Realize the Benefits of a Balanced Fund

Physician's Money Digest, November15 2003, Volume 10, Issue 21

How simple can you make your portfolio?Believe it or not, investing in just 1 goodbalanced fund is not only feasible; it canalso be profitable. There's a good chancethat on a risk-adjusted basis, the right 1-fund portfoliowill outperform the portfolios of most investorswho work hard to investigate dozens of funds and createelaborate portfolios.

Proportionate Portions

Balanced funds are based on the idea that mostpeople should have a portfolio balanced betweeninvestments in stocks and bonds. Balanced fundsinvest in such a mix so that you don't have to do ityourself. The key advantage of letting someone elsedo the mixing for you is that it reduces the chance oftinkering with the mix at the wrong time.

Since neither you nor your money manager is likelyto keep adjusting the mix correctly over time, thefirst thing you want in a balanced fund is a commitmentto keep the mix within a specified narrow range.Most funds shoot for a 40% bond/60% stock mix.Do not consider any fund that promises to producesuperior performance by widely varying the mixbased on the manager's market forecast.

The right mix of the wrong stocks and bonds isn'tgoing to do you much good. You have to pay attentionto the ingredients. This is the second criterionthat distinguishes good balanced funds from badones. Also, don't forget about the other 2 importantcriteria when buying a fund: cost and turnover rate.

If I had to invest in only 1 fund for the next 2 or 3decades, I would pick the Vanguard Balanced Indexfund. The fund invests 60% of its assets in stockstracking the Wilshire 5000 Total Market Index(which represents the entire US stock market) and40% in bonds tracking the Lehman Aggregate BondMarket Index (which represents the entire US bondmarket). The fund has an expense ratio of just 0.22%(0.15% if you invest $250,000 or more). It has verylow turnover and isn't tinkered with by managers.

If you're a physician-investor who would rathernot invest in index funds, consider the Dodge and CoxBalanced fund (800-621-3979). The stock part of thefund is handled by the folks who manage the venerableDodge and Cox Stock fund, and the bond part ishandled by the managers of the equally good Dodgeand Cox Income fund.

The target asset mix is also 40% bonds/60% stocks,but this fund doesn't adhere to the mix as strictly as theVanguard Balanced fund. The stock part of the fund isheavy in value stocks, because that's what the managersbelieve in. Managers of the bond part adjust maturitiesand sectors based on their market outlook. The expenseratio is about 0.5% and annual turnover is a low 25%.Over the long run, the 2 funds have performed about thesame, and this is likely to continue in the future.

Checks and Balances

Balanced funds are a very good choice for manyinvestors, especially those who are likely to make allsorts of unwise investment decisions. But if you havesome investment knowledge and the necessary discipline,you may not want to invest in these funds.

First, the fixed asset mix may not be right for you.When you're young, you may want to hold a higherproportion of stocks, gradually adjusting the mix asyou get older. Second, most investors should limittheir bond holdings to short-term, 5-year bonds. Mostbalanced funds hold a good proportion of long-termbonds. Third, you may want to create a more sophisticatedstock portfolio (eg, a portfolio that includessmall cap value stocks).

Balanced funds are a compromise. But a good balancedfund is an excellent compromise for an investorwho wants to keep things as simple as possible, withoutsacrificing much in performance.

Chandan Sengupta, author of The Only ProvenRoad to Investment Success (John Wiley; 2001),currently teaches finance at the FordhamUniversity Graduate School of Business and consultswith individuals on financial planning andinvestment management. He welcomes questionsor comments at