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One may be the loneliest number, but for skittish investors it may provide some much-needed solace.

We're talking, of course, about a one-fund portfolio.

You already know that owning too many mutual funds is at best redundant, at worst a costly drag on your returns. There's virtually no reason to own more than eight funds, and many investors need far fewer.

"Some smaller investors -- such as those with portfolios less than $200,000-- could certainly do with just one equity and one bond fund," says EdOsborn, a principal with the portfolio management firm Bingham, Osborn &Scarborough.

But investors tempted to make do with just one or two funds should know therisks.

"For the majority of investors, it makes much more sense to split theirassets appropriately," says Larry Swedroe, a financial planner and author of

Rational Investing in Irrational Times

. Fixed-income funds should be in a tax-deferred account, and equities should be held in a taxable account."

Bonds that pay out taxable interest are best held in a tax-deferred account(like an IRA) so investors avoid the tax until they withdraw from theaccount. Holding equities in a tax-deferred account, though, means you giveup the ability to pay the lower capital gains tax rate when you sell yourholdings, since all tax is deferred until withdrawal, at which point it'sall taxed at the higher ordinary income tax rate, rather than the capitalgains tax rate.

But for investors who have their entire portfolio in one (presumablyretirement) account and really can't bear the thought of taking an activerole in determining their investments, some of these funds might help.

"The biggest determining factor as to whether an investor should go into oneof these funds is how much time they want to dedicate to making investmentdecisions," says Morningstar Mutual Fund Analyst Langdon Healy. "That's thegeneral profile for these funds."

Now, there's no one ideal fund for everyone, but if you thinkyou're suited to the single-fund portfolio theory, there are a few goodbets.

All-you-need funds can be split into three categories: broad-market indexfunds, funds of funds and lifecycle funds. We¿ll go over each category andhighlight a few picks.

Index Funds

Most planners will reflexively say that investors should break their equityinvestments into size (large or small-cap) and style (growth or value). Buta broad market index fund, such as the

(VTSMX) - Get Vanguard Total Stock Mkt Index Inv Report

Vanguard Total Stock Market, which tracks the Wilshire5000, can provide all of the above.

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Vanguard's Total Stock Market fund -- like other funds that track theWilshire 5000 -- is heavily weighted toward large companies. That meanstotal stock market funds do not provide

asset class

diversification.Because they have more of their assets in larger companies, their overallperformance is largely due to the performance of large-cap stocks. You'llstill catch a run-up in small companies, but it may not influence the fundas much as a drop in large-cap stocks will.

While this is something to consider, also keep in mind that the marketitself is weighted toward large companies and, ideally, your portfolioshould 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 indexmake up less than 15%.

That exposure to smaller companies will help smooth volatility, though. TheS&P 500 peaked in March 2000, while the S&P SmallCap 600 peaked more thantwo years later in April 2002. An asset mix that held small-caps over thepast two years would have mitigated the huge losses in large-caps. But sincesmall-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) - Get Vanguard Total Bd Mkt Index Inv Report

Total Bond Market,could be enough to get investors started.

Fund of Funds

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

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

Funds of funds can either be static or managed. The funds of funds inVanguard's LifeStrategy series are designed to always hold a specific assetallocation, and the only rebalancing that takes place is to keep it in linewith its stated goals. (The series has a fund for

(VASGX) - Get Vanguard LifeStrategy Growth Inv Report

Growth,

(VSMGX) - Get Vanguard LifeStrategy Mod GrowthInv Report

Moderate Growth,

(VSCGX) - Get Vanguard LifeStrategy Cnsrv Gr Inv Report

Conservative Growth and

(VASIX) - Get Vanguard LifeStrategy Income Inv Report

Income.)

Other funds of funds, though, such as Scudder's Pathway Series, are moreactively managed, with managers moving in and out of the underlying fundsbased 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, arenot generally static investments. Rather, the mix of stocks and bondschanges as the investor ages. Most lifecycle funds have a target retirementdate as part of their name.

Two good examples of such funds are the just-introduced T. Rowe PriceRetirement series (which range from

(TRRIX) - Get T. Rowe Price Retirement Balncd Report

Retirement Income for current or about-to-be retireesto

(TRRDX) - Get T. Rowe Price Retirement 2040 Report

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 theasset mix as the retirement date gets closer.

"These funds make sure that investors don't get to retirement and find thattheir portfolio is still 100% invested in equities," Healy says."Unfortunately, we've seen a lot of that over the past couple of years."

We'd like to think, though, that readers of

TheStreet.com

are more sober and savvy investors than that. And if so, you're probably better offconstructing your own portfolio with a small mix of funds chosen for theirlow expenses, tax efficiency and with the idea of maximizing return whileminimizing volatility. You're all capable of that, aren't you?