Here's a sure sign of haphazard investing: Multiple balanced funds in the same portfolio.
Balanced funds are hugely popular because they're a sound, simple portfolio-building solution. Investors and advisers like balanced funds so much they sometimes seem to be working under the principle that if one these products is good, a bunch must be better.
But teaming up multiple balanced funds can actually work against you. All balanced funds are basically a portfolio in a box, which is to say they blend bonds and domestic and global stocks to varying extents. When you combine several different balanced funds, you're basically mashing several different diversified portfolios together in a way that makes it hard to figure out what your overall asset mix actually is.
The most basic aspect of diversification is the proportion of stocks, bonds and cash in a portfolio. With a single balanced fund, you can simply look up a fund profile on Globeinvestor.com to see a recent portfolio breakdown. With multiple funds, the job becomes much more complex. You need to look up each fund and then figure out how much influence it has on your aggregate portfolio holdings. If you have half your holdings in a balanced fund with a 50-50 mix and the rest in a fund with 70-30 mix in favour of stocks, what's your total stock-bond breakdown? The answer is 60 per cent in stocks and 40 per cent in bonds.
Even more challenging is figuring out your exposure to individual stocks and sectors. You don't want to own multiple balanced funds that, for example, are loaded with defensive stocks like utilities and consumer staples. But this could easily happen if you own a couple of conservative balanced funds.
I've seen dozens of investor portfolios over the years and an excess of balanced funds is one of the more common problems. At least half these portfolios were created by advisers, which reminds us that the term adviser is an imprecise one that can encompass both true providers of advice and investment sales people.
If you've got a portfolio build on multiple balanced mutual funds or exchange-traded funds, pare it down to one or maybe two. Among the factors to focus on are:
- Fees: Some fund companies take advantage of investor loyalty to balanced funds by keeping fees high
- Diversification: Balanced funds come in a variety of stock-bond mixes - find one that offers the blend that suits you
- Returns: Look for consistency rather than boom-bust cycles
- Risk: Check out the fund's performance in the down years of 2008 and 2011.