The Benefits Of Balance

Funds that play both stocks and bonds might shield you in tough times

good test of a portfolio manager’s ability to preserve investors’ capital during extremely difficult times. Finally, we looked at the funds’ alpha, a statistic designed to show how much risk man management has taken on to boost returns. The alpha ratio measures how much a fund’s portfolio fluctuates, while comparing that to the gain investors stand to pocket. An alpha above 0 means investors were rewarded handsomely for the risks they incurred by investing in the fund; far below 0 means risks incurred didn’t always pay off in solid gains. For our purposes, we looked for a fund’s alpha to be close to 0, a sign that a balanced fund manager’s portfolio was doing its job keeping risks in check.

We came up with four good picks. Third Avenue Value (800-443-1021) led the group with a five-year 18.66% average annual return. The fund, which currently is stock-heavy with 60% of its portfolio in the market, managed to keep its 1994 loss down to a mere 1.46%, and tallied an impressive 31.73% gain in 1995. Likewise, the Fidelity Puritan Fund (800- 544-8888) has about a 60% slice of its portfolio invested in stocks. Its five-year average annual return is 15.4%. In 1994, the fund actually registered a 1.78% gain. Founders Balanced (800-525-2440), another stock- heavy portfolio, has averaged 15.4% in total return over the last five years. Finally, we chose a fund with a relatively big weighting in bonds to round off our group. Dodge & Cox Balanced (800-621-3979), with a 14.49% average annual return over the last half-decade, has held its own within the hybrid group, and can boast a 2% gain under 1994’s tough conditions.

It’s easy to overlook saving when you’re busy making bill payments or even funneling hard-earned funds into the stock market. Still, DEBORAH BREEDLOVE, A FINANCIAL ADVISOR AT AMERICAN EXPRESS in Columbia, South Carolina (803-252-4344), advises readers to build up the discipline necessary to set aside three- to six-months’ salary to cushion your finances in case of an emergency. “After an accident, you’ll often have to wait 90 days before you receive a disability payout, and while sick leave might cover some of your needs, chances are it will come up short during an extended period,” she notes. Breedlove advises that you keep half of your emergency fund in a checking or savings account and the other where you’ll be less tempted to withdraw it, such as in a CD or money market account, where it can earn up to 5% interest and still be liquid enough for you to tap into by check or ATM card (see “Keeping You Interest Up,” Moneywise, May 1997). A cash reserve is also a good idea for a fledgling investment club, she adds. “You don’t want to have to sell stocks in order to pay taxes or let a member out of the club.”

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