Are Balanced Funds Really Balanced?

After the stock market crash of the late 90's many experts called balanced funds the saviors of retirement planning and the 401k world.   These funds are also referred to as age based, target, and "set and forget it funds."    Although they have a lot of strong qualities and their internal strategy is ideal for a goal oriented portfolio, they are not the saviors of the retirement plans in the world! 

These funds break up the pie in the various flavors of stocks and bonds, and then rebalance automatically according to the funds objective.  

Most of these funds have done better than the overall stock market in the last couple of years, because they are not 100% invested in stocks. There is always at least 10% -20% of the fund in bonds/fixed.

Make certain that you have a financial plan, and an investment strategy!

The Advantages:

Diversification.   The funds are made of up of both stocks and bonds which have historically had an inverse relationship with one another. In other words when one goes up, then the other goes down. That is what diversification is all about! 

Rebalancing.  Many people fail to see the real value in rebalancing because it is counter-intuitive. Why sell investments that are doing well? Because that party will not last, and rebalancing smoothes out the ride and leads to less volatility which lead to higher compound rate of return. These funds will rebalance for you.

The Disadvantages:

They lead to buy and go to sleep syndrome. The "set it and forget" mentality lead to just that, forgetting about tracking what's going in the market and not being able to anticipate bubbles.  

Expenses. These funds can be expensive due to their one stop shopping features, and one could easily re-balance themselves with an ETF's or Index funds and save themselves at least 1% in fees.   

Worst Funds.  Many of the underlying funds that are used in these "funds of funds" are the worst funds in the family.   Not all mutual funds families do this, but some of the bigger ones do. 

In summary, these funds are OK and in fact at a cocktail party as an off the cuff recommendation, I would recommend them, but that's where it ends!   I feel strongly that real Investor balance can only be achieved through, having a goal oriented portfolio that implements this same type of strategy, and a discretionary portfolio that is forward looking and paying attention to what is to come in the markets and the economy!