Some questions have a way of "reframing" how we look at things. After a recent speaking engagement, a man in the audience said it was really...
Some questions have a way of “reframing” how we look at things. After a recent speaking engagement, a man in the audience said it was really too much bother to do the Couch Potato portfolio — the one where you put half your money in a broad stock index and half in a broad bond index.
“How about going to a managed account?” he asked.
That, of course, opens a whole can of worms. Whose management? How much will it cost?
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The whole premise of Couch Potato investing is that you and I can gain more by simplicity, low turnover and low expenses than we can gain by expensive money management.
This isn’t a casual idea: It is backed by more than three decades of investment research.
But suppose regular rebalancing of a stock and a bond fund is more than you feel comfortable with? Does that mean you need to use one of the many managed accounts or “wrap” accounts that investment firms are offering?
There is a middle course.
Long before the investment world was mapped into little “style boxes,” there was an option for the one-decision investor.
It is called a “balanced” fund — one that invests in both stocks and bonds. Typically, these funds are structured like pension funds, with about 60 percent of their portfolios committed to stocks and 40 percent to bonds.
Owning these funds isn’t remotely trendy. But the best of the bunch offer return levels that are hard to beat.
I started my search with the Morningstar Principia database. While there are some 1,036 “moderate allocation” funds — typical balanced funds — only 38 have been in operation for at least 20 years.
Requiring that they have expense ratios of 1 percent a year or less eliminated several. Requiring that they be ranked four stars or better by Morningstar was a good way to eliminate the funds that tended to take high risks.
Of the 11 funds that survived, Dodge and Cox Balanced had to be eliminated because it is closed. I also eliminated Van Kampen Equity and Income A shares because Morningstar gave the fund a fiduciary grade of “D” — meaning there is little alignment between the shareholders’ interests and those of the fund manager.
That left a list of nine funds, five no-loads and four load funds. The load funds are American Funds American Balanced A shares, American Funds Income A shares, MFS Total Return A shares and Oppenheimer Capital Income A shares.
Over the past 15 years, the two American funds and MFS Total Return A shares have done better than the 10.04 percent annualized return of all domestic equity funds with about two-thirds of the risk.
The no-load funds are Mairs and Powers Balanced, Vanguard Wellington, Fidelity Puritan, Pax World Balanced and T. Rowe Price Balanced.
Of those, Mairs and Powers Balanced, Vanguard Wellington and Fidelity Puritan have done better than the average return of all domestic equity funds over the past 15 years.
Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at firstname.lastname@example.org. Questions of general interest will be answered in future columns.