Probably the only thing keeping Vanguard’s balanced funds from being the biggest funds in the world is irrationality.
Rather than invest in a low-cost mutual fund consisting of a simple allocation of stocks, bonds and cash, many investors would rather try beat the S&P 500 … which, of course, most investors don’t do.
Besides, balanced funds are too boring. Attempting to “beat the market”? That’s exciting.
But in that way, balanced funds are the tortoise. Everyone else is the hare.
And in Wall Street, much like in fables, the tortoise tends to win. Think Warren Buffett, the legendary investor who said in his most recent annual letter to shareholders of Berkshire Hathaway Inc (NYSE:BRK.A, NYSE:BRK.B) that his money will be invested in Vanguard index funds for his wife when he dies.
Be boring — you’ll be more successful that way. And you can get started by investing in three of Vanguard’s best balanced funds:
Best Balanced Funds from Vanguard: Vanguard Balanced Index (VBINX)
You can’t get much more boring (and outstanding) than Vanguard Balanced Index (MUTF:VBINX).
The portfolio for VBINX invests in a moderate allocation of approximately 60% stocks and 40% bonds by tracking two indices that represent broad exposure to the U.S. equity and U.S. taxable bond markets.
In short, you get a low-cost, well-diversified blend of stocks and bonds that can do more passively than most asset managers can do actively.
Go back 15 years, which includes two of the worst bear markets in history, and the case for VBINX is compelling. Its 15-year annualized return is 5.6%, which beats out the S&P 500’s 4.75%. And you would be losing very little of that performance to fees — VBINX expenses run at a rock-bottom 0.24%.
Boring is suddenly more exciting, isn’t it?
Top holdings include Apple Inc. (NASDAQ:AAPL) and Exxon Mobil Corporation (NYSE:XOM). Minimum investment is just $3,000.
Best Balanced Funds from Vanguard: Vanguard Wellesley Income (VWINX)
Vanguard Wellesley Income (MUTF:VWINX) is a 40-year-old, income-oriented conservative allocation fund that produces returns that are much more than conservative.
If were directing a movie for the investing version of the famous tortoise-and-the-hare fable, I would cast Vanguard Wellesley as the tortoise that wins the race.
Again, a time period that includes both bull and bear markets show the strength of Vangaurd’s balanced funds. The 15-year annualized return of 8.1% demolishes that of the S&P 500, and any portfolio manager with an allocation of 100% stocks would be proud to boast of such outstanding long-term results.
But Vanguard Wellesley has produced these returns with one arm tied behind its back (or behind its tortoise shell, as it were). The portfolio for VWINX stays around one-third stocks, two-thirds bonds. How’s that for low relative risk, high relative return?
Some of that return comes in the form of dividend income — VWINX has a trailing-12-month yield of 3.1%, powered by holdings such as Wells Fargo & Co (NYSE:WFC) and Merck & Co., Inc. (NYSE:MRK). Meanwhile, expenses at just 0.25% are a steal, and minimum initial purchase is $3,000.
Best Balanced Funds from Vanguard: Vanguard Tax-Managed (VTMFX)
If you’re looking for the best of conservative Vanguard funds for your taxable brokerage account, Vanguard Tax-Managed (MUTF:VTMFX) is your fund.
Beginning with performance, you can’t argue with Vanguard Tax-Managed track record of consistently outperforming more than 90% of all other conservative allocation funds, punctuated by a top 1% rank for both the one- and three-year returns.
On a tax-adjusted basis (measured by tax-cost ratio), VTMFX beats 99% of the conservative allocation funds for one-, three-, five- and 10-year returns.
Like the other two Vanguard funds highlighted in this article, VTMFX beats the S&P 500 in 15-year annualized returns.
Although you’ll need to come up with $10,000 for the minimum initial purchase, the Vanguard Tax-Managed fund can be used as a standalone investment or as a solid core holding in a diversified portfolio.
The expense ratio of VTMFX is the lowest of this bargain bunch at 0.12%.
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities, although his firm holds VWINX in client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.
