By Scott Burns

Today we’re playing a meaningful game of woulda-coulda. We’re going to see how a $1 million portfolio fared over the last few miserable years. We’re going to put our money in some of the largest and most successful balanced funds. Some will be no load funds, some will be load funds, but we’re not going to count the up-front commissions.

A balanced fund, called a “moderate allocation” fund by Morningstar, typically has about 60 percent of its assets invested in equities and 40 percent invested in fixed income. Most investors and their advisors favor balanced portfolios because the combination works to smooth the ups and downs of portfolio value. Bonds tend to rise when stocks fall, and vice versa. While aggressive investors may be able to live with the charge of a double espresso, most of us feel better with a cup of Sleepytime tea. Balance helps us sleep at night.

I’ll tell you right now that the thumbnail lesson here is bittersweet: Investment success is a lot easier when you are accumulating your nest egg than when you are spending from it. This is great news for the young, if they are saving regularly.

But it’s bad news for retirees. A bear market, as you’ll soon see, does permanent damage when you are making regular distributions from your nest egg.

To measure the damage I used Morningstar Principia to compare how investors in more than a dozen of the largest moderate allocation mutual funds had done between the start of 2007 and the end of March this year. The results are telling.

If you were a do-it-yourself investor and had invested $1 million in T. Rowe Price Balanced fund (ticker: RPBAX, expense ratio 0.71 percent) at the end of 2006 and reinvested all dividends and capital gains distributions, you would have had $1,031,343 by the end of March. Your heart would have been in your throat during many of those 51 months, but your nest egg would be ever-so-slightly improved. In fact, 9 of the 15 balanced funds examined had higher values at the end of the period than at the beginning.

Only one of the remaining 6 funds lost over $100,000. It was the American Funds Income Fund of America. It ended the period with $882,272. Before you dismiss this fund as a sorry loser, consider that its performance was at the 50th percentile during the last 3 years. So it may trail this list, but about half of the moderate allocation funds out there probably did worse. When you consider that the last three years contained the worst market crash in more than half a century and one of the very worst declines since 1815, the numbers could be a lot worse.

Unfortunately, things go downhill when you start making regular withdrawals. Start with the same amount in each fund and withdraw $3,333.33 a month. This amounts to $40,000 a year or 4 percent of starting value, a commonly used benchmark for safe withdrawals from retirement savings. Only 1 of the 15 balanced funds was worth more than $1 million at the end of the period. The other 14 were all below $1 million. The hindmost was down to $699,990— a loss of 30 percent. The funds are listed below with their end value with no distributions and with distributions. (The figure in parenthesis is the percentile rank over the preceding 3 years against other moderate allocation mutual funds.)

While $170,000 was distributed from each fund over the 51 month period, every fund lost more than was distributed. This happened because shares redeemed at low prices were not there for the recovery.

As always, it could be worse. If you had invested the same million in George Putnam Balanced A shares, for instance, the million would have been reduced to $760,361 with no withdrawals and to a dismal $585,561 after distributions. This fund still has $1 billion in investor assets but has been in the bottom 10 percent for performance over the last 3 and 5 year periods.

One of the reasons the focus of this column is on index funds can be seen in this list. The two index funds are toward the top of a better-than-average list. Sticking to index funds may have foreclosed the possibility of being at the top of the list, but it also eliminated the possibility of being at the bottom.

It’s Hard To Recover from a Market Crash If You Need Income

This table shows a rank ordered list, by end value of a $1 million investment after distributions, of how 15 major balanced funds performed if returns were reinvested or after a monthly distribution of $3,333