Chapter Seven How to Select a Balanced Mutual Fund The Golden Mean

“Whoever cultivates the golden mean avoids both the poverty of a hovel and the envy of a palace.” When the Roman poet Horace wrote those words back in the year 23 B.C., he was hardly thinking about the principles of investing that were to prove themselves 2,000 years later. But the golden mean is an apt description of the modern balanced mutual fund.

In a sense, the balanced mutual fund is the ultimate fund, the ideal manifestation of the fund concept. Combining a stock component, a bond component, and a money market component, the balanced fund is a complete investment program in a single portfolio. The equity portion of the balanced fund should be evaluated based on the standards applicable to equity funds and the bond portion on the standards applicable to bond funds. (Since most balanced funds maintain modest cash reserve positions, the standards applicable to money market funds are not especially significant.) I shall first review these standards to provide a starting point for more detailed evaluation. Once these structural elements have been considered, I will turn to the past returns achieved by individual balanced funds relative to those of their peers.

The first balanced funds were founded during the late 1920s and remained a major component of the mutual fund industry until the mid-1960s, before losing much of their allure during the go-go years, when their conservative policies made them look passé. ...

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