The Appeal of Funds that Hold Both Stocks and Bonds

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During the bull market that ended in 2000, investors learned that stocks can deliver big returns—and sudden losses. Since then, there has been a new spirit of caution, and funds that once seemed stodgy have enjoyed renewed demand. These include balanced funds, which typically hold a mix of blue-chip stocks and relatively safe bonds.

 

In the 1990s, balanced funds lagged technology and internet stocks by wide margins. But lately, balanced portfolios have delivered steady returns. The stock and bond holdings tend to complement each other. Bonds provide protection in downturns, while stocks allow for some growth. “Many people are focused on avoiding losses, so they turn to balanced funds,” says Avi Nachmany, research director of Strategic Insight, a fund tracker.

 

A top choice is Fidelity Balanced, which has returned 10.3% annually for the past five years, outdoing the Standard & Poor's 500-stock index by nearly 4 percentage points. The fund has about 60% of assets in stocks and 40% in bonds. What makes the Fidelity fund particularly noteworthy is that it delivers very stable results. In 11 of the past 12 years, Fidelity Balanced has stayed in the black.

 

Even aggressive investors may want to consider a balanced fund. A solid balanced choice can provide stability for a portfolio that may focus on riskier holdings. Balanced funds also make ideal choices for children who are just starting to save. With one fund, a youngster's small account can hold a diversified portfolio. 

 

Among the more popular balanced funds are so-called lifecycle funds—portfolios that include a mix of bonds and foreign and domestics stocks of all types. The portfolios come in a variety of styles, including conservative, moderate, and aggressive. An investor can put most of his assets in a lifecycle fund, or simply use it as an anchor for a broader portfolio. A strong choice is Vanguard Life-Strategy Conservative Growth.

 

T. Rowe Price reports that the best-selling new product introduction in the company's history is a

version of a lifecycle fund known as a retirement-date fund. With these, savers pick a fund that is aimed at a particular retirement year, such as 2020. The fund gradually changes its allocation, increasingly shifting assets to bonds and away from stocks. At the same time, the port-folio manager rebalances the fund, making sure that no one investment category becomes overweighted in the portfolio. The T. Rowe Price 2010 fund makes a solid holding for conservative investors. Such lifecycle funds can be convenient choices for busy investors. With one choice, you obtain a professional manager who will keep your assets diversified and work toward achieving your long-term goals.

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