ELI5 why I should have 2 funds vs 1 balanced in 401k

[badatmath]

Okay, so granted I completely understand why investors who actually have a clue what they are doing pick 60% equities and 40% fixed or whatever.

But for those of us that do not, is one balanced fund horrible?

This question is prompted by my employer announcing we will be getting new fund options instead of the current ones. I do not know what they are yet.

 

[joeea]

But for those of us that do not, is one balanced fund horrible?

No, it's not horrible.

 

[The Cosmic Avenger]

No, but the fees might be higher, since the fund is not as simple. If not, then more power to you!

 

[pb4uski]

Okay, so granted I completely understand why investors who actually have a clue what they are doing pick 60% equities and 40% fixed or whatever.

But for those of us that do not, is one balanced fund horrible?

This question is prompted by my employer announcing we will be getting new fund options instead of the current ones. I do not know what they are yet.

Not horrible at all and great easy-peasy choice (if the ER is rasonable) for those with mostly taxable or tax-deferred or tax-free.... but arguably suboptimal if you have significant balances in each type.

 

[REWahoo]

I'm a big fan of balanced funds. 2/3 of our investable assets are in two balanced funds and they've done well for us over the past 15 years.

 

[badatmath]

They did give us the fee schedule even if not the fund name, the large cap was cheapest followed by balanced - fixed was about twice as much. They had some target dates in there also which I ignored. Should get fund names soon I would think. They mostly just wanted to break it to us current option leaving soon.

 

[joeea]

They had some target dates in there also which I ignored.

Why?

 

[badatmath]

I think they move too fast towards 30% equities which just seems too low to me.

 

[LOL!]

I think they move too fast towards 30% equities which just seems too low to me.

So? Just pick a longer-dated fund. One doesn't have to pick the 2020 fund if one wants more equities: Pick the 2060 fund instead. Make any changes as needed. In a 401(k) one is not locked into just buying and never exchanging.

 

[joeea]

I think they move too fast towards 30% equities which just seems too low to me.

Are you talking about target funds in general, or the specific funds you ignored? How can you know if you ignored them?

 

[badatmath]

They introduced the target fund choices to us under current plan; I looked into them, I was not impressed with the returns or the fees. The funds they are kicking me out of are being replaced with a few as yet unknown funds + same target funds.. I see no reason to pay higher fees just to get a target date fund even though you are apparently a big fan. I am just impatiently waiting for a little more information on my new funds.

 

[OldShooter]

... why I should have 2 funds vs 1 balanced in 401k?

The answer is "it depends."

The problem with balanced/aka blended funds is that they are nearly impossible to benchmark. They are pretty much a closed box with you having limited visibility into the contents and, specifically, the total return of the equity and bond components separately.

Here is an entertaining little horror story: https://www.reuters.com/article/us-...ers-on-risky-path-to-retirement-idUSKBN1GH1SI

So ... I would say that balances/blended funds should be used ONLY if the equity portion is invested in a broad/total market index. With that, you really don't have to look inside the box because you know you will be getting market returns less ten or twenty basis points.

Re target date funds, as @LOL! points out, they can be as conservative or as aggressive as you like. Pick a date before your planned retirement date if you want conservative. Pick a date after your planned retirement date if you want aggressive. Personally I am not interested in having my AA on autopilot, but many people like these funds. Again, I would insist that the equity portion of the fund be invested in a broad/total market index, not be run by stock-picker.

Fees? No news there. Lower is better. Here's Morningstar saying it in a more detailed way:https://www.morningstar.com/articles/752485/fund-fees-predict-future-success-or-failure.html "The expense ratio is the most proven predictor of future fund returns."

 

[joeea]

They introduced the target fund choices to us under current plan; I looked into them, I was not impressed with the returns or the fees. The funds they are kicking me out of are being replaced with a few as yet unknown funds + same target funds.. I see no reason to pay higher fees just to get a target date fund even though you are apparently a big fan. I am just impatiently waiting for a little more information on my new funds.

Calm down. I never said I was a big fan. I was just trying to understand what you meant by "ignored them".

If you dug in, understood them, and decided they weren't what you wanted, then that makes a lot of sense.

If you "ignored them" without first even trying to understand them, that wouldn't make much sense, IMHO.

 

[N02L84ER]

If you expect to roll your 401k into an IRA after you retire, it will be easy to change your AA at that time. You can pick a target fund that is more aggressive than your actual retirement year with the plan to not hold the investment until the equity drops to 30%.

 

[badatmath]

Thanks all, no I expect to keep it where it is (well I did before I heard it was moving) and sorry if I got a bit snappy. I am off to read the links provided by OldShooter. I have a suspicion that my new funds will not be as nice as the old but hope I am pleasantly surprised!

 

[yakers]

We could live on pensions & SS but spend down a little. Retired 11 years ago (DW 13 yrs ago) Everything was predictable until 2 years ago, MIL dies, sold a house bought a house and a couple cars. Now settling again, DW has to take RMDs but those are QCDs. Happy to spend more but we are traveling a lot the last two years and have too much stuff already.