Mild Salsa

William Ehart

BALANCED FUNDS ARE a great first investment for those with a moderate risk tolerance. But which fund? Vanguard Balanced Index Fund Admiral Shares, with its incredibly low 0.07% expense ratio, $3,000 investment minimum and mix of 60% stocks and 40% bonds, is the standard by which all balanced funds should be judged—and it’s likely your best choice.

But if it isn’t one of your 401(k) options, chances are you’ll find the plan includes one or more of the other five funds in the accompanying chart. They’re the largest and arguably the most successful balanced funds and, together with Vanguard Balanced Index Fund, are among the 10 biggest in the 401(k) market.

They’re also good choices. These longstanding brand names don’t have the buzz of bitcoin or smart beta ETFs. But they continue to deliver generally consistent, solid results. Their average age is 62 years. Through many management changes and many market crises, their parent companies have kept them largely on track.

Most balanced funds are actively managed. That means that, since the Vanguard index fund’s inception in 1992, they have tried to beat it, rather than match it—a difficult feat, but one that two of the five actively managed funds in the chart have accomplished over the past 15 years, while the other three weren’t far behind. These were also the five largest balanced funds 15 years ago—and they’ve lived up to their reputations.

Each has its own distinctive appeal. Whereas Vanguard Balanced Index Fund offers exposure to the entire U.S. stock market and only investment-grade bonds, some of the active funds have juiced returns with lower-quality bonds, including junk bonds. Fidelity Puritan currently has the lowest-quality bond rating of the group, at the last rung of investment grade, according to Morningstar. The index fund’s top-quality bonds will hold up better in bad times. The higher expense ratios of the active funds can incentivize them to increase risk, with an eye to boosting returns and thereby overcoming the drag from their higher annual expenses.

Most of the actively managed balanced funds have more of a large-company investment focus than the index fund does. Some use a growth style, others value and some have significant foreign exposure, which has detracted from returns over the past 15 years.

Undoubtedly, each has had ups and downs of its own making. Dodge & Cox Balanced stumbled badly during the financial crisis, thanks to its heavy stake in financial stocks. And portfolio manager changes are a source of uncertainty. In fact, Fidelity Puritan recently lost its lead fund manager and, next year, Vanguard Wellington will lose one of its lead managers, both because of retirement. Morningstar has cut its rating of Puritan to neutral, pending evaluation of new management, but has expressed more confidence in Wellington’s remaining team.

With all that, there’s a lot to recommend all six funds. Here are five reasons to consider buying a balanced fund:

  1. The 60% stock-40% bond split, which is what these funds typically maintain, is ideal for moderate risk investors. It’s like mild salsa. In fact, it’s the industry standard for moderation: mostly stocks, to tap into the potential growth we need, but a hefty slug of bonds to limit volatility. Most investors below their 50s are advised to go heavier on stocks. But it’s also crucial to stay within your risk tolerance. That’s especially true for less-experienced investors.
  2. While target-date retirement funds are also great choices for set-it-and-forget-it investors, they’re a different animal. The allocation to stocks declines over time, plus they often have substantial foreign exposure. With a balanced fund, you have a better idea of what you’re getting.
  3. Even the best advice—about low-cost indexing, broad diversification, astute asset allocation, periodic rebalancing—can be a blur for beginning investors. The great investment books sometimes contradict each other on crucial issues, such as how much to invest overseas. As in other areas of our lives, we shouldn’t let the perfect be the enemy of the good. A lot of people have made a lot of money in balanced funds without knowing anything about asset class correlations or the price of shares in China.
  4. Your 401(k) choices may be limited—but there’s a good chance one of these funds is in there. The American Balanced Fund, normally available only through financial advisors for a heavy cost, may be available without a commission in your 401(k).
  5. I think of my mother, sitting in funds like Vanguard Wellington and American Balanced, and reinvesting her dividends and capital gains for decades. Her financial advisor was happy with such a low-maintenance client. What did Mom know about investing? Not much, except to buy and hold her balanced funds. Mom slept soundly, while I tossed and turned, worrying about whether my asset allocation was the right one.

William Ehart is a journalist in the Washington, D.C., area. Bill’s previous articles include Weight ProblemNot My Guru and China Syndrome. In his spare time, he enjoys writing for beginning and intermediate investors on why they should invest and how simple it can be, despite all the financial noise. Follow Bill on Twitter @BillEhart.

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