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Author: ricerFool Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: Bond Funds vs Balance Funds Date: 4/25/2003 9:08 AM
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"would moving current VTSMX stock and new money to a balanced fund (VBINX) be a better choice than just adding new money to a Total Bond Index fund(VBMFX)? This is for long term investments."

As far as rebalancing your portfolio goes, I see three scenarios:

1) You could liquidate your VTSMX and roll it all into VBINX. For reasons listed by other respondents in this thread, this approach has its plusses and minusses.
2) You could liquidate a portion of your VTSMX and buy a bond fund, to achieve your desired stock/bond allocation. My advice is that it would be a conservative move to buy a bond fund which has a short duration. (~2yrs.)

The shorter the duration, the less volatile that fund is to interest rate movements (up or down.) However, shorter duration bond funds have less yield. (The whole risk vs reward thing...)

OR........

3) You could liquidate a portion of your VTSMX and buy a "bond fund with a hedge". Meaning, buy a balanced fund instead. You'd still be overweighted in stocks, but in this low interest rate environment, the stock portion of the balanced fund provides a hedge.

IOW, when interest rates head up, because the economy is finally starting to pick up, stock prices will then increase. The stock portion of the balanced fund helps out in this scenario, while pure bond funds will be losing. (Bond prices will fall w/rising interest rates.)

Then, you could run this gimmick until the (eventual) stock market recovers. Then you'd move this $$ into a pure bond fund. (i.e. after the hedge plays out.)

FWIW, I own a balanced fund, OAKBX, in a taxable account. However, I view this as a "stock fund with a hedge". It is the 3rd tier in my after-tax savings structure. The first two being cash (Money Market), and "bonds" (CD's). I did not want a pure stock fund, as I did not want the volatility of stocks with this near-term money.

(OAKBX has a beta of 0.35, so it swings about 35% of what the DOW does. This is due primarily to its bond component, and secondly by its value-style.)

Just another comment from the peanut gallery here on TMF.

rF
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