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As a mutual fund investor, do you buy one fund that acts as a unified portfolio or do you build your portfolio from the bottom up, selecting a collection of individual funds?  This sounds almost like that old question of “paper or plastic”.  The obvious answer to the bag question is paper, because it’s biodegradable…  unless you need some cheap plastic trash bags, then the answer is plastic.  So, really, the type of bag you want depends on some other factors.  The same answer holds true with mutual funds.

The benefits of an all-in-one fund can’t be minimized.  The concept is simple, you buy one fund and get: all of the diversification benefits that funds offer; all of the cost synergies that funds offer; all of the professional management benefits that funds offer; and all of the tax simplification that funds offer.  What you don’t get is much control. 

For example, if you purchased Vanguard Balanced Index Fund (VBINX), your portfolio would always be 60% invested in the total U.S. stock market and 40% in the total U.S. bond market.  If you felt that stocks were overvalued and wanted to lighten up your exposure there, you can’t.  If you believed that technology stocks were really cheap, you would have no way to increase your exposure.  However, you have to ask yourself if this type of control is really something you want.

With control over your investments comes the responsibility of watching those investments.  This can be a major undertaking if you have a large portfolio of funds.  It also means you and you alone are responsible for making asset allocation decisions: how much money should each fund have?  When should you move money from one fund to another?  Should you sell a lagging fund or is there still a reason to own it?  These are not immaterial questions.  They require time and effort to answer, not to mention some expertise.

One way around this is to move away from static funds like Vanguard Balanced Index and toward more actively managed funds, such as Vanguard Wellesley Income Fund (VWINX), where managers actively select individual investments while adhering to a roughly 60% bond/40% stock mix.

You may also like something that changes with you as your needs change.  For this you might consider funds like Fidelity’s Freedom funds or T. Rowe Price’s Retirement funds, which target specific retirement dates.  Vanguard has similar offering, too, under the Target Retirement moniker.  Each of these funds starts out more aggressively and, as the target date of the fund approaches, gets more conservative. 

Moreover, by outsourcing all of the investment decisions to an expert (owning an all in one fund), you can focus your efforts on the areas in which you will have the most impact.  Specifically, saving and spending. 

It may sound silly, but if you save more money you will have more money.  This point can’t be hammered home enough.  If you save $100 a month for a year, you will have $1,200.  If you save $200 a month for a year, you’ll have twice as much.  Add investment growth and compounding into the picture and you start to see the importance of saving more.  This is, of course, where spending comes into play.  The only way to save is to not spend.  Again it sounds silly, but it is a base truth.  These two areas are where investors will most help their own cause.

That said, some people find owning individual mutual funds, and stocks, an enjoyable pastime.  Indeed, it can be fun to research investments and then monitor their progress.  Others see the benefits of fine-tuning their portfolios to suit their individual needs.  For example, if you believe in a particular investment style, you may not be able to buy an all-in-one fund that is pure to your desired style.  In these cases, it makes complete sense to do it yourself. 

There is, however, no right answer and, in fact, a hybrid model might work well, too.  Often referred to as core and satellite or core and explore, you buy a fund that acts as your core portfolio and then supplement it with other investments that you cherry pick.  This can, of course, work with mutual funds, as well as individual exchange traded funds, stocks, and bonds.

In the end, there is no “right” answer.  It depends on your needs, desire, and time.  The advice that might be most sage, however, is to focus on what will benefit you most.  That starts with saving, controlling spending, and doing things that make your life better.  If the last item includes spending time with your investments, then go for it.  If it includes spending time with your family, then opt for the all-in-one fund.