"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?
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 committed 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 1.00 percent a year or less eliminated several. Requiring that they be ranked 4 stars or better by Morningstar was a good way to eliminate the funds that tended to take high risks.
Of the eleven 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 9 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 last 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 2/3rds 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 last 15 years. They have been mentioned in previous columns. Data on the funds is in the table below.
|Simplicity and Balance|
|This table shows the annual and annualized returns of leading balanced funds compared to the performance of the average domestic equity fund. Return figures are in bold when they are greater than the average domestic all equity fund.|
|Fund||2004||5 years||15 years||Yield||Exp. Ratio|
|Average All Domestic Equity Funds||11.92||1.39||10.04||0.62||1.48|
|No Load Funds|
|Mairs & Power Balanced (MAPOX)||12.02||7.97||11.38||2.62||0.94|
|Vanguard Wellington (VWELX)||11.17||7.53||10.85||2.81||0.36|
|Fidelity Puritan (FPURX)||9.28||5.57||10.51||2.29||0.64|
|Pax World Balanced (PAXWX)||13.39||3.09||9.93||0.94||0.99|
|T. Rowe Price Balanced (RPBAX)||10.32||3.78||9.86||2.32||0.78|
|American Funds Am. Bal. A (ABALX)||8.92||9.47||10.90||1.95||0.67|
|American Funds Income A (AMECX)||12.92||9.42||10.85||3.50||0.57|
|MFS Total Return A (MSFRX)||11.35||7.76||10.18||2.35||0.89|
|Oppenheimer Capital Income A (OPPEX)||10.28||7.55||9.83||3.88||0.89|
|Source: Morningstar Principia, 12/31/04 data|
The past won't duplicate the future, of course. But if you hunger for a simple approach, you could do worse than buying one of these balanced funds. Managed accounts cost about 1.00 percent more a year than the most expensive of these funds. It is highly improbable that the average managed account will recover that additional expense.
On the web:
Tuesday, December 21, 2004: "Here's a way to get balance"
Sunday, November 3, 2002: "Indexing is built for the long haul"
Tuesday, May 1, 2001: "Searching for the Best in Balanced Funds"