Look for More Factual Facts

Personal Money Planning |

By Gary Silverman, CFP®


Data, true data, is an interesting thing. True data is, by definition, fact. But most of the time facts by themselves lack meaning.

Recently, I read a factual article written for financial professionals. It looked at how balanced funds did over the last 10 years compared to a pure stock portfolio. The funds the author looked at were those which targeted a mix of 60% stocks and 40% bonds—which is the classical balanced mix.

The shocking result of the data he collected was that the balanced funds “significantly underperformed broad equity indices….” Why this was so significant, I am not sure. If you take a period of time and look at the stock market you will find that either it does great, okay, or lousy. When it does great, as it has since the end of the financial crisis, it should not be all that surprising that anything that isn’t completely invested in the stock market is going to underperform. And, as I think my readers can easily imagine without resorting to a calculator, the 'bullier' the bull market, the greater the underperformance of a balanced fund compared to it. (And yes, I just made up the word ‘bullier’.)

The author goes on to explain that if you have a long-time horizon then balanced funds aren’t really a great place to be, the last 10 years being a perfect example. He is correct in that the last 10 years were not kind to the 60/40 balanced fund whose 40% in bonds did not have the same growth as stocks.

For some reason, he thinks that balanced funds purport to do almost as well as fully invested all-stock portfolios with a lot less risk than those stock portfolios. 'Some reason' probably came from the marketing materials that come out of balanced funds. They all kinda report just that. 

After all, if the author had instead compared stock portfolios from the Oh-Oh decade (2000-2009), he might have come to a different conclusion. Those 10 years saw the return on many stock indices to be about zero. Amazingly, the average balanced fund during that same period of time did a lot better. Not having all its money in stocks, a balanced fund does better than an all-stock portfolio when stocks are in their “lousy” phase. And given the two major bear markets that occurred during that time, it was a time of super-sized lousy.

So, which truly is best, an all-stock portfolio or a balanced one? It comes down to which is more important to you: Ensure you make the most return when the stock market is in a bull market or ensure you don’t get burned when the stock market turns into a bear.

What probably bugs me most about the article wasn’t the point it was trying to make (which, while true, was unbalanced), but rather that it was written to professional investment advisors. I mean, aren’t we supposed to already know all of this stuff? Unfortunately, in many cases, some do not.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.