I recently had a conversation with a Connecticut reader about balanced mutual funds. The objective of a balanced fund is to “seek” both income and capital appreciation.

We talked about how to do a screen. The first step is to get a sense of the universe.

Using a database such as Steele’s Mutual Fund Expert (steelesystems.com), you can narrow the field to similar funds.

Filter for “balanced” as the “objective,” and “allocation” as the “category.” Objectives are the goals the fund is organized to accomplish. Categories break down funds into peer groups based on their holdings, according to Morningstar, the independent research house. The allocation category invests in multiple asset classes (stocks, bonds and cash).

These filters provide a basic screen, which I ran using Steele’s June 30, 2020 database. The screen yielded 424 funds. Most had equity allocations of 50-70%. Equity allocations tell you how much the fund invests in equities compared to fixed income investments. The higher the equity allocation, the higher the risk -- and the potential return.

To further narrow the list, I filtered by “best-fit index.” The best-fit index provides a more refined measure of how similar a fund is to another (correlation coefficient or r-squared regression of the fund against an index).

The best-fit indexes for the balanced fund list included the S&P 500 Index, the Russell 3000, the ICE BofA US High Yield Index, with the largest representation being “Morningstar Lifetime Mod 2030” (a target-date fund based on a retirement year of 2030). Using the latter narrowed the field to a more manageable list of 72 funds. By adding an additional screen (3 year alpha greater than zero), my list resulted in 29 funds. (You can think of alpha as a measure of success.) By excluding extra share classes of the same fund, I was down to 10 choices, representing seven different managers.

Even though this filtered screen was tight, using only like funds, the ranges of data points diverged quite a bit.

Total operating expenses ranged from a low of 0.09% per year to a high of 2.5%. Yields (12 months) ranged from a low of 0.91% to a high of 2.23%.

During the last down-market cycle reported by Steele (October 2007 to February 2009), the best performer lost 24.4%; the worst lost 37.2%. During the up-market cycle (March 2009 to February 2020), the highest performer returned 249.4%; the lowest returned 161.3%.

Three-year cumulative returns provided another data point. The highest had an 8.25% average annual return; the lowest had a 5.9% average annual return.

What does this say about balanced funds? They are not all alike.

All of this data is backward-looking, meaning it’s historical. The big question for an investor is how current portfolio decisions are being made. As a result, what matters most is the fund’s managers. That is, when you buy a fund, you are buying the style and skill set of the manager.

One of the best ways to get a sense of how managers differ is to “listen” to them.

Before the world “went virtual,” I attended the annual Morningstar Investment Conference in Chicago in person each year to meet and speak with the pros behind the funds. Due to the coronavirus, you can now “meet” portfolio managers from the safety of your home -- something I highly recommend self-directed investors do before choosing a fund manager. One option is Morningstar’s 2020 Digital Conference, which is scheduled for September (tinyurl.com/y2l92293).

Research is only the first step to finding funds that you want to hold. Retirees (and future retirees) will want to build out portfolios for themselves using funds along with other investments in order to meet their personal goals. That takes an understanding of what funds can do for you, which is part of the overall “job” of your personal portfolio manager, whether you yourself are in charge or you delegate that job to a professional.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

The difficult period we are experiencing as a result of the COVID-19 pandemic has a related, unsavory aspect: It has opened an opportunity for scammers to take advantage of people, especially seniors.

Criminals are even stealing Economic Impact Payments. EIPs are stimulus payments made available by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27.

Seniors are targeted more than others. If you yourself are a senior, or know someone who is, it’s important to know what to expect.

First, beware COVID-related phishing schemes. Watch out for emails, letters, texts and links that use keywords such as “coronavirus,” “COVID-19” and “Stimulus,” warned the IRS in a release issued July 16 (“IRS unveils ‘Dirty Dozen’ list of tax scams for 2020”).

“These schemes are blasted to large numbers of people in an effort to get personal identifying information or financial account information,” said the IRS. “Most of these new schemes are actively playing on the fear and unknown of the virus and the stimulus payments.”

Second, if you are charitably inclined, be alert to fake charities related to the COVID-19 pandemic. These schemes “normally start with unsolicited contact by telephone, text, social media, email or in-person using a variety of tactics,” according to the IRS. “Bogus websites use names similar to legitimate charities to trick people to send money or provide personal financial information. They may even claim to be working for or on behalf of the IRS to help victims file casualty loss claims and get tax refunds.”

If you want to contribute to a cause, look up the charity to make sure it is legitimate. You can use the search tool on IRS.gov (tinyurl.com/y84b96ja). Scroll down the page until you see the “Tax Exempt Organization Search” blue box. Clicking on it will give you search parameters for finding an organization by name or by Employer Identification Number (EIN). From there you can determine if the charity is legitimate.

Third, watch out for telephone scams, or “vishing” (voice phishing). The scam calls can threaten arrest, deportation or license revocation if the victim doesn’t pay a bogus tax bill. They often take the form of a “robocall” (a text-to-speech recorded message with instructions for returning the call).

If the caller says he or she is from the IRS, be on the alert. The IRS will “never demand immediate payment, threaten, ask for financial information over the phone, or call about an unexpected refund or EIP,” said the IRS.

Fourth, if you, or someone you know, live in a retirement community or a nursing home, have you received your EIP?

In a June 16 alert to nursing homes and other care facilities (tinyurl.com/yc5p8aaq), the IRS stated that others might take advantage “of vulnerable populations who received the EIPs.”

These are only a few of the types of situations seniors need to be aware of. Read about the “Dirty Dozen” tax scams for 2020 at tinyurl.com/y22l6nl5.

I also recommend watching this video: “Pick Six to Stop COVID-19 Fraud,” prepared by the U.S. Attorney’s Office, Northern District of New York: tinyurl.com/yy42jf7x.

Another resource is “Taxpayer Guide to Identity Theft” (tinyurl.com/yd56ytru) and “Coronavirus Tax Relief” (tinyurl.com/ukv9vkh), both found on the IRS website.

If you are the subject of a coronavirus-related scam, contact the National Center for Disaster Fraud (NCDF) Hotline at 1-866-720-5721. The NCDF is an agency within the Department of Justice’s Criminal Division.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

Last week, we talked about this year’s July 15 deadline for 2019 IRA contributions. July 15 is also an important date for “backdoor” Roth conversions for people who don’t qualify for Roth contributions.

That is, if you haven’t made your 2019 IRA contribution, and you don’t qualify for a Roth contribution due to income limits, consider doing a backdoor Roth for 2019 and, while you are at it, do one for 2020. That way, you can contribute a maximum of $6,000 ($7,000 if you are 50 or older) for each tax year, for a total of $12,000 ($14,000).

When you convert, you will have to pay taxes on the amount converted, except in a special situation that I’ll describe shortly.

What’s “backdoor” about the conversion?

If you earn over a certain dollar amount, you cannot make a direct Roth IRA contribution. The back door is a contribution to a traditional IRA followed by a conversion to a Roth.

What are the income limits that prevent a direct contribution to a Roth? That depends on your filing status.

For example, if you are single with a modified adjusted gross income (MAGI) of $137,000 or more (2019), then no Roth contribution for you. The max for 2020 for single filers is $139,000. The limits are higher if you are married and filing jointly ($203,000 for 2019 and $206,000 for 2020).

Limits are published in IRS Pub. 590-A, which you can read online at irs.gov/pub/irs-pdf/p590a.pdf.

Why would you want a Roth? Roth IRAs are tax-free, not tax-deferred. There are no required minimum distributions (RMDs) during your lifetime. And when you withdraw the funds (after age 59 ½ and a holding period of five years), there is no tax bill. In the ideal case, the backdoor Roth can even be tax-free.

Take this example: John, age 52, is single. He earned $160,000 in 2019 and expects to earn about that amount or more in 2020, which means his income is above the limit for Roth contributions.

He cannot contribute to a Roth, but he can contribute to a traditional IRA. He has made no 2019 or 2020 IRA contributions to date, and in fact does not have an IRA. He wants to maximize his Roth opportunities.

John opens up a traditional IRA at a brokerage firm, as well as a Roth IRA. He contributes nothing to the Roth. He contributes $7,000 to the traditional IRA for the 2019 tax year before July 15. At the same time, he contributes $7,000 to the traditional IRA for the 2020 tax year.

He can do these contributions because there are no income caps on traditional IRAs. The Roth IRA he opened is not funded -- yet.

But now that he has $14,000 in his traditional IRA, he directs the brokerage firm to convert his traditional IRA to a Roth IRA. In this very limited example, the conversion is tax-free.

If John had other traditional IRAs, he would have to pay taxes on the conversion because of “aggregation” and “pro rata rules.”

Here is how Fidelity describes these rules:

“When it comes to conversions ... the IRS views all of your traditional IRAs as one account. If you have three traditional IRAs and a rollover IRA spread across different financial institutions, the IRS would lump all of them together.”

The accounts are aggregated and the conversion must be done pro rata -- “proportionally split between your after-tax and pre-tax balances, including contributions and earnings,” according to Fidelity.

It might be clearer to see an example of this in action, which you can find here: fidelity.com/viewpoints/retirement/earn-too-much-contribute-Roth-IRA-conversion.

In any case, now is a good time to fund a Roth IRA, either through the back door or directly if you qualify.

For more reading on backdoor IRAs, a good resource is forbes.com/sites/jimwang/2020/02/20/supercharge-your-retirement-savings-with-a-backdoor-roth-ira/#5753a74a8f08.

July 15 is almost here, so make sure to take care of your 2019 IRA contributions -- and your 2019 income tax return -- before the deadline.

For a quick video that covers the topics we’ve discussed in today’s column, go to vimeo.com/437251929.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION