You may have heard that you shouldn’t put all your eggs in one basket. This is sound advice. However, there are exceptions to this rule with mutual funds. You might be a beginner investor or someone with limited investment options in your 401(k) plan. Or you might want to find a strong core investment for building a diversified portfolio.
What are balanced funds?
Balanced funds are also known as hybrid funds. These are mutual funds that provide a mix (or balance) of underlying investment assets; these assets can include stocks, bonds, and cash. This is asset allocation in its simplest form.
Balanced funds typically have a specific objective. This objective can describe aggressive, moderate, or conservative allocation. For example, the Fidelity Balanced Fund (FBALX) maintains a moderate allocation (medium risk). It holds roughly 70% in stocks, 27% in bonds, and 1% in cash.
One of the top balanced funds is the Vanguard Wellesley Income Fund Investor Shares (VWINX). It usually maintains a conservative allocation of approximately 40% stocks and 60% bonds.
Balanced funds can be used as core assets for a mutual fund portfolio. Or they can be utilized by beginners as a primary fund. Either way, balanced funds are diversified and professionally managed. They are a win/win for a one-fund approach.
How to choose target-date funds?
Target-date funds are exactly what they sound like: These are funds that invest for a specific date in the future. These funds are common in 401(k) plans. They can be used in a one-fund approach. If you are investing for retirement, you might want to consider one of the target retirement funds from Vanguard.
For example, let’s say you plan to retire in or around the year 2050. You could use the Vanguard Target Retirement 2050 Fund (VFIFX). As the target retirement year nears, the fund manager will gradually reduce the allocation to stocks and increase the allocation to bonds and cash. In other words, it will transition from aggressive to moderate and then to conservative over time.
Buyer beware: Target-date funds are a “lazy portfolio” in the end. However, there are no funds suitable for everyone. Very conservative investors may not feel comfortable with the allocation of a target-date fund if it is too aggressive for their risk level. This means you may want to do some research before investing. Be sure to check the asset allocation of the target-date fund.
For example, let’s say you want to be more conservative. In this case, you might want to consider a target date closer, like five or ten years before your target date.
What if you want a more aggressive mix of stocks and bonds with a target-date fund? In that case, you might want to choose a target date further out, like five or ten years after your target date.
Why invest in index funds?
When looking at a one-fund approach, index funds can be a wise choice. This is due to their passive management, broad diversification, and low costs. Beginners may want to start with an index fund, such as one of the top S&P 500 index funds, to use in a core and satellite portfolio structure. Or they might want to increase exposure more broadly with a total stock market index fund.
Disclaimer: The information provided on this site is for discussion purposes only and should not be construed as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
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Sources:
- Fidelity. “Fidelity Balanced Fund (FBALX).”
- Vanguard. “Vanguard Wellesley Income Fund Investor Shares (VWINX).”
- Vanguard. “Vanguard Target Retirement 2050 Fund.”
Source: https://www.thebalancemoney.com/how-to-invest-with-just-one-mutual-fund-2466570
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