For the most part, investors aren't patient. They want results, and they want them now! If an investment doesn't perform as expected, they typically dump it to seek greener pastures elsewhere.
This tendency is unfortunate, because investors -- even really smart ones -- are much more likely to time market calls wrong than to get them right. Frequent buying and selling typically only makes your broker richer. It's in your best interest to find a fund that works, and stick with it.
Asset allocation funds take center stage
A recent study released by Dalbar found that asset-allocation funds may encourage investors to be more patient and hold their funds longer. Asset-allocation funds typically invest in a mix of stocks and bonds, varying that mix over time in an attempt to get the best returns possible. The Dalbar study found that not only were asset-allocation funds the fastest-growing type of fund last year, but also that investors tended to hold on to these funds longer than they did equity or bond funds. Owners of asset-allocation funds hold on to their shares for an average of 5.2 years, compared with 4.3 years for equity funds and 3.7 years for bond funds.
This is an important discovery, because previous Dalbar research found that investors who hang on to fund shares tend to get better performance than those who constantly try to time the market. Keep that in mind the next time short-term disappointment tempts you to sell out of one of your funds!
It's not clear exactly why asset-allocation funds tend to encourage longer-term investing behavior. Maybe investors tend to compare asset-allocation funds less closely to benchmarks in the short term. Or perhaps asset-allocation fund investors tend to be a bit more investment-savvy than the general public. These investors may be aware that hopping in and out of funds is a losing game, leaving them more inclined to stay the course.
Whatever the reason, it bodes well for the future of these types of funds. Dalbar's research may even help asset-allocation funds qualify as default investment options in retirement plans under the Pension Protection Act. Billions of retirement dollars are at stake, and sponsors of these funds stand to profit handsomely. That's doubtlessly been a driving force behind these funds' recent proliferation.
One good option
If you decide that an asset-allocation fund might be right for you, there are plenty of options to choose from, with new funds becoming available every day. But if you want a nudge in the direction of a decent asset-allocation fund, look no further than the Vanguard Asset Allocation Fund (VAAPX).
It's run by longtime lead portfolio manager Tom Loeb, on board since 1988, and co-managers Charles Jacklin and Helen Potter, who've been with the fund since 2001. The fund's mandate includes the flexibility to allocate any percentage of the portfolio among stocks, bonds, and cash. Management relies on quantitative models to divvy up holdings among these asset classes. Right now, the fund has roughly 80% of assets in stocks, including top holdings ExxonMobil
The fund has a history of making some heavy bets, tending to load up on equities, as it did last year. So far, this strategy has paid off. The fund posted a 10-year annualized return of 8.5% through June 2007, besting the 7.1% return of the S&P 500 Index. A low 0.41% expense ratio and 16% annualized turnover further add to its appeal.
If you find yourself growing impatient with your funds' progress, look into asset allocation funds. Something about them seems to soothe the market-timer in many investors, and they may be able to do the same for you.
Whatever type of fund piques your interest, let Fool fund expert Shannon Zimmerman suggest some sterling candidates for your investment dollars. Check out the Fool's Champion Funds newsletter with a free 30-day trial.