An Investment I Love

An Investment I Love

The month of October has been really volatile for the stock market. Over the first two weeks the market was down about 7% and then over the past week it has regained much of those losses where it is down now only about 3% from its peak. All of this volatility makes a lot of people nervous, including myself to some degree. I mean who likes to see their investments go down. I certainly don’t. But I know enough about the history of the stock market and put enough trust in the system to know that in the long- term I will have more money ten years from now then I will today.

I also am a person who doesn’t have a problem with risk. Over 90% of my investment portfolio is tied up in the stock market in some capacity, but I do have as part of my investments something that I think might help people who are a little bit more risk averse: balance funds.

Balance Fund Advantages

If you are someone who doesn’t want a lot of volatility in their investments, but still want to make some good gains I strongly recommend people into balance funds. Balance funds typically have a combination of stocks and bonds in them. When the market is going really well the person(s) running the funds tend to weigh that fund more toward stocks. When the market is more volatile or going down they buy more bonds. A few advantages of balance funds are this:

  • You get stock market growth without a lot of the volatility.
  • It takes some steam out of the large swings within the market. For example, from 2007-2009 the Dow Jones Index lost over 50% of its value. Depending on which balance fund you would have probably lost in the neighborhood of 20-30%. Now 30% is nothing to sneeze at, but it is a lot better performance than a normal stock fund.
  • You can still get decent returns (6-8%) in a lukewarm hot stock market.
  • It is great for diversification because it invests in both stocks and bonds at the same time.

Now let me be clear. Just because you invest in balance funds does not mean that you may not lose money in the stock market. Any investment is risky. There is no guarantee not to lose your money except for putting that money under your mattress. But in 10 years that money will be worth much less anyway so sticking it in your proverbial mattress or CD or bank account doesn’t help. For the conservative to moderate risk taker, particularly people who are nearer retirement or in retirement, I think balance funds are a great way to diversify your portfolio, get some growth, but reduce volatility and risk, and achieve diversification which is what many investment advisers say is absolutely essential (and so do I).

I personally own Fidelity Balanced Fund. I own it, partly, because it is a choice that I have for my 401(a) and 403(b). However, there are a number of a great low-cost balanced funds that you can get from Vanguard (Vanguard Balanced Index, Vanguard Wellesley Income are two of my favorites) or from other brokerage firms.

The key is to do your research. Look at the fund’s  track-records (I only buy funds with 10 year track records or more), the expense-ratio (the lower the better), and their asset allocation (e.g. how much do they have in stocks/bonds). Some balance funds are a little more aggressive in their stock allocations, some are more conservative. Do your OWN research. Spend a little time going through your investment choices in your 401k or other retirement accounts. Make sure you make an informed decision, but when you investigate them like I did. I think you will find them to be a great investment alternative for people who can’t stomach large swings in the stock market.

If you don’t like a lot of volatility, but good steady gains that won’t drop like a stone in a market downturn then balanced funds might be for you.

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