My investment portfolio has undergone many permutations over the years. It started out as individual stock-investing and has evolved into a few index funds. For the ultimate hands-off, minimalist investment portfolio, a single-fund investing strategy might be most suitable.
After a few years of investing, a few individual index funds stood out and satisfied my personal risk profile. The allure of a highly customized portfolio added unnecessary complexity which didn’t last long. Eventually I settled on 5 individual index funds and have maintained that portfolio ever since.
My current holdings are:
- VBTLX (bonds)
- VEMAX (emerging markets)
- VGSLX (REITs)
- VTSAX (equities)
- VSCIX (small-cap)
A Traditional Investing Strategy
To utilize a single-fund investing strategy you simply chose 1 fund which satisfied all your risk, returns, and asset allocation desires.
The risk is something you’ll have to figure out on your own or with the help of an astute financial adviser. This will often help you determine how much equities exposure you are willing to take on.
Desired returns can be determined by figuring out the kind of volatility we are willing to accept. It would be hard to get 8% returns with a bond portfolio alone unless you take on excess risk.
Finally, asset allocation is how we build a portfolio which reflects our individual risk and return profile.
A sample portfolio may hold 1-15 different funds to accomplish the desired outcome. 15 can be on the high side and would require a lot of work when it comes to rebalancing a portfolio.
However, a single fund investment strategy isn’t always feasible because not all investment accounts will offer the desired fund to invest in. If your job’s 401k only offers a few shitty options then you’ll have to make the best of it by piecing something together.
A Single-Fund Investing Strategy
A single-fund investing strategy means that you invest in an all-in-one fund, with one single ticker symbol. This fund will have a percentage of bonds and stocks in order to satisfy your risk desires.
Most brokerages now have such funds available. They are called by different names:
- all-in-one funds
- Allocation Funds
- Target Date Funds
Simplicity is the main advantage of a single-fund investing strategy. Next, there is no rebalancing that you’d have to do. Some fund types will do the rebalancing for you and others are set at a fixed asset allocation that doesn’t change.
If you had a portfolio of 4 funds then you’d have to decide each month how much and in which fund you will invest.
Furthermore, as the markets fluctuate up and down, you’d have to make asset allocation adjustment. A single-fund investing strategy removes all that calculating.
The disadvantages are the higher fees.
While a single fund may have fees as low as 0.04% per year, a single fund strategy investing fund might have fees closer to 0.15% – that’s nearly 4x as high.
Naturally, the brokerage company will charge you a little more for the convenience of you having access to such an all-in-one fund.
Taxes may be another small disadvantage. Bonds often don’t do well in terms of taxes when held in taxable accounts. However, the ease and convenience of single fund investing strategy may be worth the slight tax implications.
Single Fund Investing Examples
Each investor will have different preferences. Some of us will want to change our asset allocation to a less risky profile as we approach or enter retirement.
Others will have a high risk tolerance and will accept a higher volatility in hopes for higher portfolio returns.
The working retiree: Imagine a healthcare professional who decides to continue to generate income until they die. It may not be much but perhaps enough to cover their household expenses. This person could tolerate a lot more portfolio risk which often means a higher chance of investment growth. They would choose an all-in-one fund with a high stock percentage.
The poor retiree: Now imagine a healthcare professional retiring with only $200k and social security. They cannot afford a sudden drop in their investment value so they will need to take on a lot less in retirement. They would choose a fund with a high bond percentage.
Target Date Funds By Vanguard
A simple example would be one of the Target Date Funds from Vanguard. I’ll use VTTSX as an example. VTTSX is the Vanguard Target Retirement 2060. The “2060” stands for the year in which you expect to retire.
There are all sorts of date ranges and you can choose based on the year you retire. The further away you are from retirement the more aggressive the fund is. As it approaches retirement, it gets more conservative.
This VTTSX fund holds the following individual funds:
- Vanguard Total Stock Market Index Fund
- Vanguard Total International Stock Index Fund
- Vanguard Total Bond Market Index Fund
- Vanguard Total International Bond Index Fund
Each of the above funds have their own symbols. Vanguard takes them all and stuffs them into one fund and that’s how you get this all-in-one fund. This allows for an easy single-fund investing strategy.
This fund actually changes its asset allocation as you get older. This is a strategy in which the investor wants to take on less risk as they get older. Having a fund that allows for this adjustment is very unique to these “target date funds”.
In the above figure from Vanguard you can see that as you get closer to retirement your asset allocation changes. 25 years before retirement you have a 90%/10% stock/bond ratio.
By the time you’re 5 years into your retirement, the majority of your holdings have been gradually converted to bonds. In fact you would have an asset allocation of 20/80.
A higher bond allocation means less portfolio returns but also a lower volatility which may be favorable for someone living solely off their retirement portfolio.
Vanguard’s LifeStrategy fund series are the ones I mentioned which have a fixed asset allocation that don’t change over the life of the fund. This means that you could hold such a fund from now until your death if you never wanted to change your asset allocation.
Just like the other single fund investing options, the fees are higher than individual funds and the same tax implications hold true.
I’ll use the Vanguard LifeStrategy Growth Fund (VASGX) as an example. You can see a screenshot of it from the Vanguard website below. Starting on the left is a very conservative portfolio of an AA of 20/80 and over the on the right is the more aggressive 80/20 asset allocation.
Below, you can see the individual funds which are held in the VASGX fund. It’s essentially the same exact funds which were held in the Target Date Fund (VTTSX) from above.
Single-Fund Investing Options From Other Brokerages
I am not a fan of Charles Schwab because I have had too many negative experiences with them. Fidelity, however, has always been easy to navigate and they have been consistently solid as a brokerage company.
Schwab Target Date Funds are essentially identical to the Target Date Funds I mentioned above from Vanguard. Your asset allocation will be adjusted the closer you get to retirement and even more after you enter retirement.
Their single-fund investing options are listed below. You can see that their expense ratio is quite low. However, I would warn my colleagues to pay very close attention to anything offered by CS to make sure there are no hidden fees.
I don’t do business with Vanguard because they are popular or because that’s all that everyone talks about. I use them as my brokerage company because they aren’t greedy; they are happy to make a ton of money off me in a legitimate & predictable manner.
That’s the same reason I do business with Ting instead of Sprint.
Fidelity has recently stepped up their game and is trying to compete for the wealthy index investors who flock to Vanguard.
The screenshot below is of the “Allocation” funds from Fidelity which is basically their own version of all-in-one single-fund investing options.
One example would be the FFOPX fund with an expense ratio of 0.16% per year. Just like other target date funds this all-in-one fund changes AA as the account holder gets older.
5 Reasons To Switch
- Your brokerage company actually offers a single-fund investing option
- The fees are relatively low (below 0.2%)
- You want to simplify your investments
- You don’t want to deal with asset allocation and portfolio rebalancing
- You want to handle your portfolio without the aid of a professional adviser