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Best Way To Allocate Assets

- Alan Lavine and Gail Liberman



How many funds do you need to practice asset allocation?

The answer: Not as many as you think.

When you practice asset allocation, you own different investments that do not move in the same direction. As a result, losses on some investments are wiped out by gains in others.

Typically brokers will invest your hard-earned cash in the following types of mutual funds.

  • Large company growth stocks.
  • Small company growth stocks.
  • Large company value stocks.
  • Small company value stocks.
  • Foreign stocks.
  • Bonds and inflation hedges like precious metals, depending on you goals and investment comfort level.
If you follow that advice, which is not bad advice, your overall investment should be less volatile.

The big drawback: Commission break points on the sale of mutual fund shares. Typically, when you buy mutual funds from a broker, you pay a 5 percent up-front commission. But if you invest $50,000, the commission is lower. You might pay 4 percent or 3.5 percent. Typically, if you are fortunate enough to have at least $1 million, you can invest in broker-sold funds free.

Here's the kicker: If you split your investment too much, you don't get the commission breaks. The broker makes more money because the investment is spread out over several funds. You don't qualify for the break points.

The solution: All you need is one fund. It can be a balanced fund that invests about 60 percent in stocks and 40 percent in bonds. Or, you can invest in an asset allocation fund, which owns both U.S. and foreign stocks as well as bonds and cash.

The benefits: You lower you investment costs. Plus, you get adequate diversification. Historically, balanced funds have earned about 80 percent of the return on the S&P 500 with nearly 40 percent less risk. Balanced funds historically have grown about 8 percent annually. Meanwhile, the S&P 500 has grown at 10 percent annually over the past seven decades. But when the S&P 500 drops 10 percent, the balanced fund declines about 6 percent.

So what's the best asset-allocation fund sold by brokers?

American Funds' American Balanced Fund, according to Morningstar Inc., Chicago, which gives it a five-star rating. The means it is one of the best funds in its class based on risk and return. The fund has 64 percent in stocks and the rest in bonds and cash. The fund has been around for more than 50 years. Since inception, the fund has grown at a 6.5 percent annual rate. It is 33 percent less volatile than the S&P 500.

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Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).


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