Making the Most of a One-Fund Portfolio

Have only enough cash or time for one fund? Here's how to do it.
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I spend much too much time in my garage.

No, unfortunately, not doing things I might like, such as waxing a late-model, fire-red 'Vette or tinkering with a '65 classic Mustang. Instead, I waste many a sunny Saturday afternoon looking after our three cars, none of which is anything special. Yeah, each was perfectly respectable when we bought it, but after a few years (sometimes more), they all seem interchangeable -- good for carting the kids around or getting to the train station.

The trouble? The mundane job of upkeep.

When I'm waiting for hours in line at the inspection station, I often think of my friend Maggie. She and her husband own just one used car. It gets them where they need to go and, best of all, takes one-third of the maintenance time that my collection of vehicles requires.

I know you're wondering: Is this

TSC

or

Auto World

? Don't worry, it

is

a column about mutual funds. What's true in the parking lot often holds true for your portfolio. If you're a beginner with limited investment dollars, daunted by the thousands of look-alike funds (as well as the rigid rules of diversification that demand a fund for every asset class), why not go with just one?

If you're young and have a long time before you need to cash in on this investment, I say start with an all-stock fund because stocks will likely outrun bonds by the time you need them. Index funds are good bets because most of them come with rock-bottom expenses. The first name that probably comes to mind is the nation's second-largest fund,

(VFINX) - Get Report

Vanguard 500 Index. Yes, it has been the fund to beat over the past few years, but it doesn't give you a lot of exposure beyond the current market leaders. If you are focusing on one fund, I suggest trying an index fund that tracks a bigger portion of the markets, such as

(VTSMX) - Get Report

Vanguard Total Stock Market Index.

Is your time frame shorter? Do you want to spread your risk a bit more? Consider a balanced fund. As the name suggests, it "balances" between both stocks and bonds, usually in a 60/40 mix.

Here are a couple of candidates:

(JABAX) - Get Report

Janus Balanced. Last year, as more assertive, all-stock managers struggled to match the market, this fund actually outdid the

S&P 500

by 3 percentage points. The longer-term record is just as impressive. It's No. 3 in its category for the past five years, according to

Morningstar

, and its 22% average annual return blows away the competition.

Of course, manager Blaine Rollins, who's been on board since early 1996, didn't get those kind of numbers in this kind of market by counting on conservative choices. His does not use the value strategy most of his peers swear by. Stock and bond picks tend to be more aggressive. Recent holdings include

Microsoft

(MSFT) - Get Report

,

Cisco

(CSCO) - Get Report

and

Dell

(DELL) - Get Report

, for example.

Though it may run a bit faster than most balanced funds, Janus Balanced is still much less risky than the average stock fund. And when you take into account its lower annual expense ratio (1.03%), Janus Balanced might make sense for a one-fund investor who doesn't want to sacrifice too much torque.

(DODBX) - Get Report

Dodge & Cox Balanced. More conservative? On the other end of the spectrum is Dodge & Cox Balanced. You won't find flash or frills here. Indeed, none of the independent firm's three funds deliver much of that. Dodge & Cox Balanced definitely doesn't like following the leader.

Unlike Janus, it steers away from stocks that sell for a high price relative to earnings, looking for bargains despite the fund fashion of the day. In 1998 when this was definitely not a popular play, the fund, which is run by committee, was high on

Alcoa

(AA) - Get Report

,

Union Pacific

(UNP) - Get Report

, and

Dow Chemical

(DOW) - Get Report

. That proved to be quite a drag on long-term numbers as Dodge & Cox Balanced fell into the bottom quintile of the category with a 7% return. Of course, as cyclicals may be more in favor today, such a strategy looks interesting, as do the short-term numbers. The fund is up 10% year to date.

Plus, it ranks eighth among all balanced funds in 10-year average annual returns, gaining 14% each year. It boasts a very low-cost 0.55% annual expense ratio, besides.

Now, you could choose the latest and fastest top-performer, say, an aggressive-growth tech fund. Yeah, that probably would win the race for you in the short run. Or you could go with an even more conservative choice, like a money-market fund, one you could depend on even if the market plunges. But in a one-fund portfolio, both approaches can be treacherous. Betting on one sector alone is always tricky. And the opportunity cost of trusting a low-return vehicle can be quite high.

That is not to say that balanced or index funds don't have their own risks. A one-fund portfolio is not perfect. But look at this as the beginning of a process. When you have more money and/or time, invest in a few others that have different and complementary profiles. Underline time. Because you need to know that it will take more effort and a lot more hours to monitor more than one fund. As managers, no matter their stated mission, chase after the hot growth stock du jour, you want to make sure you don't end up with three vehicles that follow the same route.

And remember, too, investing regularly in a fund -- automatically setting aside dollars for it month after month -- will get you much further than if you invest once and forget about the fund, even if it is a hot one.

Now excuse me, please. Time to tend to three oil changes.

Morningstar Conference Coverage

The annual

Morningstar Investment Conference

in Chicago brings together many of the investment industry's top executives and portfolio managers to share ideas and spotlight emerging trends.

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contributor Brenda Buttner and staff reporter Joe Bousquin will provide continuous coverage of the three-day event starting Monday.

Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner had no positions in the funds mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at

TSCBrenda@aol.com.