These one-stop funds can get you to your goals.
By Christine Benz | 02-22-05 | 06:00 AM | Email Article

Although I'm not particularly car-oriented, it's hard to ignore the fact that most of my friends are driving some really boring vehicles these days: station wagons, family-sized SUVs, and--egads--even minivans. I've now heard more than one blow-by-blow account of haggling with a dealer over a Honda Odyssey, and Audi wagons have begun to look downright sexy to me.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

It's tempting to ask, in the immortal words of David Byrne, "How did I get here?"

But I know the answer. Somewhere along the way, getting from point A to point B safely (and with lots of cupholders) became more important than doing it with a lot of flash.

I wish more investors would reach a similar point in their investing lives. After all, finding the funds that can get you to your goals is more important than being able to boast about a hot-performing investment at a cocktail party. (Really, who does that, anyway? And why do people keep inviting them back?)

And in my experience, actively managing a portfolio of stocks or mutual funds requires more time and hands-on oversight than many investors are willing to give to the task. As a result, too many investors' portfolios lack cohesion and a strong core. Instead they are a mishmash of funds that are past their prime, too narrowly focused, or redundant with one another.

Even if you wouldn't be caught dead driving a minivan, you owe it to yourself to consider a truly low-maintenance mutual fund investment. Funds offering all-in-one diversification haven't gotten much attention, as investors have flocked to more narrowly focused investments with the potential to deliver big gains. But these one-stop funds have serious appeal to the time-pressed in that they essentially let you buy in, tune out, and know that you've got a portfolio that's well diversified across asset classes.

Here are some of my favorite vehicles for the job.

Target-Maturity Funds
Although this is still a relatively new breed, I'm surprised that these funds aren't far more popular. Target-maturity funds are the ultimate choice for delegators. Essentially, you choose a target-maturity fund--essentially, a basket of other funds that span the major asset classes, from stocks to bonds in the U.S. and abroad--that will "mature" in the year you need to tap that money--to retire, to buy a second home, to send a child to college, etc. That's it. You're done. (Well, apart from that small matter of saving the money and sending it to the fund company.)

Behind the scenes, the fund company shifts the mix of investments over time according to a predetermined schedule, gradually tilting toward more-conservative investments as the target date draws near. Essentially, the fund-management company is making some of the same decisions that you might hire a financial advisor to handle, but it isn't necessarily charging you for this. (Some of these funds charge no additional fees on top of what the underlying funds charge.) And while the goal is to hold the target-maturity fund until it hits its target date, you're not required to do so. You can cash out at any time.

Target-retirement funds also have the potential to be more tax-efficient than investing plans that require more active maneuvering among funds. Additionally, because investors in a target-maturity fund don't have to shift into more-conservative investments as they go along, they won't personally trigger taxable capital gains along the way, although they still will have to pay taxes on any capital gains the fund itself pays out. With less of their money going to Uncle Sam, target-maturity fund investors may have more money to put to work in the market.

So what's the catch? You'll likely be putting a lot of your eggs in one basket. Because all of the monies you put into a particular target-maturity fund are invested solely in that fund company's funds, you must feel confident that the firm behind it levies reasonable costs and boasts good breadth in its investment capabilities--stock, bond, and international.

In addition, it's worth noting that these funds' stock/bond mixes vary considerably from one fund company to another, even if they're targeting the same time frame.  Vanguard Target Retirement 2025 , for example, stakes 60% in equities. Meanwhile, Fidelity Freedom 2025  features a 75% stock allocation. As a result, these funds' risk/reward profiles are apt to vary considerably.

Top picks: Happily for do-it-yourself investors, the three big no-load shops--T. Rowe Price, Vanguard, and Fidelity--all offer solid target-maturity lineups. Vanguard's lineup of funds, which launched less than a year ago, is the cheapest of the three, as it relies almost entirely on inexpensive index funds and doesn't charge an additional management fee on top of the individual funds' expenses.

T. Rowe Price also fields a solid lineup of target-maturity funds with its T. Rowe Price Retirement Series. Like Vanguard, none of the T. Rowe funds charge additional management fees on top of what its underlying funds are charging. I also like Fidelity's Freedom lineup, but I'd like it even better if it didn't charge a pesky 0.08% in additional management fees for putting the whole package together.

Life-Cycle Funds
If you'd rather have more control over your investments than is possible with target-maturity funds, life-cycle funds could represent a happy medium. In some important respects, these offerings (also called life-strategy funds) are similar to target-maturity funds. They're usually diversified enough to serve as a stand-alone investment, and they're also typically funds of funds offered by a single fund family. The most significant difference, however, is that life-cycle funds hold a relatively static mix of assets, whereas target-maturity funds actively change their asset allocation as the investor's target date approaches. Thus, life-cycle fund investors enjoy a level of control not available with target-maturity funds. With life-cycle funds, the investor--not the fund company--decides when to shift into a more conservative investment.

Top picks: Life-cycle funds have been around longer than target-maturity funds, and many more firms offer them. (They're also popular options in 401(k) plans.) Here again, however, Vanguard and T. Rowe Price's lineups are hard to beat. Vanguard's Lifestrategy series allows investors to choose a fund that best matches their goals and risk tolerance and draws upon the firm's lineup of low-cost, strong-performing funds. T. Rowe's Personal Strategy funds, though more expensive than the Vanguard offerings, also include some of that firm's most impressive offerings.

Moderate- and Conservative-Allocation Funds
Although most funds that land in Morningstar's moderate- and conservative-allocation categories aren't diversified enough to serve as an investor's sole holding, funds in this group can nonetheless go a long way toward anchoring a portfolio that's awash in niche funds. Most funds in these two groups split their assets between high-quality bonds and large-company stocks, with conservative-allocation funds holding more in the former asset class than the latter.

Top picks: Morningstar's moderate- and conservative-allocation categories are chock-full of no-nonsense core offerings; our analysts' favorites appear on our list of Analyst Picks. Among these,  Vanguard Tax-Managed Balanced  is a particularly useful offering for investors in taxable accounts. In addition to offering inexpensive stock and bond exposure in a single well-diversified shot, the fund also uses tax-saving strategies to maximize investors' after-tax returns. I'm also a fan of  Fidelity Asset Manager , which maintains a fairly even split between stocks and bonds and draws on the talents of top stock-picker Charles Mangum.

This article originally ran Oct. 12, 2004.

Securities mentioned in this article



Morningstar Rating Morningstar Analyst Report
With Morningstar Analyst reports you can get our expert Buy/Sell opinions on over 3,900 Stock and Funds
Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
Sponsored Links
Sponsor Center
Content Partners