If you're anything like my fiancee, anything that involves dollar signs goes in one ear and right out the other. Retirement planning and investing is something she views as nothing more than a necessary evil, something she does, but only because the alternative of not doing it is so much worse. It is not remotely fun or interesting to her; it's just another chore.
I suspect a lot of people are wired like her. They know they should invest, but dealing with the hassle of doing it is a barrier to getting started. Luckily, all those barriers can disappear by using a one-fund portfolio. It's simple, convenient, and threads the needle by offering a "good enough" portfolio with basically zero effort.
The hands-off investment plan
One of the hardest parts about investing is deciding what you should invest in. In truth, there's no perfect answer. You could put 100 of the world's brightest investors, academics, and financial planners in a room and ask them to pick the perfect portfolio for you, and no two answers would be the same.
But though the answers may differ -- one advisor might recommend a little more international stocks than another -- the differences would be relatively small. In the grand scheme of things, whether you have 50% of your money in U.S. stocks or 45% of your money in U.S. stocks, it probably won't matter much to your long-term result.
There are some basic principles upon which virtually everyone agrees. These are that younger people can afford to take more risk, and older people who are nearing retirement should take less risk with their portfolio. This alone is the largest part of the retirement puzzle, and why I think target-date funds are the best solution for investors who don't want to spend a lot of time managing their investments.
The way target-date funds work is that you pick a year that roughly corresponds with when you'd like to retire (say, 2050 for someone who is 35 years old) and make regular contributions to the fund over time. As you age and time goes by, target-date funds are designed to automatically reduce your risk profile, consistent with retirement advice that virtually every expert agrees on.
Vanguard's fund for a 2050 retirement date holds 90% stocks and 10% bonds. The 2030 fund is roughly 70% stocks and 30% bonds. As the retirement date nears, the percentage of bonds in each fund increases, reducing the portfolio's overall risk. Twenty years from now, the 2050 fund will look like the 2030 fund does right now.
Every financial company has their own unique twist on the target-date fund. They range from the super-simple (like Vanguard's) to the more complex (like those by T. Rowe Price), but the basic premise is the same -- a target-date fund can be a one-fund retirement plan. You put money in, the fund manager takes care of the rest.
Picking a good target-date fund
There are a ridiculous number of target-date funds. According to Morningstar, target-date fund investors entrusted 23 different companies with at least $1 billion of their wealth as of 2017.
You can explore all of them if you'd like, but I'm biased toward Vanguard's roster of target-date funds. Not only is it the largest in the business, Vanguard is also owned by its clients, meaning it has no incentive to make a profit. As a result, its funds are downright cheap, carrying annual expense ratios of roughly 0.15% (for every $1,000 you invest in the fund, you'll pay fees of about $1.50 per year).
You could spend all day analyzing the differences in target-date funds, but if you wanted to dumb down your search to the single most important parameter, you should focus exclusively on the cost of the fund. Data shows that the single best predictor of a fund's success is how much it costs. The lower the fee, the higher the return, on average. It's very hard for a high-cost fund that owns a very similar mix of assets to outperform a lower-cost fund.
When it comes to cost, no fund manager has managed to come close to what Vanguard offers in target-date funds. That's the big advantage of Vanguard's business model -- no profit motive means it has every reason to be the least-expensive option on the market. Vanguard isn't paying me to say this. It's just the reality of business. If you eliminate the need for a fat profit margin, you can offer a cutthroat price on anything, including financial services.
Love for the unloved
If after you read this article you start Googling for information on target-date funds, you'll find they can be controversial. A common criticism is that they're too expensive. Others complain that a one-size-fits-all solution isn't as good as a customized portfolio that a financial planner could create for you (albeit at a much higher cost).
I can't disagree with these criticisms, though I warn you that they are most often levied by forum-posting keyboard warriors who have nothing better to do than argue about personal finance's most trivial matters, as well as financial planners who have a vested interest in convincing you that their higher-cost solution is in some way meaningfully better.
Yes, you could re-create Vanguard Target Retirement 2050 Fund with four funds and reduce the average cost to 0.07% vs. the 0.15% it charges. But obsessing over 0.08% per year in fund fees that will not make a difference in your retirement outcomes is missing the forest for the trees.
Besides, paying an extra $0.80 per year for every $1,000 invested is a small price to pay for the convenience of having the funds automatically rebalanced for you as you age. It might matter on a $5 million portfolio, but it's a rounding error for people who are just getting started.
And while a financial planner might be able to produce a more thoughtful retirement plan, the question is whether the added customization is worth it. If given the choice of paying 0.15% per year for a hands-off target-date fund and 1% for a human advisor's input, I would personally take the target-date fund every single day of the week. Fund managers would give up their firstborn child to get a 0.85% edge over the market average return each year; you can get that kind of edge just by avoiding 0.85% in annual fees.
The point is not to get bogged down in the details. If you're someone who wants the best possible combination of convenience and returns, a low-cost target-date fund like those offered by Vanguard is difficult, if not impossible, to beat. In less than one hour you could open an IRA, pick a target-date fund, and set up automatic investments to start saving for retirement. It won't be perfect -- no portfolio is -- but it is easily better than 90% of the alternatives, and that's plenty good enough.