Balanced funds can help you become a more disciplined balanced investor

Global investment research company Morningstar has been examining the difference in the returns mutual funds deliver and the returns investors actually get. They’ve been measuring what they call the behaviour gap. This is the difference between the investment return and the investor return of a mutual fund over time. Their most recent published study covered the 10-year period to the end of 2023.

It’s common to have situations in which the fortunate timing of buying and selling units in a mutual fund result in higher investor returns than investment returns. But over long periods, when looking at the overall results of the study in two broad categories, two patterns are clear. First, across categories investors on average underperform the mutual fund they choose. Morningstar has repeated this study several times, and while the numbers change from year to year, the direction doesn’t. Investors as a group underperform their investments. But second — and most important for this discussion — the gap is narrower for balanced funds versus other categories.

What makes balanced funds special in this regard? One of the reasons for this better performance resides in the fact that the balanced fund acts like a kind of wrapper and shields the investor from noticing individual assets within the balanced fund that have underperformed over short periods. As a result, they’re more likely to stay invested in the fund. 

In other words, balanced funds can be an effective tool in minimizing the behaviour gap. They can help an investor stay focused on overall results and away from any one investment in the fund, and help an advisor keep an investor focused on the big picture and less on the distractions.