The words sounded like Chinese to him—“stocks,” “bonds,” “mutual funds,” “asset allocation,” “rebalancing”… Shimon Pearl had a few thousand dollars to invest but was stymied by the strange world of finance. The selection offered on the stock brokerage website he visited was overwhelming—there were thousands of options. The guides weren’t too helpful either; apparently, they expected him to learn a whole new vocabulary. It would be great if he could hire someone to manage his investments, but the people he spoke to only accepted investors with big money.

Did everyone else need to learn it all on their own? In today’s modern age, is there no simple solution for beginner investors?


One “Box” Does it All

Yes, there are outstanding “portfolios in a box” options today which easily enable investors to put any size account to work for them. While the investment process still has multiple complex steps, there are certain mutual funds that do all the work at little cost and with minimal amounts!

But let’s back up for a moment to the basic concepts. Mutual funds pool together money from thousands of people to invest in a certain strategy or niche. This pooling spreads the costs of hiring top money managers across the whole group. Investors benefit from professional management and excellent customer service at very low cost. Today, most people who use the stock or bond markets to grow wealth do so via mutual funds.

Which to Choose?

But there are many thousands of mutual funds available—some risky, some staid, some well managed, some not so. The challenge of selecting the right mutual fund portfolio—which includes assessing those that invest in stocks versus bonds, US stocks versus international stocks, large company stocks versus small, government bonds versus corporate, etc.—is also beyond many everyday investors. And when market conditions change, who decides how to shift among these niches to get the proper balance between potential risks and rewards? Enter the asset allocation fund or target risk fund, a small niche within the mutual fund world.

The All-in-One Mutual Fund

The best asset allocation mutual funds incorporate virtually everything required to maintain a full portfolio in a single, low-cost package or fund. All the investor needs to do is decide on the portfolio objective or targeted level of risk-aggressive growth: growth, with the most upside and downside potential; moderate growth; conservative growth; or the relatively low risk of volatility but limited growth opportunity of an income portfolio. Then, the mutual fund managers do all the rest to pursue the selected objective. As long as personal objectives haven’t changed, a good target risk fund can be left alone for years, even decades!

Vanguard’s Asset-Allocation Offerings

By way of example, I’ve graphed above Vanguard Investments’s LifeStrategy asset-allocation funds which come in four risk levels: growth (80% stocks/20% bonds), moderate growth (60/40), conservative growth (40/60), and income (20/80). With a minimum investment of just $3,000, investors can simply select how much risk they want to take and let Vanguard’s managers do the rest. Once the minimum is met, additional sums in any amount can be deposited. These LifeStrategy funds cost just 0.14% annually, about 85% less than similar mutual funds, and cuts out any adviser commissions and fees too! I love these “portfolios in a box” funds and think many investors can benefit from them.

But How Did they Do?

These funds have performed very nicely, if not spectacularly, and in line with their risk profiles (see the first graph). Since they began, the growth fund (blue) grew by 659% (a bit over 8% compounded annually), the income fund (brown) gained 386% (about 6%), and the moderate (red) and conservative (orange) yielded returns in between those two. The growth fund had the greatest returns in the long term but, as expected, was also by far the most volatile. And during a very difficult decade for stocks, from 2000–2009, the growth fund underperformed the low-risk income fund even as investors in the income fund had a much smoother ride (see the second graph). More potential reward. More potential risk.

A Very Good Bet

I think it’s just mind-boggling that you can get a professionally managed portfolio with such minimal restrictions and fees. Because they use index strategies, the LifeStrategy portfolios are well diversified, tax efficient, and not dependent on any one superstar to manage them. While no one knows the future, I think it’s a good bet that the tried and tested LifeStrategy funds will serve investors well for decades to come. With $50 billion already entrusted to these Vanguard strategies alone, the funds have staying power.

Another All-in-One Option

However, some don’t have Vanguard’s $3,000 minimum to invest. Another excellent group of asset-allocation funds to consider is iShares Core Allocation Funds (tickers AOK, AOM, AOR, AOA), managed by another investment giant, BlackRock. These all-in-one funds are almost identical to Vanguard’s and feature four options ranging from aggressive growth to conservative growth. iShares allocation funds are a bit more expensive (0.25% versus Vanguard’s 0.14), but they can be bought in any dollar amount. Also, (as they are structured as ETFs ) iShares are available via any stock brokerage account such as E-Trade,  Robinhood, etc. whereas Vanguard’s LifeStrategy funds require a Vanguard account.

So What are Advisers For?

But if solid investing can be so easy and accessible, why would someone pay good money to an investment adviser, even if they have access to one? The real benefit from a personal financial adviser today is in the financial planning and hand-holding. (I focus on corporate 401[k] plans, another animal entirely.) Good advisers help clients answer fundamental questions such as: How should I save for various goals? How much risk is reasonable for me to undertake? What tax shelters and moves can I use to increase investment returns? How much and what type of insurance do I need? What should I do with investments that didn’t work out? How do I generate income for retirement?

Perhaps most importantly though, people often thwart themselves—just because we know what to do doesn’t mean we do it. Many investors never follow through, never actually save and invest, no matter how simple it may be. Others only put money into investments when things are rosy and then pull out when the going gets rough. Paying someone to get you on track and then to stay the course is often well worth it.