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Can You Get True Asset Allocation in a Single Fund?

Brian O'Connell

Are so-called single-asset allocation plans a better deal than going out and building your own retirement asset allocation program out of individual funds? Some reputable financial industry insiders think so.

A 2014 study from John Hancock shows that retirement plan participants "who invested exclusively in a single John Hancock asset allocation portfolio earned better returns on average than participants who selected individual investment options to form their portfolios over the five, 10 and 15 year periods ending Dec. 31, 2012." The gap isn't huge, but individual asset allocation plan investors earned 1.06 percent more, on an annual basis, in their retirement plans, than investors who invest in non-asset allocation funds.

For 401(k) plan participants, these one-choice portfolio funds come in the form of target-date funds that tout automatically diversified 401(k) plan investments in a single fund.

[See: 12 Steps to a Stronger 401(k).]

By and large, asset allocation funds usually come in two categories:

-- Risk-based asset allocation fund: A portfolio that matches your comfort with market ups and downs. This fund aims to rebalance to stay at a balanced risk level, and you decide what that risk level should be.

-- Time-based asset allocation fund: A portfolio based upon a future date. (Mostly the date the investors wants to retire.) This fund is adjusted automatically to grow more conservative as the portfolio owners move closer to that retirement date.

Wall Street money managers seem to think highly of such funds.

"Vanguard's Wellington and Wellesley funds have been around for decades, successfully producing long-term value," says Guy Penn, founder of Rush Penn, a financial advisory firm in St. Louis. "It's a relevant topic, especially given all the attention toward robo platforms these days. It's important to remember that asset allocation funds have been doing effectively the same thing for years."

Penn says that asset-allocation funds offer retirement savers multiple benefits.

"In a standard retail brokerage account, trading fees can eat away at gains over the long term, so for the average investor, a single-asset allocation fund can be an ideal way to keep an overall pool of funds efficiently balanced at a lower cost," he says.

Plus, because asset allocation funds are methodically rebalanced, they also help prevent the investor from making emotionally charged decisions that negatively impact their longer-term goals.

"That's the case provided the investor doesn't panic sell the entire fund during market turmoil, or get too aggressive by investing their emergency cash savings during boom periods," Penn says.

Still, not all single-asset allocation funds are alike, so it's still up to the investor to review the underlying methodology of the fund they intend to invest in, Penn says.

"Ask some questions before investing," he says. "How often is the fund rebalanced? What are the underlying holdings? Consider the net expense ratios, when all else is equal, the lowest underlying cost tends to be the most optimal."

Not every investment professional is enamored of single asset allocation funds.

"Most of the target date funds these days are single-asset allocation funds," says Jay Srivatsa, chief executive officer at Future Wealth in Los Gatos, California. "But the problem I see with these funds is that they adopt a cookie-cutter investment approach."

[See: 9 Ways to Avoid 401(k) Fees and Penalties.]

For example, Srivatsa says, a fund owner's target retirement date is 2025, and his allocation of stocks and bonds is 70/30, or his retirement date is 2030, and allocation is 60/40.

"In taking this approach, the portfolio manager is constantly focused on building a balanced portfolio of stocks and bonds and not taking into consideration the risk threshold of the client," he says.

If the retirement saver wants to retire in 2030, but is willing to take modest risks with 60 percent of his or her portfolio, 20 percent in "strict safety mode" and another 20 percent in high risk, "there is no way for a single asset allocation fund to replicate the client's requirement," Srivatsa says.

That said, for the Wall Street novice who wants to make his or her 401(k) saving experience easy, single-asset allocation funds may be the way to go, other experts say.

"Picking an all in one, like a balanced fund or a conservative growth fund, is a decent choice for someone who doesn't have the desire or ability to more precisely manage their portfolio," says Justin Smith, a financial advisor at Slayton Lewis, in Chicago. "After all, the best investment strategy is one you can stick to, and if an all-in-one fund helps you stick to the plan, that's a great option."

That being said, Smith thinks all-in-one funds can cause investors to miss out on some of the benefits of a more customized portfolio, including individual retirement accounts.

"There may be more optimal ways to locate the various asset classes of your portfolio if you have multiple accounts like IRAs, Roth IRAs and taxable accounts," he says. "Instead of buying an all-in-one fund, you could save on taxes by strategically locating some assets, like bonds, in your IRA and tax efficient assets, like index stock funds, in taxable accounts."

Furthermore, for those in retirement who are drawing funds from the portfolio, having a more deconstructed portfolio can allow you to sell stocks for cash flow in up years and sell bonds for cash flow in years when the market is down, Smith adds. "A number of academics have shown an approach like this can bolster your retirement longevity," he says. "It's simply something you can't do with an all-in-one fund."

As always, discuss your unique retirement planning needs with a trusted financial professional.

[See: 10 Financial Perks of Getting Older.]

But if you're looking for a simple way to stack up cash in retirement, while still getting that "I can sleep at night" vibe, single asset allocation funds could be for you -- in multiple ways.



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