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What fund(s) would you suggest if I want moderate allocation with approx 60% in stocks and 40% in bonds?

Sep 01, 2013 by Tom from West Hills, CA in  |  Flag
9 Answers  |  11 Followers
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7 votes
Brad Raines Level 15

Tom - while all the above are good funds and advice, the actual investments you use are the easy part but must come AFTER you address the following (horse before the cart):

  1. Do you believe you or the fund managers can accurately and consistently predict the market? If so then you need an "Active" portfolio of mutual funds where the fund managers are trying to buy the right investments at the right time (like Bruce Berkowitz and his Fairholme fund, FAIRX). These funds are usually more expensive because you are paying for professional, active management.

If you are pessimistic (like me) in the ability to accurately and consistently predict the markets and unforeseen events, then you need a "Passive" portfolio of mutual funds or exchange-traded funds (ETFs) that own the entire market at a very low cost. Vanguard, Schwab, Fidelity, and others have those passively-managed, low-cost funds.

  1. Once you come up with your initial asset allocation (ie 60% stocks, 40% bonds), can you stay invested or make the right adjustments in a normal up or down market? In the recent 2008-09 market crash the US stock markets (S&P 500 & Dow Jones) dropped over 50%. That would mean your 60/40 account would have dropped about 30%. What would you have done? Could you stomach that big loss and stay invested? If you use an advisor, is he/she financially motivated (fee vs commission) to recommend you stay invested or even better shift a little more to stocks?

That 2008-09 market crash wasn't too unusual since it just happened back in 2000-02. The asset allocation and how you react in up/down markets is almost more important than the actual investments you use.

Once you know whether you want an Active or Passive portfolio and are comfortable with your initial allocation (ie 60/40), then the funds can be selected. Hope that helps!

Invest With Purpose www.appliedcapital.com

Comment   |  Flag   |  Sep 03, 2013 from Little Rock, AR

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5 votes
Joe Soto Level 15

Hello Tom,

I would recommend you find a Fund Family (Fidelity, Legg Mason, American Funds, etc.) that you trust and and talk to an advisor from there to explore your options. There are too many options of funds out there and at any given time one could be out performing another. As long as you have a sound strategy and the right habits you should feel comfortable talking with someone face to face.

It's important to note that there are a number of other factors to think about when picking the appropriate fund not just what's "hot" today. Talk with with a specialist and find out what would be right for you.

Hope this helps.

Comment   |  Flag   |  Sep 01, 2013 from Burbank, CA

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5 votes
Rich Winer Level 20

Tom, I too like T. Rowe Price Capital Appreciation. A more conservative option would be FPA Crescent. If you have more questions, feel free to contact me through this website. My office is in Woodland Hills.

View all 4 Comments   |  Flag   |  Sep 01, 2013 from Woodland Hills, CA
Brad Raines

The Active vs Passive debate I was briefly describing pertains more to an investor's personality than the effectiveness of the investment strategy. I have clients who have been successful with active fund or money managers for a portion on their overall portfolio. More often I have seen investors and advisors flock to actively managed funds AFTER great performance (see FAIRX in 2009-10), but abandon those strategies when the "fund manager changes his style or begins to underperform" (see FAIRX in 2011). Another way of saying "we just bought high and sold low"... hard to recover. As a fee advisor, my job is to match each client's investing personality with the most effective strategy or combination of strategies. While I am skeptical in the ability to accurately predict most market or economical events, I do agree that there are some brilliant fund managers who can maneuver a mutual fund to outperform the market (B Gross, B Miller, A Gudefin, B Berkowitz, S Romick, R Goldfarb). The problem occurs when I incorrectly match a participation-oriented investor with an active portfolio and the Fund Manager of the Decade (Berkowitz) has a terrible year like 2011 when FAIRX was -32% with the S&P 500 +2%. Many investors and advisors would and did bail at that point creating an unrecoverable (Buy High, Sell Low) event for the client. The investors and advisors that understand and can tolerate temporary underperformance of active management like that would have realized the benefits of a brilliant fund manager who recovered to beat the same benchmark by almost 20% the next year. The same thing happened with Bill Gross' Pimco Total Return fund when he made a bad bet on treasuries in 2011, but followed it up with a brilliant 2012. Good advisors and investors add the greatest value to their portfolio when they understand the basics positives and pitfalls of the Active and Passive strategies. And then use their preferred strategy or combine both effectively according to their personality to improve the bottom line.

Flag |  Sep 04, 2013 near Little Rock, AR
Rich Winer

I see your point. However, I believe that my job is to recommend the financial strategies I believe are best and most appropriate for each client. If I believe in active management, I must convey my beliefs to my client and the reasons behind them as best I can. If the client doesn't agree or feel comfortable with my recommendations, then I am not the right advisor for him or her. If the patient doesn't want to follow the doctor's advice, there's not much I can do. I like Nick Murray's writing on how investor behavior is a major determinant of results. You are correct that people chase performance and are often unwilling to face the fact that no strategy works 100% of the time. So, they abandon good managers and strategies during periods of underperformance. Our job in managing investor/client emotions and behavior is as important the recommendations we make. I think we agree that it never hurts for investors to get advice from a qualified financial advisor and that it's important that the client believes in the advisor's approach and is willing to follow their agreed-upon strategy throughout a full market cycle.

Flag |  Sep 04, 2013 near Woodland Hills, CA

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4 votes

T. Rowe Price Capital Appreciation is a great fund that has performed in the top 1% of all moderate allocation funds in the past 10 years and is beating the moderate allocation category by over 5% so far this year. The ticker symbol is PRWCX.

Comment   |  Flag   |  Sep 01, 2013 from St. Louis, MO

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4 votes

Hi Tom - I would suggest the Vanguard Balanced Index Inv. (VBINX). The initial investment is only $3.000 and the annual expenses ratio is only 0.24% with no load fees. The fund invests roughly 60% in stocks and 40% in bonds by tracking two indexes that represent broad barometers for the U.S. equity and U.S. taxable bond markets. There are over 3,000 stock holdings and over 4,000 bond holdings in this fund which allows for excellent diversification. The bonds are all investment grade. This fund would be appropriate if you have a long-term time horizon and you want growth and some income—and you are willing to accept stock and bond market volatility.

Comment   |  Flag   |  Sep 02, 2013 from Allendale, NJ

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3 votes
Alex Bentley Level 18

Vanguard Wellington Fund. It's been in business since 1929

Comment   |  Flag   |  Sep 01, 2013 from Pacific Palisades, CA

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3 votes

Hi Tom - There are some great options when it comes to balanced funds - many have been mentioned in response to your question. In the current interest rate environment, it may make sense to look at the TYPES of bonds that comprise the fixed income portion of your portfolio. It is highly likely that rates will continue to rise from historic lows. If this scenario plays out, you will be well served to hold fixed income investments that have a lower duration (lower interest rate risk) and to avoid overweighting U.S. government bonds.

1 Comment   |  Flag   |  Sep 04, 2013 from Cranford, NJ

This conversation should be first about asset classes, and then about any particular funds. In some asset classes you'd want to go with Active strategy (e.g. in High Yield, Munis, Preferreds, Small Cap and International equities) and in others you are better off with Passive indexing (Treasuries, TIPS, Large Cap Equities). Then, choose each active or passive fund from a wide selection based on long term performance history (at least 5 years), a number of quantitative measures like Information ratio and Sharpe ratio, peer rankings, fee levels, fund's parent company, portfolio managers tenure, etc and narrow down to one fund for each asset class. After that due diligence, stick with it for at least 5 years, unless something serious happens (like portfolio manager leaving). It is also important to understand from the beginning if that particular fund's strategy is bound to be out of favor in certain market environments, so when that happens you don't feel the urge to sell.

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Flag |  Sep 04, 2013 near Saint Johns, FL

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1 vote

Given your request for a 60/40 split you have some good answers above. I want to highlight your 40% bond allocation. In the past this was the safe part of the portfolio. It still has the lower volatility of the two, but be aware many balanced funds index against the US Aggregate for the 40% bond portion. At the end of 2012 this index had over 35% in US treasuries. The current duration is 5.61 (Barclays website - 9/10/13). This means if rates rose 1% over short-term the price would drop approximately 5.6%. A healthy bond allocation may be warranted, but looking at different underlying sectors and different maturities are worth considering.

Comment   |  Flag   |  Sep 10, 2013 from Western Springs, IL

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1 vote

Tom, I would recommend that you do some of your own research, not even exactly so much to select investment choices, but more to find out where you are more comfortable in the active vs. passive debate and to develop a personal financial strategy in general.

For many of my clients, I utilize institutional third party money managers, or strategists that do their own extensive research and develop alogirithms to determine when they should allocate to certain asset classes. These money managers invest basically in ETF’s. The fees are low. I get to invest my clients money in low-cost ETF’s, and utilize money managers that I have screened for integrity, past performance, risk and volatility, and that I believe their investment strategy is sound.

I believe that the great majority of returns comes from being in the proper asset allocation. I believe that by actively managing low cost ETF’s with what I believe are some of the best money managers gives my clients the best of both arguments.

As for investing 40% in bonds; I understand that historically this has been a sound strategy. But I am very concerned that interest rates will rise, perhaps significantly. If this happens, people with large bond positions can get hurt badly. I believe we are probably entering a bond bear market. This is after a sustained 30 year bull market. If you are to invest in bonds, I recommend you stay with short duration bonds, perhaps TIPS going forward. If this makes sense to you, please refer back to my first sentence; do some of your own research. Seek advice from a local financial professional, preferably a CFP(R) who agrees with your philosophy.

Comment   |  Flag   |  Sep 20, 2013 from Delray Beach, FL

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