 Personal Finance PowerPoint Presentation. Balanced funds. Prepare to get financially fit by practicing personal finance. Most of this information comes from the Vanguard website, which you can find online at investor.vanguard.com. In prior presentations, we've been taking a look at investment goals, strategies, tools, keeping in mind the two major categories of investments, that being the fixed income, typically the bonds and the equities, typically the common stock. Also keeping in mind tools we might be using such as mutual funds, ETFs, possibly to help us diversify with a less of an investment upfront to do so. Then if we were to invest in say individual stocks, individual bonds, we've been drilling down here on the different types of mutual funds. Here's a quick recap of some categories of mutual funds. We've got the money market funds. We've talked about in prior presentations. Bond funds. We've talked about in prior presentation. The balanced funds. That's the one we're going to take a look at now. Stock funds. We'll take a look at the future international funds and the sector and specialty funds. Remember that when we are investing as an individual, we might be thinking then should I invest in individual stocks and bonds or use a tool such as mutual funds and ETFs. Most of the time investors will often be using tools such as mutual funds and ETFs. Once using mutual funds and ETFs, we then want to think how specific do I want to get? Do I want to have one mutual fund, for example, that can possibly give me the balance I'm looking for, which would be the easiest thing to do and just try to invest in one mutual fund and have the diversification within that fund. Or do I want to say break out multiple different types of mutual funds, possibly have mutual funds or ETFs related to stocks and some related to say bonds, for example, and then get more specific within the realm of stocks and bonds, which gives me a little bit more flexibility to invest differently than one overall fund, but also of course adds to a level of complexity. Also keep in mind that we want to think do I want to put my money in index funds, which are trying to follow a specific index and therefore usually have less management cost for the fund managers or do I want to have more active management funds, allowing the managers more capacity to pick and choose things, possibly getting a bigger return if they're a good manager, but then also it's going to have higher fees. So the question is, can they really beat the market in the long term? Also note that when you're putting money into an IRA or 401K, you're putting them under kind of an umbrella of a tax benefit kind of format. And I would generally think that normally you would have something like a mutual fund or ETF that is just basically under the umbrella of like an IRA or 401K plan. So remember those things aren't really different or separate. It's just taking an overall investment, which is similar to what you would invest in outside of an IRA or a 401K plan and then putting them under that umbrella restricting yourself because you can't take the money out as easily in order or in exchange for a tax benefit, which has its own implications. So now we're going to be diving into the balanced funds. So look to balance funds for a mix of income and growth potential in a single fund. So the easiest thing we can do if we're saying, hey, look, I'm a really hands-off investor. I don't want to stress myself out. I just want to have as much diversification as I can with low interaction where you can just get a balanced fund generally and try to get a balanced fund that basically gets you well balanced between stocks and bonds and possibly one that can even vary or change in accordance to how close you are with your goals such as retirement so that they can basically take the steps and give the industry practice averages on what would be the best averages for just general industry practice, which might be a good way to go. You have less capacity than to vary from that strategy that way, but that could be an attempt to get a good attempt to get some balance in there with ease with one fund. So these funds have a varying degree of risk based on the percentage of stocks and bonds in the portfolio. So notice we're talking about a bond fund. We could think of funds that have pools of different stocks in different areas, but we could also think about funds that have both bonds and stocks within the fund. So some maintain a steady asset allocation. Others gradually become more conservative over time. So in other words, you might select a fund that's going to allocate between bonds and stocks at some fixed interval or in oftentimes, especially when you're looking at funds that are going for retirement that might be under the umbrella of an IRA or 401K plan for example, the target might be retirement age and usually as your time horizon gets shorter, the general thought process would be as we've discussed in the past that you would want to reallocate your investments to those which are going to be more income generated and more stable, less risk as you get closer to the target. When you're further away from the target, you might be willing to take on more risk risk in exchange for growth over a long period of time. So you could actually select a fund that's targeted common type of strategy for retirement funds, especially those under the umbrella of an IRA or 401K or some kind of retirement plan that's going to adjust the mix as you get closer and closer to that target. So what are multi-asset or balanced funds? 96% of our, that's just being from Vanguard, low-cost balanced funds perform better than their peer group averages over the past 10 years. Okay, Vanguard, stop your bragging here. You can get the general idea here. You can apply it to not just Vanguard. But in any case, get a mix of stocks and bonds in one fund. Combine the potential for income and growth. Balance mutual funds invest in both bonds, which focus primarily on income and stocks, which aim for investment growth. So we're trying to get both sides of our investment strategy. And remember that when you actually invest, if you're looking at like the stock growth and the bond growth, then there's concept of diversification, which is the key to almost any financial planner worth their salt that's any good. It's going to somehow say diversification. If you hear them talking on stock channels like Bloomberg where they're discussing, you know, their stock portfolios, investment strategy, they got 100 different words to get back to just basically diversification. But when you're looking at the play between the stocks and bonds, it is more difficult to do. Because remember that if you're in a situation where stocks are going up and bonds, for example, are staying quite steady, especially if the interest rates are quite low, you're going to be thinking the bonds are actually losing me money. I want to put my money in the stocks. And you might be tempted to take your money out of the bonds and put them into the stocks. But then, of course, when the stocks go down, then now you're in a situation where you're saying, I'm getting killed on the stocks, the stock market's going down. And then you'll be tempted to take your money out of the stocks and put them into the bonds possibly, or you might get totally discouraged and just take out the cash entirely, which is again, is usually the worst strategy because now the whole point of having diversification over a long point is that you don't know what's going to happen in the future. And so whether the market goes up or down, we're trying to balance it in such a way that we're hedging against that activity. If you put your money into one fund that has both the bonds and the equities in it, it can kind of help you sometimes to basically say, I'm going to let it ride on that instead of agonizing when you look at them separately each time you're going to be agonizing one way or the other. Like, I should be having my money in stocks or I'm getting killed on stocks and I should have them in bonds depending on what the market is doing. And if you're making your decisions based on fear and reacting to the market, you're usually going to be at the wrong end of the trade. So add stability to your portfolio. The bond portion of the fund helps offset the risks associated with the stock portion providing you with a quote balanced and quote investment. Automatically maintain your asset mix so you never have to rebalance a balanced fund. It's done for you automatically. So that's the ease of it. You can't have any control over that balancing, but they're balancing it in accordance with the general industry best practices that have been put in place over time. So that could be good. Then if you're an investor that's just saying, hey, I want to do the industry best practices. If you want more leeway, more capacity to do what you want to do, then you might use multiple mutual funds. For example, they give you more capacity or possibly have a mix of mutual funds and individual investments if you want to invest in individual stocks because you feel that would be a way to go. So some funds maintain a set asset mix while others grow more conservative over time. So spread out your exposure to risk by potentially holding hundreds, sometimes thousands of bonds and stocks in a single balanced fund. And you get more diversification than you would buy an individual bonds or stocks. So we know this is the case with mutual funds in general. That's the goal. We want diversification. The question is what's the strategy we're going to use to do it? Usually we're not going to buy all stocks and bonds only as an individual investor because that would be too costly and cost a lot in terms of transaction fees. Therefore we use tools like mutual funds and ETFs oftentimes. And then the question is do I want one mutual fund or ETF that's going to help me to diversify or do I want to have multiple funds? Do I want to use index funds or do I want to use active managers? Do I think the active managers can beat the market or do I think that I want to just bet on the market over a long run? So how to choose a balanced fund? Picking a Vanguard balance fund generally depends on whether you're investing for a specific goal like retirement or you have another goal in mind. So oftentimes people are thinking retirement, but you might have another goal like saving for college or something like that. So target retirement funds. If you're investing for retirement, you can get a complete portfolio in a single fund with a Vanguard target retirement fund. So this would just be the easiest way to go, right? You're going to say I'm going to just rebalance my portfolio on a targeted fund. I'm going to tell them what my retirement date is and they're just going to rebalance that thing up until I get closer to retirement and that's the way it's going to be. So simply choose a fund based on the date you plan to retire or your current age and the fund will gradually grow more conservative the closer you get to retirement and that's generally what you want. Why is it doing that? Because that's usually what you want, right? As you get to retirement, you want to have less risky stuff usually because you don't want to have a downturn or recession right before you hit retirement that just devastates your portfolio. Whereas if that happens earlier and you still have 15 years or whatever to recover from it then you probably still may come out ahead of things if you have a balance that will take into consideration more risk at that time horizon. So see which target retirement fund fits your timeline. You got the lifestyle fund, life strategy funds. So if you prefer a fund that maintains a set of asset mix a life strategy fund can help you reach other financial goals match your risk tolerance to a life strategy fund. Traditional balance funds index and actively managed. So remember we got the difference between this index and actively managed. Actively managed means you're giving more leeway to a manager. That means you're trusting that the manager thinks they can beat the market. These are fairly highly paid managed so it's going to cost to do that so you can have expenses related to it to think that they're going to beat the market or you're going to say, you know, just give me the low cost and just bet on the index, bet on the average rather than the betting on an investor who's going to be a genius that's going to beat the market. So that's the question you got to consider. So if you'd like a set allocation based on the level of risk you're comfortable with choose from a variety of traditional index or actively managed balance funds. Many people start with a core portfolio of index funds and then actively managed funds for certain segments. And that's not a bad strategy, right? You might say, hey, look, I'm just going to get my index funds as the broad base. And then if I really find an actively managed fund because in my opinion, you're going to have to find someone that's good to actually beat the index or beat the market because I tend to think that the markets are fairly efficient. So then you might then tack on after you've got your ground base and say, I think this particular fund for whatever reason is quite good for whatever reason actively managed and then maybe tack that on to your strategy. In any case, index mutual funds and ETFs. So you have a chance to keep pace with market returns because index funds try to mirror certain market segments. So when you look at the index funds, these are kind of like averages. We're trying to get an idea of what the opinion is of a segment of a population. We're going to take the opinion of a group of people. So that's a similar kind of thing with the index funds. We're going to try to group these companies together that are in a particular sector to try to get an idea of the sector as a whole. And then we can invest on those particular averages in essence. And so that's going to take the control away from the money from the fund manager and hopefully cost less. But not all index funds are created equal, actively managed mutual funds. So that's the one where the manager is going to be more involved in picking and choosing. You're uncuffing their hands. You're letting them pick and choose what they think is going to be the best way to do it. And you're going to pay them to do that. It's going to cost more typically. Or you can try to beat market returns with investment handpicked by professional managers. So when we say beat market returns, obviously you would think that the actively managed funds, the fund managers can have to justify their salary by saying that they're beating, in essence, the index, the average. And they have to beat it in such enough that they are paying for their cost of them doing that, their salary. So you may be surprised by our active funds performance. So you can check those out.