1. Money
Kent Thune

When to Use the One-Fund Approach

By December 29, 2012

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In my years of advising clients on asset allocation and investment selection for building solid portfolios, there are times when investing with just one fund can be wise.  Now may be one of those times.

When I was just a young apprentice in the world of mutual funds and investment advice, my first job was to receive calls from 401(k) investors.  One of the first lessons I learned was that the number of calls increased dramatically after quarterly statements were mailed to the 401(k) participants.  Here's a typical phone call request:

"Hello, I'd like to make some changes to my 401(k).  Fund ABC is doing well so I'd like to add more money to it but Fund XYZ is doing poorly so I'd like to stop using it and find another one.  What do you recommend?"

As you can imagine, the answer had to follow several follow-up questions about risk tolerance, other investments held outside of the 401(k), and investment objective questions, such as time horizon.  Of course, there were many different answers because each investor is unique in their own financial goals and attitudes about market risk.

Using One Fund: Overcoming the Investor's Worst Enemy

However, one particular recommendation would follow a common and underlying aspect of investing:  When an investor sees some funds doing well and others doing poorly, the natural reaction, especially for the inexperienced investor, is to make changes.  However, abandoning a long-term investment objective for short-term economic and market activity, is like trying to move out of a house during a severe thunderstorm--it is not usually the best idea.  To paraphrase, Ben Graham, "the investor's worst enemy is often themselves."

Therefore, at times, I would recommend a one-fund approach for the investor.  401(k) plans, for example, often have balanced funds or target-date funds as investment choices.  When an investor uses this approach, they don't see as much of the ups and downs of the underlying investments.  For example, when stock prices fall and bond prices rise, the investor will not see one fund doing poorly and another fund doing well -- they just see one fund slightly fluctuating in value, rather than the deeper swings in value that is common in volatile periods.

Another bit of advice is to stop looking at your statement!  Of course, I must follow these thoughts with my Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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