Are asset allocation funds right for you?
1. Do you want to invest in them at all?Not everyone believes in these funds. If the allocation percentages of the fund are fixed, you may be unhappy in certain market environments.
"Too often the funds have 60 percent or more of their assets in stocks," says Michael Heyman, an independent financial adviser in San Diego. "When things are going OK in the stock market, it works. But the moment something goes wrong, you're worried that you have too much in stocks."
And your worries don't end by choosing a fund that shifts its allocations, he says. "If it's not a passive fund, then you're really just betting on the manager. The problem of doing that in a mutual fund is you don't really get an insight on who that manager is. And for all the managers who are successful, there are a million horror stories."
2. Assuming that doesn't deter you, the next issue is how big a return do you seek and how much risk you can you stomach?If you are risk averse, consider a fund that is weighted more heavily toward U.S. government or high-grade corporate bonds. If you're looking to maximize your returns and can handle the elevated risk of trying to achieve high returns, consider a fund more weighted to stocks, including small-cap and foreign equities.
3. Do you want a fund with static allocations or one that shifts according to market trends?"We like passively managed funds," says David Cowles, director of investments for financial advisers Mosaic Financial Partners in San Francisco. "For example, if a fund decides to sell international stocks for 12 months, that's market timing, which we don't like."
But others feel differently. "The ability of the management team to shift its portfolio weightings based on the economic environment is positive for investors," Sheldon says.
In either case, of course, you want to research the fund manager thoroughly -- from his/her track record for returns to his/her investment philosophy.
"There's a little more risk on making the right call for the active managers," Carlson says. "So you want to understand the asset allocation process and how that fits into what you're doing."
4. How broad a range of assets do you want your fund to include?Many advisers say the broader, the better. "The benefit of a multi-asset fund is that you get diversification in one fund as opposed to having to make multiple securities choices," Sheldon says.
5. How much are you willing to pay in fees?For funds that are oriented toward domestic stocks and bonds, advisers say you should be able to find a strong performer with fees totaling about 1 percent or less.
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