How Many Funds Do You Need In Your Retirement Account? (2024)

For most people, investing for retirement means building a portfolio of index funds or exchange-traded funds (ETFs). Choose the right funds, and you get excellent diversification and ultra-low costs.

But how many funds do you need in your retirement account? For many retirement investors, a three-fund portfolio is sufficient. If you’re feeling like a minimalist, you can get the job done with two funds—or, if you’re feeling very Marie Kondo, even just one single, solitary fund.

How to Choose Funds for Retirement

Building a well-diversified investment portfolio is job one for retirement investors. When you choose mutual funds and index funds in your retirement account, the funds may contain hundreds or even thousands of individual stocks. On its face, this appears to provide excellent diversification.

Owning too many funds or the wrong sorts of funds, however, could result in yet another problem: Overlapping holdings. While you might have 10 index funds or ETFs in your portfolio, all 10 funds themselves could end up owning substantially similar assets if you’re not careful. (That’s why some of the best robo-advisors hold just four or five funds in their portfolios.)

As you consider which funds to add to your retirement portfolio, consider how each fund complements your other holdings. This is the real key to building a properly diversified retirement portfolio. The ETFs and mutual funds you own should coordinate with one another in the service of your investing goals.

The right way to choose is to opt for funds that concentrate on different asset classes, such as a diversified stock fund, a total market bond fund and perhaps an income investing option. Passively managed index funds are your go-to choice because they offer the lowest costs—that is, expense ratios—on the market.

How Many Funds Do You Need?

You can build a perfectly well diversified retirement portfolio with three, two or even just one fund. These compact approaches to retirement investing aim to provide you with the right kind of diversification, very low costs and simplicity, which could be their greatest advantage.

The two- and three-fund options require minimal upkeep besides occasional rebalancing. The one-fund option requires practically zero input from you.

A Three-Fund Portfolio

A three-fund portfolio is made up of three index funds or ETFs. Advisors typically suggest choosing a total U.S. stock market index fund, an international stock fund and broad market bond fund. The amount of money you allocate to each fund depends on your age, goals and risk tolerance.

Stocks have delivered better returns than bonds and cash over the long term, as you can see from our analysis of the historical performance of stocks and bonds. Since the beginning of the Great Depression in October 1929, the annualized return for U.S. stocks has been around 9.6%. Meanwhile, bonds have provided annualized returns of 5.6% over the same period.

Younger people and more risk tolerant investors should overweight the total stock market fund in this three-fund model while older, more risk averse investors would do better to put more money into the broad market bond fund. Adding an international stock fund that invests in both developed and emerging markets can provide additional growth that’s potentially uncorrelated with the U.S. stock market.

To sum up, in a three-fund portfolio you get growth from stocks, stability from bonds and additional protection from international stocks.

A Two-Fund Portfolio

Investing legends John Bogle and Warren Buffett have both advised that a two-fund portfolio is best for many, if not most, investors, and they agree that the best way to build a two-fund portfolio is to choose a U.S. equity fund and a U.S. bond fund. They differ on the particulars of the asset allocation, however.

“Deep down, I remain absolutely confident that the vast majority of American families will be well served by owning their equity holdings in an all-U.S. stock-market index portfolio and holding their bonds in an all-U.S.bond-market index portfolio,” Bogle wrote in “The Little Book Of Common Sense Investing.”

A total U.S. stock market index fund and a total U.S. bond index fund would meet Bogle’s parameters, although he also suggested an intermediate-term bond index fund or an intermediate municipal bond fund could be used for the fixed income fund option.

Warren Buffett has suggested a two-fund portfolio consisting of a 90% allocation to an S&P 500 index fund and a 10% allocation to U.S. treasury bills. Buffett made the advice in one of his letters to Berkshire Hathaway shareholders, indicating that this two-fund approach was how he would advise his trustee to invest money for his spouse upon his passing.

“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund,” wrote Buffett. “I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions or individuals—who employ high-fee managers.”

A One-Fund Portfolio

There’s another name for a one-fund portfolio you may already be familiar with: a target-date fund. When you own a target-date fund, you get an entire retirement portfolio in a single fund. Instead of buying individual stocks or bonds, it buys a broad portfolio of different mutual funds—a so-called fund of funds.

Named for the year when you plan to retire, target date funds adjust their holdings from higher-risk growth assets like stocks to safer, lower-risk assets like fixed income as the date on the fund approaches. This mimics the advice you’ve heard before: Younger retirement investors should own a greater proportion of stocks, shifting the allocation to bonds as they grow older, to preserve capital and generate income.

Once you choose a target date fund, all you have to do is set up automatic contributions and the fund managers handle everything else. They periodically rebalance the fund portfolio to make sure it adjusts to the right mix of stocks and bonds for where holders are in relation to retirement.