As you move through different stages of life, your investments need change. One of the most important financial changes is the gradual transition from a growth to an income focus as retirement approaches. Balanced funds, which invest in a mix of equities and fixed income securities, offer an opportunity for investors nearing retirement to change the mix of their growth and income assets. But not all balanced funds are the same, and what is appropriate for one investor might be a bad fit for another.
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Every investor is different with unique needs, circumstances and preferences—but how do you know what funds are best for you? In the case study which follows, we illustrate the fund selection process for an example investor, showcasing the measures every investor should take when selecting funds, and describing the three balanced funds that are a good fit for this example investor and three which the investor should avoid.
Case Study: Rick Stewart
Rick Stewart is 51 years old and expects to retire in 17-18 years. Rick is cautious by nature and looks to avoid whatever risks he can, though he also understands that some risks are necessary to achieve his financial goals.
He recognizes income is going to become more important for him as he ages, but wants to keep a growth component to his portfolio. Rick is also a bargain-hunter, never wanting to pay more than he has to for anything, whether it’s a new pair of shoes or a mutual fund.
He decides that it may be time to start shifting the balance of his retirement portfolio towards income-oriented investments and plans to sell off some of his higher-risk equities and replace them with balanced funds.
The funds that are best for Rick will provide a combination of the attributes that matter most to him: good income yield, while leaving room for growth, relatively low levels of risk, low fees, and consistent performance across both short and long time periods. Here are the three funds that we at Jemstep identify to be best three funds that match his preferences:
Rick Stewart’s Top Three Balanced Funds
These are from a pool of 691 balanced funds with a track record of at least five years.
As shown in the chart above, the three-year standard deviations for each of these funds range between 7.8% and 10.5%. Standard deviation is a widely-used measure of asset risk—the higher the standard deviation, the riskier the asset. This is about half the standard deviation for the broad equity market as represented here by the Vanguard S&P 500 index fund—which is important for risk-averse Rick.
These three funds are also competitive on other measures. The expense ratios are very competitive, appealing to the bargain hunter in Rick. They also have income yields of more than 2.5%, which is an important consideration in an environment where short-term market rates are zero and the 10-year US Treasury note yields around 1.5%.
Moreover, Rick should avoid the funds listed below. They all have rather poor performance measures on both a total return and risk-adjusted basis. More surprising still are the fees you would have to pay to own one of these laggards. Forward Growth charges a whopping 2.20% expense ratio, while its income yield is an underwhelming 0.72%. Pacific Advisors is even more egregious— a 3.13% expense ratio for the privilege of owning a volatile balanced fund with a yield barely over zero. Invesco Growth Allocation’s expense ratio is 1.89% and its yield is 0.02%. To add insult to injury, each of these funds comes with a sales load fee over 5%.
Three Worst Balanced Funds for Rick Stewart
Not all funds are created equal. When choosing a fund, what matters is what is best for you according to your individual needs and preferences. Don’t be fooled by generic ratings or by whatever your broker’s firm happens to be peddling this week. Do your due diligence and take care when selecting funds. As Rick’s choices above clearly show, the differences can be dramatic.
Jemstep Inc. is a free online investment guidance and management service that helps individual investors make better investment decisions and achieve their financial goals faster. Jemstep’s investment evaluations, based on patented technology and objective market data, are unbiased and transparent. Jemstep does not accept paid listings or sponsorships that influence its fund rankings in any way, nor does it factor subjective user reviews into the guidance it provides. A privately owned company with headquarters in the heart of Silicon Valley, Jemstep is a registered investment advisor under the rules and regulations of the U.S. Securities and Exchange Commission. To learn more, please visit www.jemstep.com. For a free, easy way and objective way to find the best investments for you, visit Jemstep.com.
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