Diversification is About What’s Inside the Fund(s) You Own, Not the Number of Funds You Own
Hi Friendos,
You’ve heard it before: diversify your investments, don’t put all your eggs in one basket. But how exactly do you accomplish that in your 401k? I think the best thing for most people is to put all your money in a target date fund if your 401k has that option. Two researchers studied 880 retirement plans covering 1.2 million participants and concluded, “The adoption of low-cost target date funds may enhance retirement wealth by as much as 50 percent over a 30-year horizon.”
Which target date fund to pick? Identify the approximate year you’ll stop working, find the fund with that year in its name, and pick that one. 100% of your contributions go into that fund. Job done.
Owning just one fund does not mean all your eggs are in one basket, because a target date fund will have many proverbial baskets inside of it. It will have stocks and bonds, U.S. investments and international investments. It will have it all. It’s like an expertly packed suitcase with everything you need for your trip in the quantities you need. Not every fund is like that – you could have a fund that’s the equivalent of a suitcase full of pants but no shirts! Pants are great but they’re not the only thing you need.
Here’s an example target date fund: the Vanguard Target Retirement 2040 Fund. It’s what my partner owns in his 403b. It’s the only investment inside his account, just one holding, and he’s super diversified.
Here’s what is inside this target date fund as of 5/31/2026:
And more specifically:
His target date fund owns 4 other funds. It’s like we opened his suitcase and found 4 packing cubes inside. So…what’s in each of those?
- Vanguard Total Stock Market Index Fund Institutional Plus Shares: owns 3,484 stocks as of 5/31/2026, “with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks.” Many sectors of the economy are represented such as consumer discretionary and consumer staples, energy, financials, health care, industrials, real estate, technology, and utilities.
- Vanguard Total International Stock Index Fund: “The fund tracks stock markets all over the globe, with the exception of the United States.” As of 5/31/2026, it owned 8,738 stocks from more than 40 countries.
- Vanguard Total Bond Market II Index Fund: “Provides broad exposure to U.S. investment grade bonds” and as of 3/31/2026, owns 11,001 bonds. They range in credit quality: 70% are federal government bonds, 2.9% are AAA graded, 3.1% AA, 11.7% A, 11.8% BBB. They have a range of maturities from under 1 year to over 25 years, and have a variety of issuer types such as utilities, industrial firms, financial firms, municipalities, foreign governments, and asset-backed securities.
- Vanguard Total International Bond II Index Fund: “[S]eeks to track the performance of an index that includes international government, agency, and corporate securities, mostly from developed countries, but also some emerging markets countries” and as of 5/31/2026, owns 7,161 bonds with issuers from more than 40 countries and bonds of varying credit quality, issuer type, and time to maturity.
So in total, his single holding of a target date fund gives him exposure to more than 12 thousand stocks and 18 thousand bonds across countries, industries, credit quality, and types of issuers. We had to do a little “look through” analysis to truly appreciate the extent of diversification, but now we can see it’s like an expert packed a suitcase with every type of item you need for a trip.
If your 401k doesn’t offer target date funds, you’ll need to select something else from the menu. Not every fund is as well-diversified as the target date fund I discussed above. For example, the T. Rowe Price Health Sciences Fund was offered in some retirement plans, and it only owns health sciences types of stocks, like biotech and pharma companies. Like an all-socks suitcase that you’d want to swerve on. Next week I’ll talk about one simple approach to choosing 401k investments if target date funds aren’t on offer.
-Stephanie
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