One-stop solution

If you’ve been putting off opening an investment account outside your retirement savings, there’s an easy way to get started: Use a balanced fund.

These ready-made portfolios combine stocks, bonds and cash, providing investors with instant diversity, often with very low expenses. In addition to the ease of one-stop shopping, balanced funds typically deliver a smoother ride than pure stock funds, said Eric Tyson, a former financial counselor and author of several investing books.

For many of us, this makes them a more palatable choice. That’s because people who track share prices to see how their investments are doing will find less variability with balanced funds than they would in a similarly allocated portfolio of multiple funds.

“I’ve long loved balanced funds, especially for skittish investors, because the bonds mask the volatility of the stocks,” Tyson said. “When I was doing financial planning, I saw that people often had a hard time keeping in mind the overall portfolio, and a balanced fund kind of forces them to do that.”

If you’re looking for a fund to hold outside a retirement account, the taxes associated with the bond income of balanced funds might make you think twice about owning one, particularly if you’re in a higher income bracket or live in a high-tax state. If you find a balanced fund doesn’t make sense for your tax situation, you might be better off building your own balanced portfolio with municipal bonds, which are exempt from federal taxes.

Not all balanced funds are built the same; their asset allocation and level of risk will depend on the aims and philosophy of management. They may be extremely conservative with as little as 30 percent in equities, or more aggressive with high stakes in foreign stocks and hot sectors.

The first thing to consider when shopping for a balanced fund is your own time horizon, said John Sweeney, senior vice president of mutual fund product management at Fidelity Personal Investments.

“Obviously if you’ve got shorter-term horizons, you should be in cash or short-term bonds, but if you’ve got a multiyear timeline, a 60/40 portfolio will serve you in great stead,” Sweeney said. “I wouldn’t advocate it for someone who is trying to buy a house next year. … They should be in a money market fund. But for someone with a five-year-plus time horizon, it would be very appropriate.”

If your goal is a decade or more away, you could take on modestly more risk with a fund that has a higher stake in stocks, say between 60 percent and 70 percent. But you could still rely on the bond allocation to stabilize your portfolio.

“If all you’re buying is equity exposure, you’re going to get equity volatility,” Sweeney noted. “If you’re 40 percent fixed income, you’re sleeping much better at night … and you’re probably going to wind up beating the Standard & Poor’s 500 over time.”