In order to build the safest portfolio you can, it's important to own a wide range of investments. But if you don't have the time or inclination to search through thousands of different investment choices, then one particular kind of mutual fund might give you everything you're looking for.
What you need
One of the main difficulties in coming up with a strong investing plan is that it takes a lot of effort to put together a diversified portfolio. At the highest level, the typical investor will want a mix of stocks, bonds, and certain other types of assets. Furthermore, within each of those categories, you'll find many different ways to subdivide them into areas that you'll want to ensure you cover. For instance, it's not enough just to buy stocks willy nilly; you'll want to have the right mix of large- and small-company stocks, foreign and domestic stocks, and value and growth stocks.
Trying to find individual stocks that meet all your diversification needs can seem next to impossible. Even if you decide to invest through mutual funds or ETFs, you'll soon see that it can take dozens of different funds to cover all the areas you want within your portfolio. Fortunately, though, there's a simpler way to cover your bases, while still giving fund managers the chance to make strategic decisions that can lead to better returns.
Funds that change with the times
Asset allocation funds are designed to give investors a complete portfolio within a single package. Most allocation funds combine stocks, bonds, and other investments, making decisions about how much of each to own based on current market conditions and managers' projections about the future.
As an example, take a look at the Berwyn Income Fund (BERIX). Billed as a "conservative allocation" investment choice, the fund has roughly half its assets invested in bonds, with stocks and cash making up most of the rest of the portfolio. Moreover, even among the stock investments that the fund has made, you'll find primarily well-known, secure blue-chip names such as Sysco (NYSE: SYY ) , Johnson & Johnson (NYSE: JNJ ) , and Kimberly Clark (NYSE: KMB ) -- dividend-paying stocks that enhance the payouts provided by the fixed-income side of the portfolio.
By their nature, allocation funds will generally have muted performance swings. During bull markets, they won't rise nearly as much as stock funds, because their bonds will hold back returns. But over the past 10 years, with broad stock indexes remaining relatively flat, Berwyn Income has lit up the charts with a 9% average annual return.
Not (just) for the meek
Before you conclude that allocation funds are just for conservative investors, though, think again. At the other end of the risk spectrum, you'll find allocation funds like Ivy Asset Strategy (WASAX), which scours the globe focusing primarily on stocks. In addition to high-octane U.S. stocks like Wynn Resorts (Nasdaq: WYNN ) and Qualcomm (Nasdaq: QCOM ) , you'll also find Ivy's managers investing in overseas juggernauts like ArcelorMittal (NYSE: MT ) and Taiwan Semiconductor (NYSE: TSM ) . Being in the right place at the right time has brought the fund annual returns of nearly 14% since 2005.
One hallmark of allocation funds is substantial flexibility in making different kinds of investments. For instance, right now, Ivy's largest holding isn't a stock: it's gold bullion, currently making up a whopping 15% of assets. Not every allocation fund will make big precious-metals plays, but it's not unusual for funds to make big tactical bets in line with their overall views of the financial markets.
Worth a look
The biggest attraction of asset allocation funds is that they can be a one-stop shop for investors seeking exposure to a broad range of investments. Yet just as there's danger to owning just a few stocks, there's also danger in picking a single allocation fund: you're leaving your portfolio at the mercy of one manager's beliefs. No matter how skilled a fund manager may be, that's a bet that you probably shouldn't make.
Nevertheless, allocation funds are worth taking a close look at. For time-starved investors looking to build an investing strategy simply and without a huge amount of effort, a number of well-chosen allocation funds could form the core of a successful portfolio.