Looking For Balance

Ever since last year’s market crash, stories abound as to how investors can avoid getting slaughtered again. The WSJ (sorry, no link available) featured brokers promoting managed-futures funds, which returned some 14.1% last year, while other strategies took a dive.

Kiplinger published an article titled “Balanced Fund Take The Edge Off Stocks,” which makes the case for the use of balanced funds:

There’s a Wall Street adage that says the only thing that goes up in a bear market is correlation. That certainly held up last autumn. Everything that didn’t have “Treasury” in its name took a tumble in late 2008, including most bond classes. Still, funds that invest in a combination of stocks and bonds managed to do their job of mitigating losses.

I obviously disagree with that statement; but you certainly will never find anyone tied into main stream media admitting that being totally out of the market would have been a far more preferable option. Remember, investors have to be the proverbial hamster on a wheel by always being invested in the market, no matter how inappropriate that might be, so that someone can collect fees/commissions.

The average fund in Morningstar’s “moderate allocation” category, which includes funds that invest 50% to 70% of their assets in stocks, lost 28.0% in 2008. That’s no treat for investors, but at least it was far better than the 37.0% loss for Standard & Poor’s 500-stock index.

A balanced fund might be the ticket if you want to move into stocks but are worried that the market could surrender some of its recent gains. Another benefit of going balanced? Because most balanced funds stay close to a set asset allocation-such as 60% in stocks and 40% in bonds-managers must pare stock holdings when shares enjoy big runs and are forced to buy more stocks when the market falls. In other words, buying low and selling high is built into the DNA of balanced funds.

Sure, having lost “only” 28% vs. 37% is a better performance, but still not as desirable as having been on the sidelines.

To my way of thinking, balanced funds are appropriate for conservative investors and are suitable with trend tracking as well. You will not have the upside potential, but you may also avoid a whip-saw signal when the markets correct temporarily. Nevertheless, having the mindset that these type of funds can be held, no matter what market conditions are, has proven not to be the answer when the bear strikes.

It doesn’t matter what kind of equity funds/ETFs you invest in, only a disciplined exit strategy will help you avoid portfolio destruction.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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