The case against balanced funds

Though balanced funds are extremely popular with Canadian investors, we see little appeal in these investment products. A better fund strategy is to create your own balanced fund by selecting stock funds and fixed-income products according to your own needs.

Balanced funds command nearly 50 per cent of all assets Canadians hold in mutual funds. That’s up from about 15 per cent just over a decade ago.

But we see little reason to be part of the crowd. A better solution is available for any investor willing to put in a small amount of time.

You’ll likely save money and enhance your control over your asset allocation by effectively creating your own balanced fund. All you need do is invest in some stock funds and some bond funds. Indeed, most fund companies offer stock funds similar to the stock portion of their balanced funds. And the same goes for bond funds with respect to the bond portion of their balanced funds.

What’s more, because of the nature of the bond market, you can invest in ultra low-cost bond funds and significantly reduce your overall management expense ratio.

Cut costs with bond ETFs

Exchange-traded bond funds offer you bond exposure with minimal cost. And with some of these products, you can feel confident you’ll know exactly what will be in them at any given time, such as those that ladder their maturities over a one- to five-year period.

Managed bond funds, on the other hand, are generally too expensive. And that’s especially true with interest rates as low as they are now.

The real bonus from creating your own balanced fund, however, lies in the added control it affords you. By holding your investments in these two assets classes — equities and fixed income — separately, you can adjust your asset mix yourself.

If you’d like to add some equity exposure at a time when prices are down and risk has been reduced, simply add to your stock funds. If, on the other hand, you’d like to raise some cash by reducing your exposure to equities, you can.

You simply don’t have this kind of control when you hold balanced funds.

Or, take complete control

You can, of course, increase your control further by owning fixed-income securities (bonds, stripped coupons, mortgages, GICs, etc.) directly. That way, you can invest in securities that mature when you need the cash. That’s something you generally can’t do with bond exchange traded funds or managed bond funds.

We can think of only two reasons to invest in balanced funds. First, it’s the ultimate in simplicity. But for that convenience, you’ll pay.

Second, balanced funds appear to offer professional judgment on allocation between stock and bond investing. But we consider that decision a highly personal one. And your balanced-fund manager doesn’t even know you.

Create your own balanced fund. It’s cheaper and better.
Commandment 11

It’s an over-simplification to say the stock market runs on fear and greed. After all, envy enters into it as well.

In fact, a special version of envy — fear of missing out — seems to figure in all major stock-market losses. By nature, we all feel an urge to get in on anything that has enriched our friends and neighbors. Trouble is, envy only strikes after the big profits have been made — after the balance has shifted so that risk outweighs potential reward. In short, envy clouds your judgement when you need judgement most.

In the long run, the most successful investors are those who observe what we’d call an eleventh commandment, for investors only: Thou shalt not covet thy neighbor’s profit.



Canadian Mutual Fund Adviser, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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