Investing doesn’t have to be complicated. Understanding how to buy a diversified portfolio through a single fund can be a way to 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 different funds are arranged according to different 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 two 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 will 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. When that date is many years away, the fund manager tends to 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 of bonds and money market investments.
At Fidelity, we offer target date funds called Fidelity Freedom® Funds. The underlying investments consist of up to 20 Fidelity mutual funds, with an asset allocation that is actively managed by our portfolio managers, supported by a proprietary methodology for adjusting the funds’ asset mix. Fidelity Freedom Funds® are designed to simplify retirement planning. 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 n investor’s changing time horizon, target allocation funds’ asset allocations remain constant. For instance, 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 regard 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.
Most funds focus on a single investment strategy, so in order to create a diversified portfolio, it’s recommended that you own multiple funds. Single fund portfolios, however, are generally intended to be your only investment. That’s why they consist of a diversified mix of asset types. 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.