4 things you need to know about balanced funds

Consider reallocating your portfolio to these stable investments in 2019.

  • By Kayleigh Kulp,
  • U.S. News & World Report
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The biggest decision many long-term investors must make is how to diversify and allocate their portfolio to stocks and bonds to hedge risk and meet their financial goals.

Thankfully, the work is already done for passive investors who buy balanced exchange-traded funds and mutual funds, and now may be a good a time to consider investing in them.

"With the recent turbulence in the financial markets over the past six months, investors may turn to balanced, asset allocation or convertible securities funds ... (which) offer investors the ability to participate in the market's potential upside performance while at the same time ... provides greater protection against volatility during the equity markets declines when compared to a pure equity fund," says Nick Giacoumakis, president and founder of New England Investment & Retirement Group in North Andover, Massachusetts.

Balanced ETFs and mutual funds provide a mix of stocks and bonds, and the allocation between the two broad asset classes stays relatively constant, allowing an investor to earn a return somewhere between that earned on the broad stock market and bond market, says Robert R. Johnson, professor of finance at Creighton University in Nebraska.

Most balanced funds range between 35 and 65 percent in equity exposure with the balance being invested in fixed income, Giacoumakis says, noting many funds achieve a defensive, more stable posture by investing in large value stocks, such as financials, energy, health care and large pharmaceuticals. The telecom and utilities sector as well as other hefty dividend paying stocks are also popular choices "because of their ability to weather the storms of choppy or bear market environments," he says.

Several balanced mutual funds are not only well-rated by Morningstar, but are affordable to purchase, such as the American Funds American Balanced A (ABALX) recently priced at $26.30 per share, Hartford Balanced Income A (HBLAX) at $13.66, and the Fidelity Balanced (FBALX) at $22.29. iShares Core Balanced ETF Portfolio at $22.10 per share and the Vanguard Diversified Balanced Index ETF at $51.93 can be good ways to maintain liquidity and can be more tax-friendly.

Experts cite the following things investors should know about balanced funds:

  • They are diversified.
  • Ready made to "set it and forget it."
  • Simple to evaluate.
  • Make sure it fits your plan.

Balanced funds are diversified

Take the Vanguard Wellington (VWELX): "This fund has been around for 90 years, and holds both the distinction of being the first balanced fund and the oldest in the Vanguard lineup," Johnson says.

The asset allocation is approximately two-thirds stocks and one-third bonds, including international stocks. With more than 100 stocks and 800 bonds, it is well diversified, carrying a low expense ratio of 0.25 percent, and boasting a top rating from U.S. News.

Set it and forget it

Balanced funds offer excellent risk and return metrics for do-it-yourself investors who do not have the time nor the resources to manage their own investments, says Adam Dechtman, a certified financial planner at Dechtman Wealth Management in Denver.

That's because investors don't need to rebalance their holdings as the returns to stocks and bonds diverge, Johnson says.

Evaluating can be simple

That is, as long as you follow the three keys, which Dechtman says are focusing on the fund's net expense ratio, choosing a reputable management company, and the allocation of assets.

"Investors need low-cost funds managed by a solid management company, but most importantly investors need funds with an investment mix that they're comfortable with," he says.

For example, some balanced funds weight higher in international stocks than the investor might be comfortable with, "and that can be a problem when we see a downturn and the investor abandons the strategy," Dechtman says. "It's crucial the investor is comfortable with the asset allocation mix in order to capture long-term appreciation."

Stick to your plan

If balanced mutual funds and ETFs sound good to you, make sure they fit into your investment policy statement, a written document that clearly sets out your return objectives and risk tolerance over a time horizon, Johnson says.

"If a particular balanced fund's asset allocation fits an investor's IPS, it can be an efficient means to invest and can greatly simplify the investment process," Johnson says, noting it is best to develop an IPS in a calm market, so that it prepares you for volatile market conditions before it occurs.

"As 2019 rolls on with many headwinds and challenges on the horizon, the fate of the current market rally is uncertain, with many market watchers having different outlooks and opinions," Giacoumakis says. "This may be a good time to invest in a moderate posture to have the ability to capture some of the upside, while at the same time finding reduced downside volatility through the use of the balanced fund concepts."

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