly, as a black cloud hangs over the stock market, that makes a balanced fund seem like a simple solution.
But now, nothing in investing is easy, and investments that seemed fairly tame are not acting that way in this round of the stock market. In particular, some balanced funds are treating investors harshly rather than softening the blows of the stock market. Some balanced funds, such as BlackRock Core Principal and Alliance Bernstein Balanced, have lost as much as, or even more than, the stock market.
Generally, in the past, a person who did not want to put a lot of work into choosing a mutual fund could hunt for words such as
balanced
or
equity and income
on a fund in a 401(k) and choose it with the assurance they would have a moderately conservative fund of stocks and bonds. The 60 percent stock allocation and 40 percent bonds has been a classic in many of the funds - a portfolio regarded widely in the industry as moderately conservative, but with some growth potential.
But investors can no longer hunt through a 401(k) and figure that the fund they see marked
balanced
will deliver that classic portfolio or will 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.
Read more of Gail MarksJarvis' observations at