Index Funds or Balanced Funds ?

[renferme]

I know the theory behind index funds, but if you look at the performance of balanced funds (eg. Dodge & Cox Balanced and Vanguard Wellington) you will see that they perform very good, especially in bad markets.
During the bear market of 2000-2002, the D&C Balanced fund had only one negative year and that was only a negative 2.9%. The Vanguard S&P 500 Index fund lost money all three years - and lost big time !
So, wouldn't you sleep better with a good balanced fund - one with low expenses like the ones I've mentioned ?

[cute fuzzy bunny]

Charlie has a similar thread going on.

Truth is, over 10-15 year periods in the rear view mirror, a handful of managed funds have kicked butt. Over longer periods the index funds catch up.

Those managed funds that did well might not do so well in the next 10-15 years though. The old "whats been hot wont be" or "chasing the return" seems to be a loser...at least in the long haul.

The vanguard and dodge and cox look particularly good for two reasons, with immediate history in mind. They focus on value/dividend bearing stocks rather than growth, which took a beating from 2000-2002. The stock index funds have to hold growth. And bonds did very well in that same time period. So both parts of these value+income funds had a good 3-5 years.

The crux though is usually the big difference in expenses between index and managed funds. The vanguard ones in admiral shares can be had at expenses rivalling stripped down indexes, and the dodge and cox is just above .5%. Sort of removes at least some of the difference.

I think they're good choices for people who just cant swallow the index fund mantra, because the low expense rate, good asset allocation, and good long term records give them a big edge over other managed funds and slim down the index funds long term advantage.

[mickeyd]

If a balanced fund helps you sleep better, then that is the fund for you! I like the TSM and the balanced fund my self. THe Vanguard total Balanced fund has about 40% bonds but TSM has no bonds and is thus more volitile. No big secret here, just 2 diferent ways to invest.
mickeyd

Two termites walk into a bar. One asks, "Is the bar tender here?"

[unclemick]

Dodge and Cox Balanced and Wellington are from the 1930's. IBM had 'tabulating machines'. Think of balanced index as the modern version of the same thing. I think Wellesley showed up in the 60's? In a broad sense they perform in a similar manner - hand grenade wise.

[cute fuzzy bunny]

Yep, wellington showed up right around the time of the great depression and is a 60/40 stock/bond mix favoring value stocks and high quality intermediate term bonds. Wellesley started around 1970 and is a 40/60 mix of the same.

[ats5g]

There's nothing all that unknown about characteristics of good non-index funds. Those that are good and last over decades all seem to have:

1) low expenses
2) low turnover (low commissions and spreads)
3) low style drift
4) Team Management

There is nothing particularly special about index funds. It's the costs of the funds that matters. That's what makes index funds so special. I might actually consider DODBX and VWELX Large value index balanced funds. After all, index funds are simply passively managed funds.

Now, let's look at the 1973-1974 bear market:

Dodge and Cox balanced returned -9.7% in 1973, and -19.3% in 1974. A combo of 60% S&P 500 and 40% 5 Yr Treasuries returned -7.0% in 1973, and -13.6% in 1974. Even if we use Long Term gov't bonds (instead of 5 yr Treasuries), we get a return of -9.2% in 1973 and -14.1% in 1974.

A 60/40 mix of Large Value and 5 Yr Treasuries returned 1.7% [positive]in 1973, and -13.0% in 1974. If we use LT gov't bonds, we get a return of -0.6% in 1973 and -13.5% in 1974.

[** LV and bond return data curteousy of Gummy]

And if we look at 2000-2002, DODBX and VWELX look to have performed a lot like mixes of LV/MV and int term bonds [like the Lehman Bros Agg index]. Granted, these two funds have beaten relevant value/bond benchmarks, but not by all that much. If you're looking for value balanced funds, either one of these should do perfectly.

- Alec