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Many people enjoy spending time with their investment portfolios. This column, all about my absolute, No. 1, all-time favorite mutual fund, is for everyone else.
Now marking its 10th birthday, my favorite fund can't boast the highest returns over any period. It's cheap, but it's not the cheapest. Neither is it the biggest, the nimblest, the most tax-efficient. You'll never see its managers on TV, talking up the fund behind bright smiles. It is in no way exclusive or exciting. What it is is good--quietly, determinedly, simply good. Its name is Vanguard Balanced Index Fund (table).
You laugh: A balanced index fund? My favorite? Please hear me out.
Having first bought Vanguard Balanced Index back in 1992, I've gotten pretty familiar with it and now always think of it by its ticker symbol, VBINX. Like any human creation, VBINX has its flaws. Since it has a relatively high income yield, for example, it's not well-suited to the taxable accounts of people in high tax brackets. But as sometimes happens, when I'm asked which single fund is best for someone who is just beginning to invest, or someone who wants to vastly simplify a portfolio, or someone who wants to own just one fund, I always say VBINX.
As you might guess, VBINX is the brainchild of Vanguard founder Jack Bogle. In 1986, Vanguard followed the budding success of its flagship fund, the one that tracks the Standard & Poor's 500-stock index, with another that follows the broad bond market. In April, 1992, Vanguard brought out another fund to track the entire U.S. stock market via the Wilshire 5000 index. A few months later, Vanguard put these two basic strategies--indexing the full domestic stock and bond markets--together in yet another fund, VBINX, with the classical mix of 60% stocks and 40% bonds kept constantly in balance. "It has been singularly successful," Bogle told me the other day, "and not particularly popular."
Too true. In 10 years, VBINX has grown to just $4 billion in assets (including all share classes). By contrast, Vanguard Total Stock Market Fund in about the same time grew to $21 billion. So what has the crowd missed about VBINX? First, with an expense ratio of 0.22%, it is an alluringly low-cost way to own, at last count, 3,417 stocks and 529 bonds. That's efficient diversification. Second, it captured much of the past decade's rewards from investing at relatively little risk. VBINX easily beat the typical balanced fund, delivering more return at less risk (charts).
That much I had expected. But VBINX also did pretty well even against an all-stock portfolio. Back in 1992, when I put my family's first $8,986.96 into VBINX, I had a powerful urge instead to invest it all in an S&P 500 index fund. For most of the years since, that would have been a far better bet. More recently, the bear in stocks and the bull in bonds have narrowed the gap dramatically. I'm still a few hundred bucks poorer than I would have been had I invested in all stocks, all the time. Yet the bonds in VBINX made such anxious days as Russia's default and the Long-Term Capital Management crisis, not to mention the recent crash in stocks, bearable. Otherwise, I might have cashed out.
Which leads me to the single best attribute of my single favorite fund: the minuscule share of time and mind that VBINX takes. Investing always imposes dollars-and-cents costs. An even steeper levy can come in distraction from what's more important in life. About other investments, questions seem to creep into our heads week in, week out. Has the portfolio manager lost his edge? Wait--I hear he's running off to open a hedge fund--should I sell the mutual fund now? Do I own too many large caps? Too few growth stocks? Maybe I need more energy and less tech? Dump my bonds today--or after the Federal Reserve meets?
As it silently tracks the full stock and bond markets, rebalancing itself daily, VBINX won't squelch all such worries. Just most of them.
Corrections and Clarifications
In ``My favorite mutual fund'' (BusinessWeek Investor, Nov. 4), the charts showing return and risk of the average balanced mutual fund were incorrectly labeled. The average balanced mutual fund posted an annual average total return of 7.1% and volatility of 10.7% during the 10 years ended Sept. 30.
By Robert Barker