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What You Need is a Balanced Fund

I have spoken with a few co-workers about how they are being told to buy when they drop by their bank to top up their RRSP’s for this year, and to no surprise every one was advised that what they should do is buy the Bank’s “Balanced” Mutual Fund just to be safe. One or two of them got told to buy a 5 year GIC as well, which also caused me to chuckle but let’s stay focused on the concept of a Balanced Mutual Fund.

Our friend Rob Carrick has already written about Lousy Balanced Funds  and the Globe and Mail has also written about Seeking some Balance in Balanced Funds and you should read both of those articles if you are even thinking about buying a “Balanced” Mutual Fund or ETF.

Balanced in What Way?
Balanced in What Way?

Just a cursory investigation gives you the following 4 “Balanced Funds” that are available:

And there are countless other “Balanced Funds” out there, which are balanced between many different axes (Equities, Bonds, GICs, etc.,). Note the MER’s on the funds I have found, pretty astronomical, aren’t they? But if it is a balanced fund it shouldn’t be going down or up a great deal, shouldn’t it? So you’ll get lower growth and a higher MER? This seems an odd pairing.

At my retirement seminar an actual Financial Planner dubbed the “Balanced” Mutual Fund as the worst choice mutual fund, which almost caused me to spit my coffee out (since he sells Mutual Funds). His points were quite valid:

  • If you want a “Balanced” portfolio why don’t you just spread out the funds you are buying instead of trying to get it all in one fund?
  • If it’s all in one fund, you can’t take your profits on the well performing part of the fund can you? You must sell the entire mutual fund unit (not just the part that went up 10% this year), which is a function of Mutual Funds in General, but if you had bought a group of Index Funds or ETFs, you’d have that option, wouldn’t you?
  • Even he commented on the MER for most funds as well

The other funny comment he made was that the standard procedure is to have folks fill in a “Questionnaire” attempting to figure out what kind of investor they are, but it is interesting how many folks end up being pitched “Balanced” funds because of their questionnaire answers.

What Can You Do?

If you want a Balanced set of investments, figure out what “Balanced” means to you and talk to someone who knows ETF, Index Funds and other investment concepts, and create your own Balanced  plan. The other interesting point is, no one ever asks for your RRSP planning if you have a pension or not (most folks don’t, but if you do have one, it really does change the equation drastically).

How many folks really even know what the “Balanced” means in their Mutual fund name? Have you filled in a Questionnaire and not been told you need a “Balanced” fund?

Feel Free to Comment

  1. There are some low MER balanced funds. The Mawer Balanced Fund is at .98%. But I’m sure you’re right that most Balanced Funds are not being sold to meet the needs and goals of the investors. I also dislike those risk surveys. Their sole purpose seems to be to cover their butts in case of future disputes.

    1. In some ways that is how the questionnaires seem to work and they give the customer a (false) sense that the person selling them investments actually cares about them.

  2. Balanced for the most part means 50% equity/50% fixed income although the fund may deviate from that slightly. Usually the equity holdings will be in large cap companies and fixed income in low yielding government bonds.

    Funny you mention the questionnaire, because I feel that is the problem with them. They don’t bring out the investors real feelings about risk. Instead, it feels like they are answering questions and not giving it much thought. An open conversation about their past investing experience will lead to a much better idea of a person’s risk tolerance than a questionnaire.

    1. It might, asking if they have a pension might help. In your conversation would you include whether you make Money on selling specific funds and such? I think the other thing many investors really need to understand is how the MER is calculated and who makes money off them buying their Mutual Fund(s).

      1. One could make a strong case for that fund, both from the mix of bonds/index/international, and from the low MER. But as BCM notes, you lose the flexibility of having everything seperate.

        Except, now I want to ask, what do you need the flexibility for? It’s needed so you can rebalance, but I would expect that the balanced fund does that automatically anyway. If you’re doing a passive strategy, I don’t know what else you need access to moving money around between different asset classes for anyway other than rebalancing. Having them auto-rebalance one’s portfolio seems like a better idea anyway.

        I could stand to be schooled on this though :).

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