FUNDS THAT TAKE LESS RISK AND EARN MORE
- Alan Lavine and Gail Liberman
If you could earn 80 percent of the return on the stock market when it does well without losing your shirt in a down market would you do it?
There are a fistful of balanced funds that do that. Plus they have performed as well--if not better--than the average domestic stock fund over the past 10 years.
Balanced funds, asset-allocation funds and life strategy funds typically invest 60 percent in stocks and 40 percent in bonds. Historically, that kind of mix has grown at more than an 8 percent annual rate. But when the stock market loses 10 percent, the balanced investment loses about 6 percent.
This year, balanced funds are down on average -3 percent, while the S&P 500 is down -13 percent. But not all balanced funds are losing money this year.
The average domestic stock fund has grown at a 10.9 percent annual rate over the past 10 years. But these funds, which are less risky, have done better over 10 years.
The Vanguard Wellington fund, which invests in undervalued blue-chip stocks and government bonds is up more than 3 percent this year. Over the past 10 years, this fund has grown at a 12 percent annual rate.
The Dodge & Cox Balanced Fund is up 7.5 percent this year. The fund also invests in undervalued large company stocks and bonds. Over the past 10 years, the fund has grown at a 13 percent annual rate.
Not all balanced funds, however, are alike. Some funds invest in growth stocks and bonds. Growth stocks have taken a licking the past couple of years. The earnings of fast-growing companies is slowing down. So investors sell these high-price stocks. That's why funds such as the Janus Balanced Fund are down about 5 percent this year.
But even that kind of return looks good compared with a growth stock fund that is fully invested in stocks. Large company growth stock funds are down -24 percent this year, according to Lipper. But over the past 10 years, the Janus Balanced Fund has grown at a 12.6 percent annual rate.
The Fidelity Asset Manager is another fund that invests in growth stocks, bonds and cash. The fund may also invest overseas. The fund is down just -4.5 percent this year. Over the past 10 years, the fund has grown at a 10.2 percent annual rate.
These four balanced funds use different methods of buying stocks cheap in relation to future earnings. But they all invest in bonds for safety. Over the past 10 years, these funds all have one thing in common: They are less risky than the average domestic stock fund. But they have performed as well as 50 percent of all diversified stock funds, according to Morningstar Inc., Chicago. #
Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).
To read more columns, please visit the column archive.