Yahoo Finance Can You Retire Off One ETF? Money Expert Humphrey Yang Has the Answer
Financial guru Humphrey Yang recently argued in a YouTube video that you don’t need to invest in multiple exchange-traded funds (ETFs) in order to help you grow your nest egg and be financially on track when you retire.
Indeed, Yang said that while experts typically recommend investment styles such as the two-fund portfolio or the three- fund portfolio, he makes the point that investing in just one ETF also has merits.
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“The one-fund portfolio — that’s where you just go all in,” said Yang, adding that often, this seems a little bit too simple and straightforward, both for newer investors and advanced ones.
“Because they think to themselves ‘man, only one fund, it seems too easy,'” he added. “I am happy to report that you can actually just invest in one fund and retire off of it.”
Some experts agree that Yang’s argument holds merit, particularly with ETFs that offer risk management through diversification and rebalancing. In addition, Yang said in the video that there are a few candidates for this approach — although he does not endorse one specifically — including target date funds.
“This approach certainly simplifies the investment process for those favoring a hands-off approach,” said Andrew Latham, CFP, managing editor at SuperMoney.
Latham added, however, that this one-fund strategy might not be a good fit for everyone. “For those with more complex financial needs or distinct investment preferences, a one-ETF strategy might prove too restrictive to meet their objectives,” he said.
What Are the Pros of a One-Fund Strategy?
Investing in just one ETF, particularly a fund-of-funds or a target-date fund, offers several advantages, such as simplicity in managing investments, which is ideal for novice investors or those who prefer a hands-off, set-and-forget strategy, according to Latham.
“These ETFs typically provide broad diversification across various asset classes like stocks and bonds, and sometimes globally, thereby reducing investment risk through wide-ranging allocations,” he said. “Moreover, certain ETFs, like target-date funds, feature automatic rebalancing, which adjusts asset allocation towards more conservative investments as the target retirement date nears.”
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What Are the Cons of a One-Fund Strategy?
Yet, experts also noted that there are potential drawbacks to this method. For instance, this may not be an optimal investment strategy for long-term growth.
“Target date funds will invest more aggressively early on and become more conservative on a defined schedule,” said Stephen Kates, CFP, principal financial analyst for Annuity.org. “It is equivalent to taking the bus to work. There is a predefined route, and you follow it with all the other people on the bus, regardless of the environment, traffic, construction or other conditions.”
Kates added that while it will deliver you to your destination, there may be other routes available that offer a more personalized route that can accommodate changes or detours.
“Fixed allocation funds that remain in a static asset allocation may leave you too conservatively invested early on and too aggressively invested later in life,” he said. “Lastly, as Humphrey mentions, a single fund may not be equally tax efficient in a taxable account as it would be in a retirement account.”
Another aspect, according to Jay Zigmont, Ph.D., MBA, CFP, founder and CEO of Childfree Wealth, is that not all target date funds are the same, as fund fees and composition vary widely.
“Many target date funds are actually mutual funds, which may have higher fees than comparable ETFs and additional tax considerations. Mutual funds are fine to hold in your 401(k) or IRA but may throw off unplanned taxes in a taxable brokerage account,” he said.
Instead, Zigmont said that he is a proponent of the three-fund strategy, as he is “a big fan of long-term, passive investing.” The three funds he recommends include: the entire U.S. stock market, the world stock market and bonds.
“With three funds, you can adjust your allocation over time to meet your risk profile and tax preferences,” he added.
Which Type of ETF Could Be Best To Use the One-Fund Strategy?
According to Latham, for those considering a one-ETF retirement strategy, there are several types of ETFs that are good candidates, such as target-date funds, asset-allocation ETFs, balanced funds ETFs and global asset allocation ETFs.
Target-Date Funds
Target-date funds, such as the Vanguard Target Retirement Funds, Fidelity Freedom Funds and Schwab Target Date Funds, gradually shift their asset allocation from more aggressive — stocks — to more conservative — bonds and other fixed-income assets — as the retirement date approaches, Latham said.
“This automatic adjustment makes these ideal for investors looking for a hands-off approach that simplifies asset management over time,” he said.
Asset Allocation Funds
Meanwhile, asset allocation ETFs, such as Vanguard’s LifeStrategy Funds, BlackRock’s iShares Core Allocation ETFs and Charles Schwab’s Monthly Income Funds, periodically adjust to maintain this balance, aiming to provide a stable growth trajectory with managed risk exposure, Latham said.
Balanced Funds
Balanced funds ETFs, like the iShares Core Aggressive Allocation ETF or the Balanced Fund from T. Rowe Price, also offer a mix of stocks and bonds but with a static allocation that does not change over time.
“These are a good fit for investors who prefer a consistent risk and return profile throughout the investment period,” he said.
Global Asset Allocation Funds
Finally, global asset allocation ETFs are a good option for those looking to include international exposure, while multi-asset income ETFs focus on generating income from multiple sources including dividends, interest payments and even real estate income, which can be particularly appealing for retirees seeking regular income streams, he added.
How To Choose Your ETF
Ultimately, as Stoy Hall, CFP, CEO and founder of Black Mammoth, noted, it also matters to have flexibility within a portfolio and pick investments you understand.
“Does that mean, if you picked a Vanguard or BlackRock Target date fund and you believe in those firms, that you can load up and set and forget, absolutely — as long as you understand and care for what you are doing,” he said, adding that as long as you are sticking to a plan and continuously investing, you will reach your goals in the long run.
“Remember, your portfolio is not here to keep up with the market or the Joneses. Your portfolio only has to reach the goals you set out for your life!” he said.
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This article originally appeared on GOBankingRates.com: Can You Retire Off One ETF? Money Expert Humphrey Yang Has the Answer
