ACTIVIDADES DE LA ETAPA DE EXPLOTACIÓN

Balanced funds, orhybrid fundsas they are sometimes called these days, are allowed to invest in a mix of both stocks and bonds. Typically, the mix is set at around 60 percent equities/40 percent bonds. But depending on the circumstances—for example, if the equity markets look appealing—the manager has the authority to change that allocation strategy to take advantage of opportunities.

During the bull market years of the late 1990s, many balanced funds shifted to a 70 percent stock/30 percent bond allocation. Others were even more aggressive, socking as much as three-quarters of the fund’s assets into equities. But as the bear market took over in 2000, many of these portfolio managers downshifted their funds by going back to the usual 60-40 split.

There used to be only one distinction among hybrid or balanced funds: betweendomestic hybrids, which only invested in the United States, and in- ternational hybrid funds, which could invest abroad. But today this class of funds has grown to the point where there are now further distinctions made within the realm of domestic balanced portfolios:conservative allocation do- mestic hybrid fundsandmoderate allocation domestic hybrids.

As the name would indicate, conservative allocation domestic hybrids tend not to shift too much into equities, for fear of the added risk that brings to an overall portfolio. In 2004, for example, the average conservative allocation fund held about 45 percent of its assets in bonds, slightly less in stocks, and the remainder in cash. In comparison, the moderate allocation domestic hybrids are a bit more willing to overweight stocks. The typical moderate allocation fund has about 60 percent or more of its money in stocks and the remainder in bonds and cash.

Because balanced funds can shift their stock-bond weightings on a dime, it is important for investors who care about their overall asset allocation strategy to keep close tabs on these funds, to ensure that a shift by a balanced fund manager— either into or out of equities—does not throw an overall financial plan out of whack.

Final Thoughts

Mutual funds were designed to make our lives simpler, by allowing us to build a diversified portfolio of stocks and bonds with one or two simple decisions.

But the fact of the matter is that deciding which mutual fund to buy has become as complicated—if not more—than choosing individual stocks or bonds. In part, that’s because of the proliferation of tens of thousands of funds in the modern mutual fund industry. But it also has to do with the sophisticated nature of fund investing today. In addition to basic stock and bond funds, there are actively managed funds and index funds to choose from. There are large-cap, mid-cap, and small-cap portfolios to consider. There are general equity funds and specialty funds to choose between. And the bond fund universe has become just as specialized.

Because of the complex nature of the modern mutual fund—and the enormous popularity of these vehicles among all types of investors, ranging from 401(k) account owners to high-net-worth investors—we have broken our discussion on funds into two chapters. In the next chapter we will discuss some key mutual fund terms and concepts that will hopefully help you figure out how funds work.

Quiz for Chapter 8

1. A mutual fund is a. . .

a. Favored asset among individual investors, alongside stocks, bonds, and cash

b. Company whose purpose is to invest in stocks, bonds, and/or cash c. Type of stock or bond that comes prediversified and is therefore safer

for most investors than individual stocks or bonds

2. Actively managed mutual funds are almost always better than index funds because there is an active stock picker at the helm:

a. True b. False

3. According to their placement in mutual fund style boxes, large value stock funds are considered the most. . .

a. Appropriate for most investors b. Conservative

c. Aggressive

4. A small-cap growth fund is a type of. . . a. General equity fund

b. Sector fund c. Hybrid fund

5. Sector funds are often considered riskier than general equity funds because. . .

a. Of the specific sectors they invest in.

b. Sector fund managers have less experience than general domestic stock fund managers.

c. They only invest in one sector of the economy. 6. The longer the duration of a bond fund. . .

a. The bigger its yield

b. The more money it will lose when interest rates rise c. The less sensitive it is to interest rates

7. Short-, intermediate-, and long-term bond funds can lose value, but because of their extremely short durations, ultra-short-term bond funds can never lose money.

a. True b. False

8. Municipal bond mutual funds are tax free when it comes to. . . a. Only federal taxes for in-state residents

b. Local taxes and in most cases state taxes

c. Federal taxes and in some cases local and state taxes for in-state residents

9. Municipal bond funds are a type of government bond fund. a. True

b. False

10. Balanced funds are allowed to invest in. . . a. Only stocks and bonds

b. A mix of stocks, bonds, and cash c. Only stocks and cash

CHAPTER

Demystifying