Morningstar.com has a very good article on Vanguard's allocation funds - mutual funds that strive to maintain a set asset allocation over the life of the fund, or tweak it according to the fund's mandate. For example, Vanguard has a series of "LifeStrategy" funds which invest in other Vanguard index funds to achieve a stated goal. The Vanguard LifeStrategy Growth Fund (VASGX) therefore has roughly 85% of its assets in stocks and 15% in bonds and is aimed at investors who have investment horizons greater than 5 years. These funds have grown in prominence because all of the work is done for you at a minimal fee - the fund rebalances itself according to its stated objective and you get the added diversification of owning a fund of funds - yes, a mutual fund that owns more mutual funds.
The Vanguard LifeStrategy Growth Fund owns four separate Vanguard index funds in varying proportions and only has an expense ratio of 0.23%. The risk with allocation funds are that you view them too much as a one stop shop and pin all of your investment goals and expectations upon the fund, which otherwise may be unrealistic. Yes, allocation funds can be a great start but make sure you do the legwork to understand the fund's fee structure, rebalancing policy and what it actually owns. The potential for overlap - owning a fund that's already owned elsewhere - is a lot higher when dealing with a fund of funds - people may not realize what that fund owns in its entirety.
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