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Which One Fund Would You Recommend to Anyone?

A reader writes in, asking:

“There are many types of investors, from those who like to micromanage, to those who don’t know and don’t care about investments. Most are in the middle: they know they have to save, have some vague notion of how stocks and bonds work, but have more important things to do, such as living their lives.

What would you recommend for investors who want to buy one fund, hold it and forget it for years, and why?”

The two primary criteria I’d use for trying to pick such a fund would be:

  1. Low costs, and
  2. A middle-of-the-road sort of asset allocation that could be at least reasonably suitable for anybody.

Unfortunately, the low-cost criteria rules out most all-in-one funds available to retail investors. Aside from a selection of funds from Vanguard, the pickings are quite slim.

Vanguard Target Retirement Funds

While I do like Vanguard’s Target Retirement Funds, there isn’t one that I’d be comfortable recommending to investors of every age and risk tolerance. Most are too aggressive for many investors, and the target date funds that currently hold moderate allocations will soon be shifting to very conservative allocations that wouldn’t make sense for many young investors.

Nor would I feel comfortable recommending that investors pick a Vanguard target fund based solely on their age. If investors did that, many would end up with a 90% stock allocation (which Vanguard’s target funds hold until 25 years from retirement). In my opinion, there are plenty of investors for whom a 90% stock allocation would not be appropriate, even if they are young.

Vanguard Balanced Index Fund

While Vanguard’s Balanced Index Fund has low costs and a reasonable 60% stock, 40% bond allocation, it’s not a fund I find myself suggesting very often, because it has no allocation to international stocks. Given how inexpensive it is to get international diversification, I don’t see a lot of reason for choosing not to do so.

Low-Cost Actively Managed Funds

While I prefer index funds to actively managed funds, the primary reason for my preference is costs. Two of Vanguard’s actively managed balanced funds (Wellington and Wellesley Income) are approximately as inexpensive as Vanguard’s Target Retirement funds and LifeStrategy funds, so they at least merit consideration.

Still, like Vanguard Balanced Index Fund, they would not be my first choice due to the fact that they both have very low international allocations — approximately 88% of their respective stock allocations are allocated to U.S. stocks.

Vanguard LifeStrategy Funds

Most likely, the one fund I’d feel most comfortable recommending to anyone would be Vanguard’s LifeStrategy Moderate Growth Fund. It has an allocation of 42% U.S. stocks, 17.5% international stocks, and 40.5% bonds.

A 60% stock, 40% bond allocation is something that I think most people have the risk tolerance to handle, and it should still provide for a decent degree of growth for young investors. In addition, studies have showed that, historically, a 60/40 allocation has done approximately as well as more conservative allocations (e.g., 40% stock, 60% bond) at supporting low withdrawal rates (i.e., 4% or less) in retirement.

One Size Doesn’t Fit All

Of course, anything that tries to be a one-size-fits-all solution is bound to have shortcomings. And this is no different.

As we’ve discussed before, in many cases, using all-in-one funds means passing up on cost-saving opportunities.

For example, if you have investments in a retirement plan at work, rather than using all-in-one funds to implement the same asset allocation in each of your accounts (e.g., 401(k), Roth IRA, traditional IRA), you can often reduce costs by choosing the lowest-cost one or two funds in your work retirement plan, then picking up low-cost funds in your other accounts in order to fill in the gaps in your desired overall asset allocation.

In addition, with something as straightforward as Vanguard’s LifeStrategy funds, there’s no reason to recommend the same fund to everybody. It doesn’t take much work (and it isn’t very confusing, even to rookie investors) to explain that the LifeStrategy lineup includes four different options — Growth, Moderate Growth, Conservative Growth, and Income — each with its own level of risk and hoped-for return.

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  1. “Most likely, the one fund I’d feel most comfortable recommending to anyone would be Vanguard’s LifeStrategy Moderate Growth Fund.”

    Ditto. I was hoping/expecting you to name that fund as soon as I started reading. 🙂

  2. Eric Meier says

    What about Vanguard’s STAR fund?

  3. Eric,

    Personally, I would prefer to use one of their lower-cost funds that’s made up of index funds, rather than the STAR fund’s collection of slightly higher-cost active funds.

    That said, it’s not the worst fund out there by any means. It’s reasonably well diversified, and its costs are still well below industry averages.

  4. Besides the life strategy funds I have also suggested people look into the Wellesley Income fund. It’s a 40/60 fund with a .25% to .18% expense ratio depending on share class.

  5. ScrappyD says

    I like Vanguard Wellesley (VWINX) and Vanguard Total Stock Market Index (VTSMX) funds. And for those who can afford Admiral class shares of these (not me…yet!), even better! Since Wellesley is conservative, it could nicely bridge the gap (risk-wise) between a savings account and more volatile stock funds. And VTSMX is a solid low-cost stock fund with decent returns.

  6. “In my opinion, there are plenty of investors for whom a 90% stock allocation would not be appropriate, even if they are young”

    Do you say that because of the risk intolerance of some young investors or is there any other reason?

  7. Jay,

    Yep. That’s pretty much it. Some investors, no matter how young, are not at all comfortable with volatility. While 0% stocks isn’t a good idea for these investors in my opinion, neither is 90% stocks.

  8. I would recommend a no-load monthy income fund with a low MER to a beginner. You can start with as little as $100.00 add $25 a month. They are usually a balanced all in one fund, like a 60/40 split of stocks/bonds. As a beginner you cand see this little dividend paid to you every month that you reinvest automatically. Then you see as the dividend is reinvested it grows. I think that would help spark an interest for someone who is hesitant about investing. They see positive growth right away. Later on when the amount grows they can switch to other smarter products….

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