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Client Update


Simplify Your Investment Life

If you’ve ever met with a financial advisor, s/he probably spent a good deal of time trying to determine your tolerance for risk, in order to better design an appropriate portfolio of investments for you. Conventional wisdom holds that the best way to guard against unwanted or unnecessary losses is to diversify your investments among stocks, bonds and cash-type holdings. If you’ve attempted this trick yourself, you may have found the whole exercise a bit overwhelming. The process of appropriately allocating your monies among a mix of assets is as much an art as it is a science – and it’s made more difficult by the sheer number of investment choices available today.

Wouldn’t it be great if − instead of deciding, for example, which short-term bond fund or large cap growth fund to put your money in − there was simply a one-size-fits-all approach? For many investors there is. It’s called the balanced fund. A balanced fund is a type of mutual fund that holds both stocks and bonds in its portfolio. The “appropriate” mix is determined by the fund manager, based – among other things – on what s/he feels the prospects (and/or risks) are for stocks versus bonds and, thus, what a prudent mix of each should be.

Theory suggests, and research supports, that for many investors, a prudent mix is approximately 60-65% stocks and 35-40% bonds. Not surprisingly, many balanced mutual funds exhibit a similar portfolio allocation. Take, for instance, Vanguard’s Wellington fund – the world’s largest balanced fund. At the end of March 2002, Wellington fund had approximately 60.1% of its assets in stocks and 30.8% in bonds. Dodge & Cox Balanced had 57.1% in stocks and 31.2% in bonds.

Typically, balanced mutual funds allocate the stock portion of their portfolios to large cap, dividend-paying stocks, and the bond portion to high quality government bonds or a mix of government and corporate bonds. But investment policies differ greatly among the many balanced funds available, and consumers need to be aware that fund managers have a lot of discretion over how a fund’s investments are allocated. For instance, the best performing balanced fund for the one-year period ending March 31, 2002 – UAM FPA Crescent fund – had fully 40.7% of its assets in cash. By comparison, one of the worst performing funds over the same period – Green Century Balanced fund – had its stock portion invested in small company growth stocks and its bond portion invested in intermediate-term “junk” bonds. You can check your fund’s investment holdings by logging on to www.Morningstar.com and requesting a “Quicktake” report.

Balanced funds are not for everyone. Many investors prefer to determine the appropriate mix of stocks, bonds and cash to hold in their portfolios themselves – or with the help of an investment professional. But if you’re looking to simplify your financial life, the one-size-fits-all approach of balanced mutual funds may be just the thing for you.


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