Many investors never bother adjusting their portfolios to restore their desired balance of stocks versus bonds, even when stocks have soared, as they have in recent years. But there is a type of mutual fund that does the rebalancing for you. Balanced funds invest in both stocks and bonds—in many cases, around 60% large-cap stocks and 40% high-quality government and corporate bonds, although many balanced funds have leeway to stray from the standard mix. This formula provides a cushion of safety along with potential for strong gains and significant yields. You even might choose a balanced fund as your only fund.
Three attractive balanced funds…
Hennessy Equity and Income (HEIFX), which outperformed 89% of funds in its category over the past five years, keeps about 60% of its portfolio in stocks, especially dividend-paying stocks. It puts the rest in bonds and cash and is willing to hold higher levels of cash than most other balanced funds do, recently about 7% of total assets. 10-year annualized return: 7.9%.
Fidelity Puritan (FPURX) has outperformed 95% of funds in its category over the past five years by combining an aggressive stock strategy with a cautious bond strategy. It emphasizes blue chip growth stocks such as Apple and Microsoft. 10-year annualized return: 7.2%.
Dodge & Cox Balanced (DODBX), which can devote as much as 75% or as little as 25% of its portfolio to stocks, outperformed 97% of funds in its category over the past five years. It tends to be more volatile than the standard balanced fund and often invests in out-of-favor stocks, including Hewlett-Packard and Target. 10-year annualized return: 6.6%.