The Lone-Fund Portfolio

Fund of Funds

Funds of funds are typically expensive, since you not only pay an expense fee for the fund itself, but also the expenses on each of the underlying funds. The appeal, though, is that they allow smaller investors access to multiple funds that may have higher minimum investments.

Some fund families, such as T. Rowe Price and Vanguard, waive the cost of the fund of funds (so their expense ratios are essentially zero), which means investors pay just the fees of the underlying funds. Since both houses offer low-fee funds as part of their funds of funds, they can be a more feasible option.

Funds of funds can either be static or managed. The funds of funds in Vanguard's LifeStrategy series are designed to always hold a specific asset allocation, and the only rebalancing that takes place is to keep it in line with its stated goals. (The series has a fund for Growth, Moderate Growth, Conservative Growth and Income.)

Other funds of funds, though, such as Scudder's Pathway Series, are more actively managed, with managers moving in and out of the underlying funds based on their assessment of the market and analysis of economic data -- much the same way a stockpicker manages a pure equity fund.

Lifecycle Funds

Lifecycle funds are a subset of funds of funds. Lifecycle funds, though, are not generally static investments. Rather, the mix of stocks and bonds changes as the investor ages. Most lifecycle funds have a target retirement date as part of their name.

Two good examples of such funds are the just-introduced T. Rowe Price Retirement series (which range from Retirement Income for current or about-to-be retirees to (TRRDX - Cramer's Take - Stockpickr)Retirement 2040, which has 90% of its assets in equities and zero in conservative fixed-income vehicles) and the Fidelity Freedom series, both of which change the asset mix as the retirement date gets closer.