From
Your Perspective:
Making sense of your 401(k) investments
Balanced funds
Balanced funds hold stocks,
preferred
stocks,
and bonds in order to provide both long-term
growth and current income. Because stocks tend to provide
strong returns in different market environments than bonds
do, and vice versa, a balanced fund that holds some of each
may be less
volatile than a strictly stock or bond fund.
While there’s no rule about the proportions
of stocks and bonds that a balanced fund must hold, a 60%
stock to 40% bond ratio is typical. Most funds establish
certain limits — requiring at least 25% of the fund
to be invested in bonds and 25% in stocks, for example —
and let the fund manager shift the holdings to make the
most of changing market conditions.
One of the trade-offs for the reduced
volatility of balanced funds is that, in a
bull
market,
they usually don’t provide as strong
returns as stock funds. Plus, balanced funds can be
disappointing when interest rates are rising, since
both stock and bond prices tend to suffer.
