Financial Planning Blog

At Table Rock Financial Planning we value simplicity, and certainly don't think you need to be lazy to appreciate an elegantly simple investment portfolio. Granted, often things can get more complex as you seek to manage your personal financial risks, maximize your investment returns and minimize your tax obligations. We can probably all agree, however, that some circumstances call for the simplest of investment solutions. How about a diversified investment portfolio consisting of just a single mutual fund?

Very reasonable single mutual fund investing solutions do exist. Before we explore what is available, let's consider some of the situations when a single fund solution would make sense.

• The investor is unwilling or unable to deal with any additional investing complexity. This could be your elderly mother who would rather be spending time with her grandchildren than tending her portfolio, or your son or daughter serving overseas in the military.
• The investor is a neophyte. Maybe you have just started a new job and investing for retirement for the first time. You're engaged and interested, but haven't had time to come up to speed with investing basics.
• The investor is starting small. You may have done your research and be capable of constructing a great portfolio of mutual funds, but you are limited by the required minimum initial investment of each fund. (For example, even though we often recommend Vanguard funds, most require a $3,000 initial investment. A simple four fund portfolio would require $12,000 to start.) In addition, you may wish to make consistent monthly investments, but unable to split the contributions across multiple funds due to minimum restrictions.
• The investor has a small account or two, orphaned from a main diversified portfolio of several mutual funds. This is a common situation--a couple has over 95% of their retirement portfolio in workplace (e.g. 401K) plans, but also have a couple of small IRAs opened many years earlier. They wish to have the smaller accounts invested with a reasonable asset allocation, but don't want to spend much time managing them.

Although you have a choice between different types of single fund solutions, each type of fund will provide you with the following advantages:

• Diversification across several asset classes (stocks and bonds; domestic and international; large and small; etc.) along with diversification within asset classes (many bonds, many domestic stocks, many international stocks, etc.).
• Professional management of an asset allocation strategy--i.e. exactly how much is invested in each asset class at any particular time.
• Automatic rebalancing of your investments.
• Simplicity and convenience.

In following articles we will explore the two major categories of single fund solutions--target date funds and balanced (or asset allocation) funds. Before we do, however, please consider an important point. Although many single fund solutions suffer from high expenses and less than optimal asset allocations, don't assume that by taking the simple road you are necessarily accepting lower returns. By automating your investments with a single fund solution, it may help you avoid many of the common errors that drag down so many investors' returns. These include well documented tendencies toward under-diversification, failure to rebalance accounts, and chasing the performance of hot funds or market sectors.

A 2010 Morningstar article on investor returns pointed out how investor (or dollar-weighted) returns trailed total (or time-weighted) returns in various equity and bond fund categories over the previous ten years. In other words, the average investor did not do as well as reported mutual fund returns would suggest. However, average investor returns in balanced funds (i.e. a single fund solution) were actually higher than the average total return of the funds.

Interestingly, balanced fund investors did manage to beat the averages. They earned a 3.36% annualized return, compared with 2.74% for the average fund. A mix of bonds and stocks leads to moderate results, and more investors stick with these funds through the down periods. In theory, it shouldn't matter if you hold a stock fund and a bond fund separately or get the same exposure through an allocation fund, but in practice it seems that boring balanced funds don't push fear or greed buttons that throw people off. As Jack Bogle says, emotion is the enemy of the investor.

The moral is simple: Simple can be smart and profitable.