You've been told not to put all of your eggs in one basket. This is sound advice but there are exceptions to this rule with mutual funds. You may be a beginning investor or someone who has limited investment choices in their 401(k) plan. Or you may want to find a solid core holding to build around for a diversified portfolio.
Before you invest with an "all in one" mutual fund, be sure to cover all of the basics of investing.
How to Use Balanced Funds
Balanced funds, also known as hybrid funds, are mutual funds that provide a combination (or balance) of underlying investment assets, such as stocks, bonds, and cash. This is asset allocation in its simplest of forms. Balanced funds usually have a stated objective described as aggressive, moderate or conservative. For example, Fidelity Balanced Fund (FBALX) maintains a moderate (medium risk) allocation with approximately 68% stocks, 25% bonds, and 3% cash. One of the best-balanced funds, Vanguard Wellesley Income (VWINX), normally maintains a conservative allocation of roughly 35% stocks and 60% bonds.
Balanced funds can be used as core holdings of a mutual fund portfolio or they can be used for beginners as a first fund. Either way, balanced funds are diverse and professionally managed — a win/win for the one-fund approach.
How to Choose Target-Date Funds
Target-Date Funds are just as they sound: They are funds that invest for a particular date in time. These funds are common in 401(k) plans and can be used in the one-fund approach. If are investing for retirement, you may consider one of Vanguard's target retirement funds. For example, someone who plans to retire in or near the year 2030, could use Vanguard Target Retirement 2030 (VTHRX). As the target retirement year draws closer, the fund manager will gradually decrease the stock allocation and increase the bond and cash allocation (evolving from aggressive to moderate to conservative) over time.
Buyer beware: Target-Date Funds are the ultimate "lazy portfolio" but there are no one-size-fits-all funds. For example, an extremely conservative investor may not be comfortable with a target-date fund allocation if the allocation is too aggressive for their particular risk tolerance. Therefore you may want to do a little homework before investing by checking the asset allocation of the target-date fund. For example, if you want to be more conservative, consider a target date that is closer in proximity, such as five or 10 years sooner than your target date. Similarly, if you want to have a more aggressive mix of stocks and bonds with a target-date fund, choose a target date that is farther away, such as five or 10 years later than your target date.
Why Invest in Index Funds
When considering a one-fund approach, index funds can be a wise choice because of their passive management, broad diversity, and low expenses. Beginners may want to start with an index fund, such as one of the best S&P 500 Index funds, to use in a core and satellite portfolio structure or they may want broader exposure with a total stock market index fund.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.