What do you want in an Allocation Fund?

[nromsted]

I'd like to hear what you look for in an allocation fund?  Why have you included them in your portfolio?

I started with allocation funds in 2003, as one reaction to the -33% losses I had sustained in 2000-2002.  I was particularly thinking of my long-term investment objectives in choosing among them.  Nothing too flashy, just to benefit from diversification, automatic rebalancing, and professional management.  This was not an exclusive approach.  I still had about half of my portfolio in single-purpose stock and bond funds and other investments.  This revised approach worked well for me in 2008, with just a 12% loss.

Since then, even with ups and downs, they've done just fine, with a CAGR in the 8-10% range.  To me, that is success.

To be sure, not every allocation fund is the same.  Stock/Bond ratio matters.  Investment style matters.  Cost matters.  Management matters.  There are lots of varieties.  I currently have VWENX, VWIAX, VTMFX, and FBALX.  I tried and gave up on VGSTX and DODBX.

[rhythmmethod]

I own only 3 balanced funds. VWIAX, VGWAX and VTMFX. I want my balanced funds to be exactly that, boring and dull. I don't like balanced funds that are wanna-be equity counterparts. If I want exposure then I'll go for direct equity. Thanks for posting on this thread. I was going to start a thread just so we could action on Balanced Funds. Stay well, rm

[fishingrod]

I included VTMFX in my portfolio so I would have something to gauge my performance against. It has done well, but I have done better so far, due to buying on the downturns. I also have more risk than VTMFX holding VWILX Int'l growth fund and VWALX high yield muni fund. VTMFX is more tax efficient than my other stock funds.

Fishingrod

[nromsted]

I've found VWENX to be a bit more exciting in the last few years because of its capital gains distributions - it's in a taxable account. I'll be getting a bunch of cash tomorrow, so that brightens my day.

[racqueteer]

Dec 28, 2020 15:31:59 GMT nromsted said:

I'd like to hear what you look for in an allocation fund?  Why have you included them in your portfolio?

I think there are a couple of good reasons for using them or something that is like them:

1.  It provides an investment that, presumably, does the work of 'balancing' a portfolio in terms of risk and equity/bond ratio; allowing one to be "hands off".

2.  It provides an investment that can be used as a base from which one can modify the level of risk and equity/bond ratio, or emphasize specific sectors; depending on current conditions.

I personally lean to the latter condition; since I tend to be active.  My base is chosen as being the most solid of, perhaps, three longer-term contenders.  If they don't all 'zig' at the same time, so much the better.  At the moment, I'm using PRWCX, FBALX, and AIGPX.

I'd hasten to point out that one could "roll his/her own", and that low rates (and possibly rising) going forward could make allocation funds somewhat problematic.

[ignatz]

I owned OAKBX for over 3 years, ending in early 2013. At that time, it was about 21% of my portfolio.

My "thinking" at the time, pardon the expression, was that a value tilt was worthwhile and Oakmark was a stalwart in that area. OAKBX had done very well during the 2008-9 crash. I didn't own it during that crash, unfortunately.

From early 2013 to last May, I did not have any allocation funds. But I had retained something of a modest value tilt. My portfolio had grown to 10 funds.

Over the several decades of my investing years, I had become increasingly frustrated with my life-long obsession with analysis, math, percentages, ratios........constantly thinking that if I only thought a little more, I'd be satisfied.

This despite evidence to the contrary. I was constantly tinkering. Not to a "trader's" extent, but I was eliminating a position totally perhaps 2 times a year, across 3 accounts. And typically holding 8 or 10 positions.

In the last 20 years, I've owned probably 50 tickers.

Last May, I went to a balanced fund for about 55% of my portfolio. I hold it in rollover, Roth, and taxable. It is my only active equity fund. It has 65 to 70% equity. I now hold 6 funds: balanced, foreign, SP, extended market, short bond, and multi-sector bond. Slight growth tilt; less foreign, less small.

Make no mistake, I would not have done this if the 2020 crash had not occurred.

If I sold all equity funds except my balanced fund, I'd still be 37 equity. That's about as low as I'd ever want. Supposedly.

I humor myself by saying "well, if we have another crash, I'll keep the balanced fund, sell the other equity funds, and ride it out".

Of course, the problem with this genius solution is that my emotions will continue to work against me as the Dow slides and I may well do something else at any moment when that happens.

Until that happens, I can strut around like a banty rooster and tell myself all is well and I'm about half smart because my balanced fund is doing very well, thank you.

What do I want in a balanced fund? Relief. Relief from prior behavior. I have relief now. I may not have it in a week, all depending on stuff totally beyond my control.........market action.

I don't think there is any solution to this short of a personality transplant.

[chang]

Dec 28, 2020 21:01:26 GMT racqueteer said:

Dec 28, 2020 15:31:59 GMT nromsted said:

I'd like to hear what you look for in an allocation fund?  Why have you included them in your portfolio?

I think there are a couple of good reasons for using them or something that is like them:

I'm going to offer a different POV from racqueteer (whose points are all logical; I just have different ones: the reader can overlap them and decide for him/herself which ones resonate).

Given the great profusion of individual stock and bond (and other asset) funds, it strikes me that:

1. Once your PV is over a certain dollar value, allocation funds do not seem necessary. You can "roll your own" and probably find better stock-only and bond-only funds that suit your appetite and goals.
   
   
2. And if your PV is below a certain dollar value, then you probably should be 100% stock.

Maybe there is a gap between A. and B., but if not, then allocation funds may not really be necessary.

Having said that, I can see three possible uses for them that could make sense:

1. If you really have zero interest in investing and just want a one-stop, zero-maintenance solution. Then a target-date fund makes sense.

2. If you like the idea of a fund that rebalances by itself, with no action taken by you (and probably you have very little interest in monitoring or adjusting your portfolio), then a allocation fund makes sense.

3. If you are searching for some exposure to an asset class or a management company that, oddly enough, only exists within a particular allocation fund.

I am actually an example of #3. I wanted exposure to Foreign Large Value (FLV) equity at a cheap price, with proven active management. So I ended up buying a world allocation fund (which is Foreign stock + US stock + Foreign bonds + US bonds) to access the 1/4 of the portfolio which is FLV equity. I just could not find a dedicated Foreign LV fund that looked better than the FLV sleeve of the WA fund.

I also own VWIAX (Wellesley) in my IRA because ..... well, why not?

[Norbert]

Additional points in favor ...

- Some allocation funds use dynamic allocation instead of fixed % targets. If the managers are very good, that's attractive. PRWCX, for example?

- There may be some interesting synergies between the equity and bond components of an allocation fund like Wellington, but this is fuzzy.

- Psychologically, it's easier for the cowardly amongst us to watch the milder volatility of the allocation fund compared to equity funds. So, perhaps an allocation fund could help with discipline?

It's probably true that mostly we can do better with a "roll your own" approach. But, can we beat Wellesley with, say, a combination of SCHD + PIGIX? I'm not sure.

N.

[acksurf]

Dec 29, 2020 7:42:08 GMT Norbert said:

Additional points in favor ...

- Some allocation funds use dynamic allocation instead of fixed % targets. If the managers are very good, that's attractive. PRWCX, for example?

- There may be some interesting synergies between the equity and bond components of an allocation fund like Wellington, but this is fuzzy.

- Psychologically, it's easier for the cowardly amongst us to watch the milder volatility of the allocation fund compared to equity funds. So, perhaps an allocation fund could help with discipline?

It's probably true that mostly we can do better with a "roll your own" approach. But, can we beat Wellesley with, say, a combination of SCHD + PIGIX? I'm not sure.

N.

" Psychologically, it's easier for the cowardly amongst us to watch the milder volatility of the allocation fund compared to equity funds. So, perhaps an allocation fund could help with discipline?"

That's exactly why I have about 25% of portfolio in allocation funds. They help keep me invested when I start thinking of putting cash in my mattress.  I certainly understand why a lot of people don't use them or like them but they work for me.

[Deleted]

vwenx (Wellington) is 8% of my retirement assets. it is serving as core along with American new perspective and berkshire hathaway. Wellington is the only allocation fund i have.

Wellington being core investment for next 15 years, I am looking for stability from Wellington. Ie not be too volatile and a have good long term performance. Goal is growth and not dividends for me.

Wellington did 10% this year. American funds New Perspective did 30% and Berkshire did 0%.

I will reevaluate BRKB at end of 2021. BRKB is my value investment (Railroad, utility and insurance). 

[steadyeddy]

I want trustworthy reliability in their performance. I have two that I use: Wellesley and Fido Puritan - one for value tilt/conservative; one for growth tilt/moderately aggressive.

[hondo]

I am getting up there in years, slowing down, and may not be as alert as I used to be. I can only expect things to get worse each year, so, I rely almost entirely on allocation/balanced funds because they are the most simple and reliable way to invest for us. Don't have to worry about rebalancing, etc. I own what I believe to be good sound funds with a good history. I also keep all funds in one fund family. Also, if I pass first, my wife would be able to handle this portfolio without being overwhelmed.
Just another point of view.

Hondo

[FD1000]

After posting many years, most will do much better holding 5 allocation funds and go to sleep.

[Mustang]

Reason #1 Simplification.
Reason #2 Stability (or less volalitility)

I was in individual stock and bond funds. I didn't enjoy doing the analysis, research or work associated with rolling your own so I didn't do it. I was way to heavy in value stock funds when I should have been in growth stock funds and way to heavy in stock funds when I should have had more bond funds. Over the last five years or so I have gone from owning a dozen funds to owning four, three balanced funds and a value oriented stock fund. In the next few years I will be down to three balanced funds and I wish I had gotten rid of the last stock fund earlier. Even though it was a 5-star fund it did terrible last year.

Through experimentation over the years I believe a moderate-allocation fund best fits my risk tolerance. I am not a market timer. I remember reading where a number of investors ran to cash last year and then later reading about how they were undecided ont when to get back in. That is not me. If I were to try that I would sell too late incurring more losses than necessary and buy too late missing the best part of the recovery.

I believe in strategically buying the right funds and then letting the fund's management teams make the tactical decisions.

As I transition from the accumulation phase to the withdrawal phase I have come to realize that the specific withdrawal strategy that is going to be used is important for determining the type of fund. Fixed withdrawal strategies provide a stable income but there is a chance of running out of money. Dynamic withdrawal strategies protect the portfolio's value but there is a chance the annual withdrawal will be half what is needed.

I have decided that a dynamic withdrawal strategy is OK when used with a moderate-allocation fund but they are still too volatile for me to be comfortable using a fixed withdrawal strategy. But we need a more stable income. For the portion of our portfolio using the fixed withdrawal strategy I have paired the moderate-allocation fund with a conservative allocation fund. Taking the annual withdrawal from the one with the highest end of year balance automatically re-balances the two.

So the three funds are American Funds Balanced Fund in our Traditional IRAs using the MRD withdrawal strategy and Vanguard Wellington paired with Vanguard Wellesley Income in our taxable accounts using a modified version of Bengen's 4% Rule withdrawal strategy.

[johntaylor]

Stumbled across the 1952 article by Markowitz on "Portfolio Selection," and he later co-won the 1990 Nobel.

Buffett said diversification can be helpful for those, like me, without any particular gift for stock-picking.

[dirk]

See my thread about PRWCX's history. I like the way Steve Boesel - the manager of T. Rowe Price Capital Appreciation before David Giroux took over - put it: that his mandate was to manage the fund defensively, or "to win by not losing." The wins might not be gigantic, but progress feels more certain when there are no substantial losses to overcome.

That's where the attraction of a good allocation fund lies for me - for those certain chunks of money I don't want to put at serious risk, but (aside from our living expenses and emergency fund) still want to earn something more than what FDIC-insured savings accounts and CDs pay these days. And because, let's be honest, I don't really grok bonds. That's what convinced me to first invest in the fund. That's also why I still have PRWCX as lead fund in my IRA and, yes, even a sizable portion in taxable (mea culpa).

Cheers,
Dirk

[johntaylor]

Only a venial sin to own it in taxable, and probably not worth the tax to move it?

[jongaltiii]

Late to this discussion but johntaylor recent reply brought the thread to my attention. I liked chang 3 possible uses for AA funds. It’s interesting because I am not a fan of target funds but I own a few AA - FBALX and FMSDX and I suppose my reasoning is that they provide me with a sense of being invested in bonds in some sort of safety net while not sacrificing performance way. I know this sounds crazy. I own a very little of FXNAX too. 8-10 percent with a lower ER is certainly success to me.

[roi2020]

I'm conflicted about allocation funds.
The potential to simplify a portfolio by consolidating several holdings is appealing.
Volatilty compared to equity funds is usually muted which can help investors to "stay the course".
Since allocation fund managers handle rebalancing, this may allow individuals to adopt a hands-off approach.
I generally prefer greater control over my investments by having separate equity and fixed income holdings.
I benchmarked a portfolio consisting of 65% Parnassus Core Equity (PRILX) and 35% Baird Core Plus Bond (BCOIX) against Vanguard Wellington (VWELX) earlier today via Portfolio Visualizer.
This portfolio had lower max. drawdown and std. deviation values but generated higher returns than VWELX in each comparison.
Past performance is not indicative of future results and portfolio constituents may have been "cherry-picked" although I own PRILX and BCOIX. 

[paulr888]

I fall under Racqueteer's scenarios and not Chang's. My Rollover IRA is high maintenance and a little complicated. I am not complaining. It has evolved over 8 years of my retirement and is battle tested from March 2020. It provides a 4% distribution yield that fills my gap expenses without having to sell anything. However, my trust is going to have inheritance and going to eventually receive RMDs. The equity side of my trust comprises 7 allocation funds from 35% equity to 50% equity. On the bond side of my trust will be the same bond funds I use in my IRA plus a couple of Municipals, thus diluting my equity position further. I know this is not tax efficient but I will give that up for simplicity. As I age, my mind will slow. I want a very simply designed trust that I am comfortable with.

[oldskeet]

Hi guys, There are a lot of good reasons noted above to own allocation funds. Old_Skeet has three sleeves of asset allocation funds. They are hybrid income, domestic hybrid and global hybrid. Combined they make up about 45% of my overall portfolio. As I age (now 73) I countinue to grow my footprint in them because it is more of a hands off approach to investing plus the ones that I own cover a wide spectrum of investment strategies and types of assets.

Years back, I was more active in my portfolio keeping it positioned in the faster moving market currents as I sought higher growth on my principal. Now being retired, I seek more income on my principal. I have found that the hybird type funds do this well ... at least ... the ones that I own. Generally, if they are not paying in income stream in the 3% range ... Well, I stay away from them.

I wish all ... "Good Investing."

Old_Skeet

[johntaylor]

Another reason might be to let the fund manager figure out what percentage should be in alt