Balanced Funds Help Investors Weather Stormy Markets

If the prospect of a decline in the stock market keeps you up at night, owning a “balanced” mutual fund that splits assets between stocks and bonds may help you get more shut-eye. These funds can’t keep up with stocks in a bull market, but they tend to lose less when stocks decline. In 2008, when Standard & Poor’s 500-stock index surrendered 37%, funds that allocate 50% to 70% of assets to stocks, with the remainder in bonds, lost just 28% on average.

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Because these funds rebalance assets to a set allocation, they can help take emotion out of investing. For investment minimalists, these funds can serve as all-in-one portfolios.

Investors looking to take some of the edge off a stock-heavy portfolio as well as add some diversification should consider Vanguard Star Fund (VGSTX), which invests in 11 low-cost, actively managed Vanguard mutual funds. The fund typically invests about 60% of assets in stocks, with the rest in bonds. The three-fund bond portfolio focuses on investment-grade bonds with both short- and long-term maturities, as well as government-issued mortgage-backed securities. Star’s eight stock funds invest in firms of different sizes and include growth-oriented and bargain-priced stocks both in the U.S. (about 66% of the stock portfolio) and abroad (about 33%).

The fund rebalances to its 60-40 allocation on an ongoing basis, and the 11 funds have held the same weighting in the portfolio since 2010, when Vanguard upped the fund’s international stock exposure from 15% to 20%. With the exception of the Vanguard Short-Term Investment Grade fund, all of Star’s underlying funds are run by at least one manager from outside Vanguard. Last year, two of the firms managing the small-cap Vanguard Explorer fund were jettisoned in favor of a team from ClearBridge Investments.

Unlike many funds that invest in other mutual funds, Star charges investors only the expenses of its underlying holdings. At 0.32%, the fund’s expense ratio falls well below the 0.89% charged by the average balanced fund. Including 2018 (through mid March), Star has beaten the return of its average peer in eight of the past nine calendar years.

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