Are asset allocation funds right for you?
Want to invest? Boring is better
By Jean Chatzky
Because of the volatility in financial markets, many investors are looking for mutual funds that don't require them to put all their eggs in one basket, such as stocks. Asset allocation funds, which invest in more than one financial market at a time, can provide you that diversity.
"These are very appropriate for the average investor because it gives you diversity and risk management, which are difficult things for most people to do on their own," says Michael Dixon, director of wealth management for Carl Domino Inc., financial advisers in Palm Beach, Florida.
The most basic form of an asset allocation fund is a balanced fund. These funds go back about 70 years and are balanced between stocks and bonds.
Traditionally, the allocation was about 60 percent stocks, 40 percent bonds and was fixed. Now the funds come in an array of different allocation percentages, and some funds even shift their percentages from time to time according to market conditions.
Over time, the funds have diversified. "Rather than just having large-cap stocks and high-grade bonds, they've gone to a broader mix of equities, bonds and cash," says Greg Carlson, a mutual fund analyst at Morningstar research firm in Chicago.
"Now there will be a broader mix of equity, bonds and cash. Often it will be a fund of funds, including large-cap stocks, small-cap stocks, foreign stocks, high-grade bonds and junk bonds."
And in the latest evolution of asset allocation funds, they have turned to alternative asset classes, such as commodities, real estate and currencies.
Here are five important questions to ask yourself when considering an investment in asset allocation funds.