Here are two questions that we will cover today.

“I’m relatively conservative and have stuck to the balanced fund concept for the last ten years. Balanced fund meaning 60 per cent stocks / 40 per cent bonds. I don’t have the expertise or the time to select hundreds of appropriate (for me) individual stocks and bonds, so I’ve always tried to buy low-cost (if I can) balanced mutual funds. My choices don’t seem to have done that well in performance over that time frame, currently, the overall return since inception of my initial investment is about 3 per cent. Maybe I was just too conservative, but I’m past 50 now and getting concerned about having enough for a decent retirement.”

From another reader: “Is it possible to get more than a 10 per cent return these days on a safe investment?”

We will review what the expectation in performance over time for balanced funds has been in the small investors’ perspective. We will talk about the rule of 72 relative to the number of years to full retirement.

We will take a look at three low-cost balanced funds: one US, one Canadian, and to keep things country diverse, one from the UK. We cannot discuss offerings in Bermuda since if I don’t cover them all I will be roundly castigated. You can, however, review my mutual funds available in Bermuda article series here, here, and here. http://www.royalgazette.com/article/20150117/COLUMN07/150119761,

http://www.royalgazette.com/article/20150124/COLUMN07/150129825

http://www.royalgazette.com/article/20150328/COLUMN07/150329733

The balanced fund investment composition holds a very large position in the overall world of mutual funds, more than $5 trillion on a global basis.* North America alone takes up 53 per cent of the global balanced fund investments.

Why should one choose a balanced fund? It becomes a question of minimising volatility of securities in various investment market situations. A complete basket allocation of diversified US stocks, for instance, can generate a much higher return — in a good market. In 2009, for example, the S&P 500 stock index returned more than 26 per cent for the year. Woe is you when capital markets crash, however, as we saw (or experienced) just the year before in 2008. Then, the S&P 500 Index lost in excess of 37 per cent. The S&P 500 index is composed of the 500 leading companies in the US. Those two years of market activity saw a swing in volatility and performance of more than 63 percentage points, more than the average investor’s heart can withstand.

Bond (bond funds) securities, on the other hand literally, generally tend to perform inversely to stocks. That is, when stock performance is high, bond prices slip (and their yields increase). Yet when markets become rocky, bond value ascend to outperform — particularly if bond selections are comprised of very-high grade, low risk, government debt. Overall, generally, bonds have lower returns that stocks.

The secret: when you combine stocks and bonds in a balanced portfolio, the result is less volatility, and smoother returns. The trade-off is a lower total return performance than an aggressive stocks-only portfolio.

The chart link here is excellent, showing the Annual Returns/Performance on Stock, T. Bonds and T. Bills: 1928 — Current (2015). Highlight the differences in the returns easily in this work provided Courtesy of New York University Stern School of Business to derive a good sense of the swings in performance over those two years and many more since 1928.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

Purely theoretically, now, it would appear that one could simply calculate the combined value of a 60/40 portfolio for 2009, for instance, and add them together as follows: 60 per cent of stock return (25.94 per cent) = 15.56 per cent and 40 per cent of ten-year Treasury bonds (-11.12%) = -4.48 per cent to find the result for 2009 of 11.12 per cent annual return. Last year 2015, the theoretical result is 1.26 per cent.

I know some of you will think this way, BUT. Sorry, readers, that is just not how it works. Every balanced fund brand is individualistic in asset allocation choices that may perform better or worse than this theoretical math computation, nor are fees for custody, clearing, trading, investment management and the like included.

However, what we can do is check the performance of the three different funds listed above.

Here are the discussion numbers.

• The Canadian fund balanced (60 per cent stocks 40 per cent bonds) had a total return in 2015 of negative 0.89 per cent.

• The UK fund with similar allocations — in 2015 returned 0.3 per cent.

• The US fund — similarly — return in 2015 around 1 per cent.

So readers, as you can see these numbers are different, and for many reasons. Besides being different countries, they may have used different securities, different indexes, different fees, and other criteria. The point here is that you should have a discussion with your adviser, get all of the information you need to track your balanced funds, then start reviewing them on a consistent routine basis. You should be able to find them on Morningstar. There is a basic free service requiring only registration. http://www.morningstar.com/.

If your portfolio is managed, as opposed to a mutual fund, you can still compare — to some extent — the returns against a balanced mutual fund. It will at least, give you an idea of your general return position. Investment analysts have calculated balanced fund total returns for last ten years at anywhere from 4.5 per cent to 8 per cent or so. We cannot project the future, but what you can do is assure yourself that your investments whatever the total return is, will get you to where you want to go. We move on to the question of whether the balanced fund will get you to retirement. There is simply not enough information provided to answer that question. We just don’t know any of the individuals’ complete financial picture sufficient to calculate a projection, but we can demonstrate how the rule of 72 and compounding works.

Next week: Should I change my perspective on my investment returns, or change my risk allocation? “Is it possible to get more than a 10 per cent return these days on a safe investment?”

• Investment Company Institute: Worldwide Regulated Open-End Fund Assets and Flows Fourth Quarter 2015

https://www.ici.org/research/stats/worldwide/ww_q4_15

Martha Harris Myron CPA CFP JSM: Masters of Law — International Tax and Financial Services; Pondstraddler Life™ Financial Perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact: martha@pondstraddler.com