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Why did balanced funds lose 7% last quarter? ~ Question from Reader

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Why did balanced funds lose 7% last quarter while bonds increased in value. Was it the volatility of the stock market? Rising inflation? ~ Tim B. Los Angeles, CA

While interesting to look at the correlation between the two indicators and they can always have the same inverse relationship you are asking about during the beginning of a Bear market; in this case I believe it is due because of two different factors.  But before I get into answering your question, for the sake of our other readers lets break down exactly what we are talking about.

So for readers that don't understand what the term "Balanced Fund" is let me explain.  We are speaking about a specific type of Mutual Fund run by large corporations like Dreyfus, Prudential and Fidelity that maintain a diverse "Balance" inside the fund.  Specific Mutual funds may be directed into investing into industries like Oil and Gas, Telecom, or High Tech   so that while diversified the main reason they are designed is to have a broad spectrum of those companies inside the portfolio, usually no more than 60% of the total, then remaining percentages in Gold, Insurance, Healthcare and other Blue Chip stocks.  

"Balanced Funds" are generally more like the general funds your companies 401K will put you in if you just want to invest but not worry about switching around to much and normally are labeled according to the year you retire for example the ABC 2035 Fund or the ABC 2040 Fund etc.  These funds generally are balance among multiple industries so that no one part of the fund holds a majority of the overall percentage of the portfolio.  So going back to 2008 and the housing bubble  a Mutual Fund that had a 60% Real Estate company, REIT, or Home Builder's stock took a big loss.  The "Balanced Fund" that only had 8% in that sector of the market did not really feel it at all, the lowest under performing stocks in the "Balanced Fund" were probably sold off and put into something else by the fund .  The ABC REAL Estate Fund probably changed a little bit pulling the percentage back to 40% from 60% and reinvested in other sectors, but ultimately stayed in the sector the Mutual Fund was designed to be in.

Now the other factor in answering the question is the Bond Market.  I do not really focus a lot of attention here it is not my area of expertise, find an experienced Bond Broker to help you with this, yes you can make really great returns and substantial profits if a company decides to buy back the bonds and cash you out.  The real reason that the Bond Market is rallying and it usually does if investors see weakness in the over all stock market; but they also start investing when interest rates rise.  Which they have been going up.  The recent plunge in the market was over the fear of another interest rate hike.  So the Bond Market is going up and should continue to do so even after the new interest rate hike goes into effect.

The reason that your "Balanced Funds" saw a 7% drop over the recent quarter is not only the recent volatility in the market but also because it effected almost every sector of the economy and most of the underlying stocks that the "Balanced Funds" were invested in.  Regardless of that drop if you are buying mutual funds in an IRA, 401K, or even in your regular portfolio they are to help you get through those periods of volatility.  You don't really want to judge performance by quarter as much as year over year and the way they actually show the fund usually with an interest rate over 5 years, 10 years, and 15 years.  Right now you would have to focus on the 5 year meaning what it looks like it will do in the future and the 15yr which shows its over all history.  Do to the 2008-9 downturn the 10 year will be under performing both of the other two interest rates.  in a couple years it will reflect in the 15 year rate as 2009 moves into the 15 yr range.

So Tim the answer to your question is although both events happened, in reality in this case it is not really a flight of investors from stocks to bonds as a place to park the money until it all blows over and would actually signal a Bear Market.  It was two outside factors that caused you to see the correlation between the two and be aware of it.  If we were moving into a Bear market this would be something you would want to be paying attention too.

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