 Personal Finance PowerPoint Presentation Balanced Fund Prepare to get financially fit by practicing Personal Finance Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category, further broken out by course each course then organized in a logical, reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information comes from Investopedia Balanced Fund which you can find online. Take a look at the references, resources continue your research from there. This is by James Chen updated June 11, 2022 in prior presentations we've been taking a look at investment goals, strategies, tools keeping in mind the two major categories of investments that typically being the fixed income usually the bonds, the equities, typically the common stock also thinking about tools we might be using helping us to invest like mutual funds like ETFs which possibly could help us to diversify with less of an initial upfront investment other than or as opposed to investing in individual stocks individual bonds. Keeping that in mind we're now asking what is a balanced fund? A balanced fund is a mutual fund that typically contains a component of stocks and bonds. Mutual fund is a basket of securities in which investors can purchase. So remember when we're investing as an individual investor we might be putting money into individual stocks and bonds but that can be difficult and expensive hard to diversify with therefore we might be using tools such as mutual funds and ETFs pooling our money together with other investors and then the fund manager using that pooled money to invest in a broader basket of funds allowing us the diversification which is great. So typical balanced funds stick to a fixed asset allocation of stocks and bonds such as 70 stocks and 30 on the bonds. So if we're picking one mutual fund so note that we could then use the strategy of having one mutual fund that is going to be widely diversified in stocks and bonds and hopefully diversified within stocks and bonds as our investment strategy that's a nice easy investment strategy to use if you're investing in say using an IRA or like a 401k plan often times they're using the tools of this kind of like a mutual fund and then putting it under I would look at it as an umbrella of the retirement plan which has tax consequences to it. So note that the underlying tool basically is a mutual fund typically even though it's under an umbrella which has tax consequences when you're thinking about an IRA or 401k plan. So we could also use another strategy of using multiple mutual funds that give us more capacity to have specialized investments in particular areas segments for example or more allocated to bonds than stocks or we might use this kind of balanced fund strategy as our overall fund our main fund and then maybe we have more heavily weight towards bonds or stocks or whatever we want to do with other funds using them kind of on the side and using that would be like a satellite kind of approach they've often called it. So bonds or debt instruments that usually pay a stable fixed rate of return so bonds to that fixed income side of things not as exciting not as much movement going on but usually more dependable and reliable. The investment objective for a balanced mutual fund tends to be a mixture of growth and income so if you're on the stock side of things then the question is well there's a lot of stocks out there how are we going to be categorizing the investments on the stock side we could have you know growth funds index funds what are the market cap funds are we just in the U.S. stocks what are the sectors we're in do we have foreign stocks and so on. So again it's still a wide area of investment when we're trying to get like a wide fund that's going to be covering a bunch of different things. So which leads to balanced nature of the fund balanced mutual funds are geared towards investors who are looking for a mixture of safety income and modest capital appreciation understanding balanced funds a balanced fund is a type of hybrid fund which is an investment fund characterized by its diversification of among two or more asset classes the amounts of the fund invests into each asset class usually must remain within a set minimum and maximum value so you're not given complete leeway to the fund manager to invest a lot more in one type or another like bonds versus stocks for example they're usually going to be set within the constraints of the bond of the fund another name for a balanced fund is an asset allocation fund balance fund portfolios do not materially change their asset mix unlike life cycle funds which adjust the holding to lower the risk as an investor's retirement date approaches so remember when you're looking at these different funds you want to have a fixed allocation that you're going to be going across or are you looking for a targeted goal where the allocation will change as you get closer to that target because remember from a general theory standpoint then you're going to be taken into consideration your time horizon and your risk tolerance level to determine the appropriate mix or the amount of risk related to the things that you're going to be investing in so balance funds also differ from actively managed funds which may involve in response to the investors changing risk return appetite or overall investment market conditions so the other things we want to be considering is are we investing in a balance fund that's basically tied to indexes in some way reducing the capacity for active management which will typically be cheaper or do we want to have some kind of active management within the constraints of the fund terms elements of a balance fund portfolio retirees or investors with low risk tolerance can utilize balance funds for healthy growth and supplemental income the elements of balance funds include a mixture of stocks and bonds so it's a nice way to get that mix between the stocks and bonds with one particular fund equity component the equity component helps to prevent erosion of purchasing power and ensure the long-term preservation of retirement nest eggs so we want to hold on to that nest egg and hopefully be generating revenue from it within retirement the equity holdings of a balance fund lean towards large equities such as the ones found in the S&P 500 index which contains 500 of the largest publicly traded companies in the United States so note that if you're having a more kind of conservative type of investment strategy you typically are gonna want the money and to like the bigger companies because those are the ones that are less likely to have a huge dip they're gonna be more stable so for example if you're in retirement for example you might be looking for a fund that still has a mix between stocks and bonds but you're looking to hold on to the nest egg and live off the earnings of it so you might want the larger companies that are being paying dividends in it and of course the bonds which could be paying out the interest for the fixed income so balance funds may also include dividend paying companies dividends are cash payments made by companies to their shareholders as a reward for owning their stocks so if we're in say retirement for example we're living off of our nest egg the earnings of it hopefully which when you're thinking about equity investments stocks would be dividends note dividends are kind of like draws for a sole proprietorship or a partnership where the company where the owner takes the money out for personal use but in a corporation then you can't have one stock having different dividends than the other stocks they have to be uniform therefore the dividend distribution is determined not by an individual stockholder but by the company board of directions or management and or management and therefore the dividend policy is determined there just like with the dividends in terms of a sole proprietorship or partnership the question is do you want to take the money out and use it personally or invest it elsewhere or do you want to reinvest it in the company and then by property planting equipment hopefully to generate growth in the future companies that are growing typically reinvest the dividends often time and hopefully they use it efficiently which will increase the value of the company which will be reflected in the stock price which will be good for us companies that are more established the larger companies already have their infrastructure in place and might be more likely to be paying out the dividends those are the companies that might be good for people in retirement that are living off the income from the investment so companies that consistently pay dividends over the long term tend to be well established and profitable bond component so the bond component of a balance fund serves two purposes we got number one create an income component to them often times by annual or semi-annual interest payments for example two tempers portfolio volatility which is the price fluctuations from the equity components so even though we might be in more stable equities like the big companies there's still going to be more flexibility more ups and downs then with the fixed income such as the bonds to the bonds act to stabilize us to some degree so investment grade bonds such as a corporate debt and U.S. Treasury provide interest income through a semi-annual payments while large companies stock offer quarterly dividend payouts to enhance yield also rather than invest distributions retired investors may receive cash to bolster their income from pensions personal savings and government subsidies so while they trade daily highly highly graded bonds companies don't usually experience while price swings that equities may experience so you can still trade the bonds obviously but they're still not going to have those big swings typically because of the nature of the underlying investment as a result the stability of the fixed interest securities prevents while jumps in the share price of a balanced mutual fund also debt securities prices do not move and lock step with stocks and can move in the opposite direction so in other words a lot of things that impact the market negatively say for the stock market as a whole therefore diversification in the stock market would still lead to a decline in the portfolio might not have the same impact on the debt side of things often times they're opposite but not always so you would think that when stocks go down maybe the bonds are doing better at that point in time you could have some times when something happens in the market where the stocks and the bonds go down and value but you would think that the bonds would be hit a lot less severely than the stocks which might fluctuate more severely so still being a bit of a safe haven or a bit of a hedge on the bonds so this bond stability provides balanced funds with bullish further smoothing out its portfolio investment return over time advantages of balanced funds because balanced funds rarely have to change their mix of stocks and bonds they tend to have lower total expense ratios so they're cheaper in terms of your management fees in general which represent the cost of the fund moreover because they automatically spread and investors money across a variety of types of stocks market risk is minimized if certain stocks or sectors underperform so you've got that diversification which is nice finally balanced funds allow investors to withdraw money periodically without upsetting the asset allocation so now when you draw money out of your balance fund then it's not going to mess up your allocation whereas if you invested in multiple different say index funds for example or multiple different companies and you've carefully balanced what you think is the optimal balance between stocks and bonds and different sectors if you need to pull the money out you need to sell something then that's going to mess up and you'll have to rebalance you'll have to rebalance in some way or also if you've got your money in different index funds once some of them might perform differently some might outperform stocks might outperform the bonds for example leading to you having more heavy weight in the stocks then in the bonds over time and then you would have to rebalance them whereas if you're in a balanced fund you would think the fund would typically be balancing in accordance with the terms of the fund basically which could be a little bit more hands-off a little bit easier to do so pros diversified constantly rebalance portfolio low expense ratio like that I like both of those less volatility that's good low risk okay good stuff cons fixed asset allocation so that could be thought of as a con because you might say hey look I want a different asset allocation at particular times which means you might do that by saying I want something like this as my investment strategy and then maybe in my projections about what's happening if I think a certain sector is going to do good or I want to put my money in high cap or low cap or something or weight my investments differently put more money in bonds than stocks maybe then I buy other index funds on top of it to rebalance that's going to be like that satellite kind of approach this is your core thing you've got other littler investments that are going to reweight your portfolio in accordance to whatever the whims that you think your genius moves are going to be to rebalance in a better way so unsuited for tax shielding strategies so they the the usual suspects investments so you can invest in the typical kind of things that a lot of people are investing in possibly a safe but stodgy returns safe but stodgy returns so disadvantages of balance funds on the downside the fund controls the asset allocation not the investor which might not match an investor's tax planning strategy so if you've got your money into a particular fund it's going to have to invest in accordance to that fund and therefore you don't have as much control over the balancing components again you can deal with that in a couple different ways you could still use it and then have it like other funds that you're trying to weight more heavily in for example for example many investors prefer to keep income producing securities in tax accounts and growth stocks in taxable ones but you can't separate the two in a balanced fund so when you think about the tax component to it if you if you're getting like if you're getting paid the dividends and you're getting paid the the interest and you're not living on those types of things because because you're not in retirement for example you don't need those you just want to invest those at this point in time because you're trying to save then it might be nice to have those components under the umbrella of say a retirement account or an IRA because you might be able to defer the tax to a later point when you draw the money out whereas if you have the money that's the types of investments and like smaller cap stuff that is going to not be paying you a dividend but hopefully it's going to grow through simply the the reinvesting of their earnings to to have a higher a higher stock price that you can sell in the future then you're not realizing the gain on those and therefore you might want those types of investments to be the ones that are outside of your retirement account because they're not they're not going to be triggering income as they are growing as they would if they were distributing dividends or interest but if you've got one fund that's balanced through both of them then you can't you can't do that more complex like tax planning that kind of planning by the way is probably going to have a more significant impact if you've got a significant investment you got a pretty good deal of money invested so that that dividends and the and the interest is are going to have a a higher impact on your tax on your taxes if your investment is fairly small then you might it might not be as big a concern for you so it's probably going to be lined up to your income level also investors can't use a bond laddering strategy buying bonds with staggered maturity dates so one component if you're buying individual bonds is to try to stagger the maturity dates of the bonds when you buy them so they become due at separate points in time and then you're buying them at different levels of interest rates when you stagger them so you can have a similar method that you might use it if you're investing in like certificates of deposits or something like that another strategy that you can use so this to adjust cash flows and repayment of principal according to their financial situation so the characteristic allocation of a balance fund usually 60% equities 40 bonds may not always suit and investors financial goals since needs and preferences can change over time so clearly you got this allocation of 60 40 that's a generic allocation possibly that's a great allocation for the general purposes over a long period of time but you might think that you want different allocations at certain point in times which you might be able to rebalance that kind of allocation by using other funds using that fund as your core fund using other funds to say balance a little bit more in bonds possibly by having another index fund specifically in in bonds that you can kind of rebalance with if you want to do something like that some balance funds play play it too safe avoiding international or outside the mainstream markets so which can which can hobble their returns so you also got to think about well is my fund suitably diversified in my to my taste within the US versus outside the US for example and again if it's not you might be able to kind of change that a bit by using still using it and then maybe using another fund that's allocated to some foreign that you think would be good for balancing your portfolio as a total so real world example of balance fund you got the vanguard balance index fund and moral shares that's the BBIAX has a below average risk rating from morning star with an above average reward profile the funds allocation consists of 60% stocks 40% bonds over the past 10 years as of April 30th, 2022 the fund has returned 3.73% annually the vanguard balance index fund and moral share has an expense ratio of 0.07 and a $3,000 minimum investment amount