Looking to Strike the Right Balance

09/12/2007 12:00 am EST

Focus: FUNDS

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Dan Wiener, editor of The Independent Adviser for Vanguard Investors, has some tips on how to buy the right balanced fund—and some recommendations.

For all the fancy-schmancy options that the mutual fund industry likes to throw at investors today, the basic strength of a good bal­anced fund is a commitment to invest in both stocks and bonds and to con­tinually rebalance that allocation.

[If] you are interested in buying a balanced fund, buy just one. Please. Pick one that’s right for you and, unless your objectives or tolerance for risk change, stick with it.

Warning to growth investors: don’t even consider a bal­anced fund. These low-octane offerings aren’t really built with your long-range needs in mind.

Vanguard Wellington (VWELX) manager Ed Bousa took the lead management position at Wellington in 2003 with nary a change in the fund’s strong and consistent gait.

I like this fund for its concentration in equities (65% of assets) and the flex­ibility Bousa has in choosing stocks for growth rather than dividends. Because Wellington is not bound by a require­ment that it produce a prodigious yield, its equity holdings are more diversified. Technology and health care are now about 20% of equity assets here. That’s a smidgen higher than the market’s weight for the two sectors.

Wellington’s bond holdings are now intermediate, rather than long-term in nature, which cuts risk. Duration is about 5.5 years.

In all but the most “growthy” markets, when this fund’s value orientation holds it back, this is a solid fund for more risk-averse investors looking for an equity-heavy balanced fund and is one of my absolute favorites in the balanced camp.

Vanguard Balanced Index (VBINX) rivals Wellington as one of the best-balanced funds (though my nod still goes to the duo at Wellington). Its mandate is to put 60% of its assets in a basket of stocks that mimic the MSCI US Broad Market index and the remainder in bonds that track the Lehman Brothers Aggregate Bond index.

That’s close to the same allocation as you’ll find at Wellington, except everything here is indexed. The mimicry of the MSCI index gives at least a bit of exposure to the smaller and mid-cap stocks that I prefer. This is a good, all-in-one offering.

Use this fund in taxable accounts and Wellington in tax-deferred accounts if you can’t decide which way to lean. The reason: Because Wellington’s man­agers tilt their fund toward value stocks, which tend to pay higher dividends, it has at times been less tax-efficient than Balanced Index.

I often think of balanced funds as being somewhat akin to my Swiss Army Knife. They do many things pretty well but nothing very well. In the hands of a casual investor or someone with very little money to put away, a balanced fund is fine. But serious investors who really want to fine-tune a portfolio will want more flexibility to mix individual stock, bond and cash funds, as well as investment strategies, to suit their needs.

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