Saturday, April 26, 2008

Fidelity Balanced Fund as a no-brainer investment

I continue to think about ways to simplify management of my investment money. For my retirement money, I am experimenting with the Fidelity Freedom Fund 2025 (FFTWX), a so-called "life-cycle target-date fund" on the presumption that I will be retiring roughly around 2025. I might consider that fund for my taxable, non-retirement money, but I am concerned about how tax-efficient a retirement-oriented fund might be in a non-retirement account. What I am really looking for is a no-brainer investment that may not give the best returns, but requires zero attention.

One of my criteria for low-maintenance investment is that I want something that can auto-balance as we go through market transitions so that I do not have to do that by hand. It occurred to me that balanced funds essentially do just that. That does cut into their returns in either a stock or bond "boom", but also reduces losses during a stock or bond "bust." Sure, you could do better yourself if you had the patience, discipline, attention, and time, but I want to identify an investment that "simply works" without me having to tinker with it. Sure, I will do my own tinkering with my higher-risk capital, but I want to build up a base of capital that is not high-risk and simply gives a decent appreciation with minimal effort on my part. That will allow me to focus much more of my attention on non-investment pursuits and any occasional high-risk investment activities I might choose to engage in, without putting my base investments at risk.

Fidelity has a balanced fund, Fidelity Balanced Fund (FBALX). It certainly has not done very well this year or over the past year, but that is not atypical and over the past ten years it has roughly doubled.

Forbes lists this fund as one of its Top 5 Best Buys for the Balanced Fund Category. They are:

  1. Berwyn Income Fund
  2. Fidelity Balanced Fund
  3. Oakmark Equity & Income
  4. Vanguard STAR Fund
  5. Vanguard Wellington Fund-Inv

One or more of those funds may be "better" than Fidelity, but being No. 2 is not too shabby and I already do a lot of business with fidelity.

The Fidelity fund does not get a very good grade for a down market, but I am interested primarily for performance across all markets. In other words, total long-term return. What matters most to me is that after a down market they position themselves well for the rebound.

I do worry about tax consequences, especially since the fund by definition needs to periodically rebalance.

I am not making any decisions right now, but I am strongly leaning towards Fidelity Balanced Fund (FBALX) as my preferred choice as a no-brainer investment.

Another motive is that I want to be able to give people a recommendation for a best first choice when they are clueless but have some money that they want to invest.

I am also thinking about what style of investment would be most appropriate as we contemplate privatization of social security.

Even if we never do privatize social security, I am sure there will be incentives for personal contributions to retirement accounts, so the question is what the best default investment should be.

It feels to me that a balanced fund is likely to be the best way to go for a lot of these investment decisions.

-- Jack Krupansky

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