This Might Be Your Perfect Investment

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As the stock market climbs ever higher out of the abyss it fell into earlier this year, investors are starting to feel a lot more comfortable with the way the financial markets are behaving. Instead of running around in a panic half-expecting their investments to be completely worthless within days, people want to prepare for when the rally may end -- but they also want to eke out every last penny of profits before it does.

So as the familiar tug-of-war between fear and greed reasserts itself, you might want to consider an investment that combines attractive features like growth potential and capital preservation -- all in one package.

Get the best of everything
For those looking to lock in some of their recent gains from the stock market rally, balanced mutual funds may be exactly what the doctor ordered. While balanced funds invest more conservatively than pure stock mutual funds, since they hold a substantial amount of bonds and cash, they don't close the door to the appreciation potential that stocks offer.

In fact, as the bear market made all too apparent to investors, sometimes more conservative investments perform better than riskier ones, even over relatively long time periods. Take a look, for instance, at these four top-performing balanced funds.


YTD Return

5-Year Avg. Annual Return

Top Holdings With Best YTD Return

Oakmark Equity & Income I (OAKBX)



The TJX Companies (NYSE: TJX  ) , Hospira (NYSE: HSP  )

Janus Balanced J (JABAX)



Goldman Sachs (NYSE: GS  ) , Morgan Stanley (NYSE: MS  )

Greenspring (GRSPX)



Suncor Energy (NYSE: SU  ) , Michael Baker

Vanguard Wellington (VWENX)



Schering-Plough (NYSE: SGP  ) , IBM (NYSE: IBM  )

Source: Morningstar.

These funds have taken maximum advantage of an extremely favorable environment for balanced funds, capitalizing on some huge returns on high-quality bonds while the stock market was crashing downward, but also choosing stocks that have rebounded strongly so far this year. As a result, their five-year results well exceed the S&P 500's 0.6% five-year average annual return.

Can balanced funds keep working?
The challenge for balanced funds going forward, though, comes from the multiple threats that the financial markets currently face. Although interest rates have already come well off their lows, putting additional pressure on the income component of balanced funds -- for example, one unleveraged long-term Treasury ETF has lost more than 22% so far this year -- many believe that inflationary pressures and huge increases in monetary supply resulting from massive budget deficits have already spelled an end to the decades-long bull market in bonds.

The funds above have used different methods to tackle that threat. Wellington has lengthened maturities and moved toward riskier corporate debt. Greenspring is also buying risky debt, but mostly with short maturities, and maintains a 20% cash position. Janus and Oakmark both focus on intermediate-term bonds, but while Janus has a varied mix of high-quality debt and riskier corporate issues, Oakmark has stuck with predominantly AAA-quality bonds. The variety of responses makes it clear that there's little consensus on how best to handle the income-producing portion of balanced-fund portfolios.

Meanwhile, in addition to staying on top of trends in the credit markets, balanced funds must also find stocks that will provide strong returns. Even though these top funds have found an array of great stocks with good performance both recently and over the long haul, they still must constantly work to squeeze the best results they can get from their stocks -- especially since those returns usually get diluted by the fixed-income side of the portfolio.

What to do
Obviously, stocks still have a long way to go before they trade at the levels we saw a couple of years ago. But if you decided last fall to wait for the stock market panic to end before making any major adjustments to your portfolio -- well, even though the economy isn't completely out of the woods yet, there's certainly a lot more optimism in the air than there was back then. No matter where the markets go from here, taking the opportunity to downshift your portfolio into more conservative investments like balanced funds might be exactly the right move for you.

More on smart fund investments:

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Fool contributor Dan Caplinger keeps his fund portfolio balanced on his own. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy always keeps its balance.

Read/Post Comments (2) | Recommend This Article (10)

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  • Report this Comment On August 07, 2009, at 2:02 PM, plange01 wrote:

    my best pick this year is up over 900% and is no where near its top. take a look at (car) i left a $50,000 job with the company in june that i had for 11 months and have made $950,000 on its stock in 10 months!thats more than its ceo gets paid!!you dont make money by working!

  • Report this Comment On August 07, 2009, at 10:08 PM, glenby52 wrote:

    My Vanguard Wellington personal return shows a -7.6% for a one-year return and 3.2% for the 5 year return w/o any transactions, so be careful of the time periods considered for these examples. Timing is everything!

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