Simplicity & Balance: Investing with One Fund

"In character, in manner, in style, in all things, the supreme excellence is simplicity."  Henry Wadsworth Longfellow

As promised, for the second year in the blogosphere, I will attempt to share information obtained in my research I believe the average investor may find valuable.  I believe any investor interested in finding an outstanding "balanced fund" with low minimum initial investment will find this post valuable.  Last week, I did some mutual fund research for my sister.  Here are the boundaries I was given:

• I needed two funds:  One fund for two separate IRA's.
• For the sake of simplicity, the funds had to be in the Vanguard family of funds.
• The new funds needed to be diversified and suitable as a "one fund investment vehicle."
• The existing accounts had small balances (leftovers from old 401k's), which means the initial investment requirement needed to be low.
• The new funds needed to be well-diversified but my sister, like most people, wanted higher potential returns with lower potential risk than the broader stock market averages.

Here's the minimum selection criteria that were my "must haves" for the funds:

• A "balanced" mix of stocks bonds and cash suitable for a "moderately-aggressive" investor with a long-term (more than 10 years) investment horizon.
• Below-average expenses (which was easy with Vanguard).
• Manager tenure longer than three years.
• History of out-performing the S&P 500 over the long-term with less market risk (as measured by Beta, Alpha, and Sharpe Ratio -- all data points for a later post).
• High ranks for performance versus category peers.
• The funds had to have less than 90% stocks and less than 30% bonds.
• Since my sister has other investment accounts, I decided Vanguard's Target Retirement funds would not be used...

Here's what I found along with the key stats for each of the two finalists (all data from Morningstar, Inc as of September 30, 2007):

• Finalist number one:  Vanguard Life Strategy Growth:  Outperforming Category Peers AND S&P 500 for 1-year, 3-year, 5-year, and 10-year returns; Consisting of approximately 85% stocks (foreign and domestic), 10% bonds, 5% cash; and risk attributes lower than a 100% stock portfolio.
• Finalist number two:  Vanguard STAR:  Outperforming category peers for 1-year, 3-year, 5-year, and 10-year returns; Outperforming S&P 500 only for 10-year returns; Consisting of approximately 65% stocks (foreign and domestic), 35% bonds, and 5% cash; and risk attributes much lower than a 100% stock portfolio.
• Both funds are "funds of funds," meaning they are comprised of other Vanguard funds (some actively managed, some index) and have extremely low turnover; therefore, manager tenure was not an issue.

Of course, past performance is no guarantee of future results but these two balanced funds were able to outperform the broad stock market, as measured by the S&P 500, with LESS risk over the long-term.  We maximized return AND minimized risk -- all with use of one balanced fund!

The funds are ideal for investors with moderate (Vanguard STAR) to moderately-aggressive (Vanguard Life Strategy Growth) investment personalities and who are seeking a "one fund" approach with low minimum initial investment requirements.

If there are questions or requests for similar information on funds, please comment or email me.  I'll respond directly or create another post to reply!

TFPAuthor, Kent N. Thune, is the President and founder of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Advisory firm located in Mount Pleasant, SC.