Balanced funds can be a safe and simple strategy in a sideways market

Posted: Friday, July 16, 2004

NEW YORK (AP) Putting your money to work in a dull market is no easy task, but staying on the sidelines can pose a greater danger for small investors: If you wait until the market seems like a comfortable place to be, you might never jump in.

Everyone wants to make the most of their investing dollars, but even Wall Street professionals are wary of taking bets these days. If you're not quite sure where to invest, a balanced mutual fund could be the right solution for you.

Balanced funds, which combine both stocks and bonds, offer simple one-stop shopping for small investors, and an easy solution for anyone who is ambivalent about the market. Because of their fixed income exposure, they tend to be more conservative and less volatile than pure equity funds, with lower expenses and higher yields. Flows into such hybrid funds have climbed this year amid worries about inflation, terrorism and rising interest rates.

''The combination of stocks and bonds has certainly provided some stability in the market through the last five years,'' said Greg Carlson, a fund analyst with Morningstar Inc. ''A lot of people feel neither bonds nor stocks are attractive right now, so they're taking the middle road with balanced funds.''

This is not a new idea. The first balanced fund was established by a young Philadelphia accountant named Walter Morgan in July of 1929, just four months before the most famous stock market crash in history. The Wellington Fund, as it was later named, survived Black Tuesday, and became part of The Vanguard Group when the company was founded in 1975.

The ideals of its founder conservation of capital, reasonable current income and profits without undue risk were not fashionable goals when the fund was established 75 years ago this month, and are still considered dull in some Wall Street circles. But many investors have come to appreciate the value of slow and steady growth, said Edward Bousa, the fund's current manager.

''I think a lot of investors really want to put their money in a vehicle that is conservative but will grow over time,'' Bousa said. ''I suspect when (Morgan) followed this strategy, that was what he was thinking.''

Often stalwarts of retirement accounts, balanced funds can serve as a fine core holding in any mutual fund portfolio, but you should select carefully, because their approach can vary dramatically.

The first thing to consider is allocation. One might assume from the word ''balanced,'' that the portfolio would be divided equally between stocks and bonds, but a 60 percent-40 percent split is more common. Morningstar considers funds that are 50 percent to 70 percent in stocks to have a ''moderate allocation'' strategy. Those with a greater percentage in bonds are said to have a ''conservative allocation.''

The securities within the fund are another factor. Most balanced funds focus exclusively on domestic stocks, usually leaning toward large caps. For a fully diversified portfolio, you may need additional exposure to international, small- and mid-cap stocks.

For this reason, keep past returns in perspective when shopping for balanced funds. Those with a greater focus on large-caps will not have done as well over the last few years as those that invested in small- and mid-cap stocks.

Also look closely at the fixed income portion of the fund. In some cases this may be treated more as an afterthought, although balanced funds from larger sponsors will likely have specialized managers for both sides.

If you have a really large portfolio and are interested in maintaining a very specialized asset allocation, a balanced fund might not be right for you. But for a younger person, or any investor just starting out, it could be a very good choice. It makes especially good sense to use a balanced fund in a retirement account, such as a Roth IRA or a 401(k), where the distributions can grow tax free, said Jack Piazza of Sensible Investment Strategies in Wheaton, Ill.

''Balanced funds are perceived as being dull, but there's nothing dull about their returns,'' Piazza said, noting that hybrids have outperformed most fund styles, except for small- and mid-cap value and mid-cap blends.

Sometimes investors misunderstand the role balanced funds should play, Piazza said. Perhaps you started out with a hybrid fund, and then branched off into other investments. If a balanced fund makes up only 5 percent or 10 percent of your holdings, there's a good chance you need to refocus your portfolio.

''The biggest mistake most investors make is not having a strategy,'' Piazza said. ''They select a fund without knowing what type of strategy they'd like to have. It's like somebody saying they're going to build a house without a plan. They go out and buy bricks but they don't have a blueprint.''

Keeping a balanced fund as your core holding and rounding out your portfolio with other types of funds is a good strategy if you stick with it, Piazza said. Rebalancing at least once a year will help you stay on track.

On the Net:

www.lipperweb.com

www.morningstar.com

www.standardandpoors.com



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