Having a diversified portfolio is one of the best ways to protect yourself from market downturns while still reaping the rewards of long-term investing. Balanced funds aim to give people diversified exposure to both stocks and bonds, conveniently packaging both types of assets into a single investment vehicle. The Vanguard Balanced Index Fund is one of the simplest, lowest-cost balanced funds available, and many investors have used it to get the specific exposure they want in a single fund. Let's take a closer look at the Vanguard Balanced Index Fund and how you can use it for your investing.

The basics of the Vanguard Balanced Index Fund
The Vanguard Balanced Index Fund is simple: it invests about 60% of its assets in U.S. stocks and the remaining 40% in U.S. bonds. To implement this plan, the fund uses an indexing strategy, tying the bond portion of its portfolio to the Barclays U.S. Aggregate Float Adjusted Index and the stock portion to the CRSP U.S. Total Market Index. To do so, the fund owns nearly 9,500 different securities in rough proportion to their representation in the underlying indexes.

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That might seem like a monumental task, but with $26 billion in assets under management, the Vanguard Balanced Index Fund has more than enough assets to make substantial purchases in both parts of its allocation strategy. Moreover, the simple strategy enables the fund to keep its costs down, with expenses amounting to $26 per year for every $10,000 invested in the so-called Investor Shares, and just $9 per year for those in the Admiral class of fund shares.

Over the long haul, strong performance in stocks and bonds has produced nice returns for the fund. The fund has a 10-year average annual return of 7.3%, tracking its underlying indexes quite well. That trails the roughly 8% return for the typical S&P 500 index fund, but the bond exposure has helped to significantly reduce overall volatility.

The shortcomings of the Vanguard Balanced Index Fund
The Vanguard Balanced Index Fund has taken its share of criticism, however. One issue is that the fund's minimum investment requirements are somewhat high, with a $3,000 purchase needed to buy Investor Shares and $10,000 necessary for the lower-cost Admiral Shares.

Another concern is that Vanguard charges a slight premium over simply buying underlying funds yourself that meet the same purpose. For instance, you can buy Investor-class fund shares of index funds covering the stock and bond markets individually for $17 to $20 per year in expenses for every $10,000 you invest, providing savings compared to the $26 figure for the balanced fund. The Admiral class has similar savings, with $5 to $7 per $10,000 comparing favorably to the $9 for the balanced fund Admiral class shares.

Nevertheless, even at a slightly higher cost for the convenience of having both investment types within a single fund, Vanguard's fund compares favorably with the industry average. With the typical balanced fund industrywide charging nearly 1% -- or $100 annually for every $10,000 invested -- Vanguard's index approach makes it hard for its rivals to beat. In particular, actively managed funds have to outperform their benchmarks by at least the amount of their extra expenses to stand a chance of even keeping up with the Vanguard Balanced Index Fund, let alone surpassing its results.

If you want a simple balanced asset allocation, the Vanguard Balanced Index Fund offers a single investment that has the best of both worlds. There's no guarantee that balanced funds will keep producing amazing returns, but you could do far worse than Vanguard's entry into the balanced fund universe if you want a conservative but growth-oriented set of investments.