Now, there's no one ideal fund for everyone, but if you think
you're suited to the single-fund portfolio theory, there are a few good
bets.
All-you-need funds can be split into three categories: broad-market index
funds, funds of funds and lifecycle funds. We¿ll go over each category and
highlight a few picks.
Index Funds
Most planners will reflexively say that investors should break their equity
investments into size (large or small-cap) and style (growth or value). But
a broad market index fund, such as the
Vanguard Total Stock Market, which tracks the Wilshire
5000, can provide all of the above.
Vanguard's Total Stock Market fund -- like other funds that track the
Wilshire 5000 -- is heavily weighted toward large companies. That means
total stock market funds do not provide
asset class diversification.
Because they have more of their assets in larger companies, their overall
performance is largely due to the performance of large-cap stocks. You'll
still catch a run-up in small companies, but it may not influence the fund
as much as a drop in large-cap stocks will.
While this is something to consider, also keep in mind that the market
itself is weighted toward large companies and, ideally, your portfolio
should look somewhat like the market. The
S&P 500 makes up 85% of the total stock market's capitalization, which means those other 4,500 in the index
make up less than 15%.
That exposure to smaller companies will help smooth volatility, though. The
S&P 500 peaked in March 2000, while the S&P SmallCap 600 peaked more than
two years later in April 2002. An asset mix that held small-caps over the
past two years would have mitigated the huge losses in large-caps. But since
small-caps are generally more volatile, an equal weighting would be unwise.
A total stock market fund and a total bond market fund, such as Vanguard's
(VBMFX Quote - Cramer on VBMFX - Stock Picks)Total Bond Market,
could be enough to get investors started.