Estimate Time5 min

Diversification through a single fund

Investing doesn't have to be complicated. Understanding how to buy a diversified portfolio through a single fund can be a way to help simplify your financial life.

Building a diversified portfolio often means owning a number of different funds, each of which focuses on a different asset class or a different style of investing. But that method, which requires investors to choose their own funds and then monitor and adjust the mix over time, may not be for everyone. Some people don't have the time, some may not feel they have the expertise, while others simply don't want to have to worry about it. If one of these descriptions sounds familiar, a single-fund strategy may make sense for you.

There are products that can offer an easy-to-manage diversified portfolio in a single fund. These may contain many different asset classes, including stocks, bonds, and short-term investments, which is why they are sometimes called asset allocation funds. While individual funds may have different underlying asset allocations, what they all do is provide you with the opportunity to own a diversified portfolio with just one fund.

Target date funds vs. target allocation funds

There are 2 common types of single-fund strategies: target date funds and target allocation funds. While they each allow you to own a diversified portfolio through a single investment, it's worth it to take a moment to understand the different approaches each type takes.

Target date funds

Target date funds are primarily for investors who know the approximate date in the future they expect to retire and may need to begin withdrawing money from their retirement accounts. These funds feature a mix of investments that is professionally managed with a specific target date in mind. For example, when that date is many years away, the fund manager may invest more aggressively by concentrating the fund's assets in higher-risk assets that offer greater potential for appreciation, like domestic and international stocks. As the target date approaches and passes, the mix becomes more conservative, with the manager slowly reducing the portfolio's exposure to stocks in favor investments such as bonds and money market investments.

At Fidelity, we offer target date funds called Fidelity Freedom® Funds. The underlying investments consist of Fidelity mutual funds representing different asset classes and are regularly rebalanced based on Fidelity’s proprietary glide path or asset allocation mix. Fidelity Freedom® Funds are designed to simplify retirement planning and investors can choose from active, index, or blend versions of these funds. Just pick a fund that's managed closest to the date you hope to retire.

Target allocation funds

The primary difference between target date funds and target allocation funds is that while target date funds' asset allocations are continually shifting in response to an investor's changing time horizon, target allocation funds' asset allocations remain constant. For example, say a fund's target allocation is 70% stocks and 30% bonds. The fund's manager will continually make adjustments to the portfolio on an as-needed basis to maintain that asset allocation. So if the value of stocks in the portfolio rises and the value of bonds falls, the manager can liquidate a portion of the stock position and shift the proceeds into bonds to maintain the 70/30 mix. These funds may be a good option for investors who understand their tolerance for risk and how that translates into an asset allocation. One thing to remember, though, is that the right asset allocation today may not necessarily be the right one tomorrow. As your time horizon changes, you should continually evaluate your investments to make sure your asset allocation matches your investment objectives.

At Fidelity, we offer a number of different target allocation funds, including Fidelity Asset Manager® Funds. Each maintains an asset allocation containing between 20% and 85% stocks. You simply select the portfolio that best matches your comfort level regarding risk, your investment objectives, and your time horizon.

Advantages of single fund strategies

Simplicity and convenience You don’t have to worry about building or actively managing a portfolio.

Diversification Single fund portfolios provide a diversified mix of investments in different asset classes and securities. Remember, diversification does not ensure a profit or guarantee against loss.

Disciplined investment approach When you’re managing your own investments, it may be hard to stay on track, particularly when markets are volatile. Most fund managers follow a carefully developed investment methodology that can help you stay true to the funds’ investment objectives.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

Research bonds quickly and easily

Get investment analysis to help you invest in bonds.

More to explore

Take on taxes

Get ideas to help manage taxes with savings and investing strategies.

You could lose money by investing in a money market fund. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Before investing, always read a money market fund’s prospectus for policies specific to that fund.

Fidelity Freedom Funds are designed for investors who anticipate retiring in or within a few years of the fund's target retirement year at or around age 65 and plan to gradually withdraw the value of their account in the fund over time. Except for the Freedom Income Fund, the funds' asset allocation strategy becomes increasingly conservative as the funds approach the target date and beyond. Ultimately, the funds are expected to merge with the Freedom Income Fund. The investment risk of each Fidelity Freedom Fund changes over time as its asset allocation changes. These risks are subject to the asset allocation decisions of the Investment Adviser. Pursuant to the Adviser's ability to use an active asset allocation strategy, investors may be subject to a different risk profile compared to the fund's neutral asset allocation strategy shown in its glide path. The funds are subject to the volatility of the financial markets, including that of equity and fixed income investments in the U.S. and abroad, and may be subject to risks associated with investing in high-yield, small-cap, commodity-linked and foreign securities. Leverage can increase market exposure, magnify investment risks, and cause losses to be realized more quickly. No target date fund is considered a complete retirement program and there is no guarantee any single fund will provide sufficient retirement income at or through retirement. Principal invested is not guaranteed at any time, including at or after the funds' target dates.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.