I'm in 15 mutual funds. How should I simplify?

By Walter Updegrave, senior editor

(MONEY Magazine) -- I recently retired and want to make my retirement portfolio -- now invested in 15 different mutual funds -- simple, cost-effective and easy to manage. I'm thinking of consolidating everything in a target-date retirement fund. Should I invest in one fund or several? -- Bill, Lady Lake, Fla.

Yikes, 15 funds!

That's not as bad as the woman I recently wrote about whose money was spread among 29 different funds. But it's still way too many, and makes managing your portfolio more difficult than it has to be. And that's the last thing you want when you're settling down to enjoy retirement.

So I applaud your idea of trimming your portfolio.

But if you really want to make things easier on yourself, you're much better off sticking to just one target-date fund that offers broad diversity and reasonable costs.

Why, you may ask, do I advocate limiting yourself to only one target fund when doing so would seem to flout the cardinal investing rule of diversification? After all, if one target fund is good, wouldn't two be better, and three better still?

The answer is no.

The whole point of investing in a target-date fund is to get a fully diversified portfolio of stocks and bonds (and in the case of target funds for older investors, some cash) inside one fund. You invest in such a fund if you don't want to go to the trouble of building and maintaining a diversified portfolio on your own.

But a target-date fund offers more than just a diversified mix of stocks and bonds. It also offers a long-term strategy. As you age, the fund's portfolio automatically changes its asset allocation, shifting more of its assets out of stocks and into bonds (and eventually cash as well). Thus, the fund becomes more conservative as you get older and, presumably, want more protection from market setbacks.

But not all target funds offer the same mix of stocks and bonds or time their shift out of stocks and into bond at the same pace, even though they may have the same target date in their name.

Nor do they all hold exactly the same lineup of investments. One, for example, may offer inflation protection by investing in TIPS, or Treasury Inflation Protected Securities, while others may add real estate or commodity exposure.

Each target fund's portfolio has been designed, in theory at least, to offer its own individual balance of risk vs. return by combining a particular group of assets.

So if you combine two or more funds that take different approaches -- and most do, at least to some degree -- you would likely end up with a mish-mash of assets instead of a coherent portfolio. That would make it more difficult for you to see how your retirement savings is allocated among different types of investments at any given time, not to mention how that allocation morphs over time. You would give up much of the simplicity and ease of management you're seeking.

Which is why I think you're better off going with just one target-date fund, but taking care to choose a target fund that makes sense for you.

How do you do that?

Start by making sure you're comfortable with the fund's current asset mix. For example, a 2010 target-date fund -- which is geared toward someone who's recently retired or is about to retire -- might have anywhere from, say, 25% in stocks to more than 50% in equities. But you also want to look at the fund's "glide path," or how today's stocks-bonds mix will move more toward bonds in the future.

Take the 2010 target-date funds of the Big Three in the target-date arena: Fidelity, Vanguard and T. Rowe Price. All are fairly close in their stocks-bond allocations today: Fidelity and Vanguard are roughly 50-50, while T. Rowe Price is 55-45.

But the similarity ends there. Fido's 2010 fund's equity exposure drifts down gradually until it hits 20% within 10 to 15 years. So if you bought this fund at age 65, by age 80 you would be in a fund that has 20% in stocks, 40% in bonds and 40% in short-term investments. The fund would then stick with those allocations.

Vanguard's 2010 fund, by contrast, takes about 10 years to get to a 30% stocks-70% bonds mix, where it would then remain. So at 75, you would have 30% of your assets in the fund invested in stock, and the stock position wouldn't drop below that amount. So Vanguard's fund is a bit more aggressive than Fido's.

T. Rowe Price's 2010 fund, meanwhile, pushes the envelope even more. Not only does it start out with a bit more in stock -- 55% vs. 50% -- it also transitions to bonds more slowly. After 15 years, the fund would still have 35% in stocks and it takes 30 years for the fund to hit its low point in stock exposure of 20%. So if you bought this fund at 65, you'd still have 35% in stocks at age 80 and wouldn't hit 20% until 95.

I don't think you can say one of these funds has the "best" mix. The percentage of stocks you want at retirement and beyond depends on a number of factors, including the total amount of money you have, how dependent you are on your target-fund stash for regular income, what other resources you have to fall back on and, of course, how comfortable you are seeing the value of your portfolio jump around. The point, though, is that you want to choose a fund with a current stocks-bonds blend and glide path that you're comfortable with.

You can get information about a target fund's asset mix and glide path by calling the fund company or, for more detailed info, checking out its prospectus. Many fund companies also provide quite a bit of detail on their various target funds on their web sites, as do Fido, T. Rowe and Vangy.

If you want to see how a particular target fund has performed in markets good and bad, you can plug its ticker symbol the Quotes box at Morningstar.com.

As I noted in a recent video, people who own target-date funds in their 401(k)s may also get more detailed information about them under recent disclosure requirements proposed by the Department of Labor.

You also say that you want your portfolio to be "cost-effective." To borrow a phrase from the great Smokey Robinson, I second that emotion. So in addition to a target-date fund's allocation and glide path, you also need to check out its costs.

On that score, it's hard to beat Vanguard. It's 2010 fund charges a miserly 0.17% in annual expenses, largely because the fund invests nearly all its assets in its own low-cost index funds.

T. Rowe and Fido charge 0.64% Rowe and 0.67% respectively, which is still relatively low by comparison to many 2010 funds that have expense ratios of 1% to 1.5%.

One final note: Sticking to one target-date fund doesn't necessarily mean you have to keep your entire retirement portfolio in that one fund. Let's say, for example, you're attracted to Vanguard's low costs, but would like a slightly more aggressive approach. In that case, you could put a small a portion of your money into a broad stock index fund.

Conversely, if you're looking to go a bit more conservatively, you could stick some of your stash into a bond index fund or a cash equivalent, like a money fund, savings account or CD.

Yes, this arrangement wouldn't be as streamlined as keeping all your dough in a single target fund. But adding one all-stock or all-bond fund would certainly complicate things a lot less than taking on another target-date fund that may have five or more asset classes.

And compared to your current 15-fund portfolio, a target fund-plus-one approach would be the soul of simplicity itself. To top of page

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