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Any time the stock market reaches all-time highs, the contributing factors are varied and their influences are impossible to measure. What we do know is that American companies for several years now have enjoyed steadily increasing profits, which are finally resulting in lower unemployment figures.

Stagnant growth of incomes, of course, has been a contributing factor to these rising corporate profits, but there are many other fundamentals, like the expected continuation of low interest rates, which make it impossible to credit the highs to any one factor.

The stock market is influenced by “animal spirits” as much as anything; or, as Warren Buffett would say, “The market is a voting machine while corporate balance sheets are a weighing machine.” This means that stock prices can be further fueled beyond the intrinsic value of companies by perceived effects of something like the tax cut.

More important over the past year has been the resurgence of foreign economies where 35 percent of all American products are sold. Reflecting their economies, emerging markets stock prices have gained close to 40 percent. “Old Europe” is up about 30 percent.

Offsetting the exhilarating “high” we feel these days should be the question, “What’s next?” For many, the answer is to mix some bonds into the portfolio. While this would seem to make sense in this day and age, the concept developed only as late as 1929. Walter Morgan, a young accountant for wealthy individuals, felt that something better than timing the market would offer a better mousetrap for people wanting to benefit from strong markets while, at the same time, limiting their downside.

After all, not everyone in 1929 proved to be as successful as Joseph Kennedy Senior, who reputedly sold all of his stocks early that year after hearing his shoe-shine man offering stock tips. That, for Kennedy, was an expression of animal spirits run amok.

So, today’s so-called “balanced fund” as a style of investing was born. The fund Morgan started became the first mutual fund to combine both stocks and bonds. In those days, funds were often referred to as investment trusts, as the mutual fund concept was termed in its nascent stages. The company Morgan started was the tenth-largest fund company by 1944, so the success of the concept speaks for itself.

The purpose of the fund was to meet the following objectives:

  1. Conservation of capital.
  2. Reasonable current income.
  3. Profits without undue risk.

A 50-50 mix of stocks and bonds tends to earn about 7.5 percent per year on average over any 10-year period of time. At the same time, if the stock market drops by 20 percent, the balanced portfolio would typically drop by just 12 percent (the standard deviation) — based on statistics that go back to 1926.

The balanced investor can enjoy the smug satisfaction of only freaking out half as much as his or her fully invested co-worker bemoaning the fact that they didn’t “bail out” in time. Who knew? But for the balanced investor, who cares?

The cost of accomplishing the three objectives cited above is the “opportunity cost,” or the lost opportunity of not earning what traditionally has been a 10 percent long-term return on an all-stock portfolio — or even an 11 percent return on small-company stocks.

This is a huge cost over a long period, so the investor with the luxury of time is better off staying committed to stocks or stock funds as a buy-and-hold investor. To give up 2.5 percent per year of compound annual earnings would reduce an ultimate nest egg by more than half over what an all-stock mix might have accumulated.

Be that as it may, for many who are approaching retirement, or for those who are anxious at any stage about losing much of what they have struggled to accumulate, the legacy of Walter Morgan has provided an alternative to institutions that purport to be able to predict future market moves. For the curious, typing “Walter Morgan fund manager” will lead you to material that is worth a visit — including some of the funds that use his methodology today.