Ray Steward knows something about building. At one time he built decks, and then he built a deck-building business, which now employs 11 people and is based in Towson, Md. While he no longer straps on a tool belt, as a small-business owner he handles marketing, payroll and even benefits, which he says are key to keeping "my big family" together. "Workers in this industry are so transient," he says, "if you want to keep them, you have to offer them some security."

Part of that security comes from a retirement plan that offers mutual funds that a busy guy like Steward can appreciate. Each fund is a pre-built portfolio of other funds. So instead of owning several funds to reduce risk by diversifying, Steward and his employees can pick just one.

No question, a one-stop fund can simplify your life. Steward, for example, held a number of funds in different accounts before consolidating his investments into a single T. Rowe Price fund. "I have enough bottles to wash as it is," he says.

But are do-everything funds solid investments? Some are, definitely. As with any type of mutual fund, there are top performers, also-rans and downright dogs. In this story we'll explain the different types of one-stop funds that are available and name the top ones.

Why diversify?

But first, you may wonder how a single fund can handle all your investment needs, and how we judge such funds. A good one-stop fund must be well diversified. It must have low expenses. And it must have a good performance record. When combined, these three factors will give you high and relatively steady returns.

One-stop funds diversify by owning a broad range of investments because the specific stock or bond you invest in isn't as important as having different types of investments.

And diversification is key for steady returns. For example, if you invested in a broad selection of nothing but small U.S. stocks, you would have seen a 47% return in 2003 but a 20% loss in 2002. But investing half your money in bonds during those years would have cut the 2002 loss to 5% and reduced the 2003 gain to 26%.

If you diversify further by combining that portfolio with stakes in other types of investments -- such as foreign stocks and stocks of big U.S. companies -- you will have even steadier returns.

By placing your money in a broad range of investments, you pass up the chance to beat the ballpark 10% average annual return such investing gives you. But you also pass up an even better chance that you won't earn that much.

Donald Chambers, a finance professor at Lafayette College, says people often resist such simple solutions as one-stop funds, even though they work. "Simple answers," he says, "remove the idea that we can digest complex information and win." But the truth, Chambers adds, is that not only do most investors not do as well as the market average, but most professional investors don't do as well either.

While diversification is guaranteed to even out your year-to-year return, low expenses are guaranteed to improve it. High expenses -- what you pay the fund company in order to buy and own a fund -- erode your return over time. Since one-stop funds are most often used to save for retirement, investors need to insist on low expenses. Say you are investing your $100,000 nest egg in a fund that returns 10% every year before expenses. If this fund charges 2% in expenses annually, you'll have $466,000 after 20 years. But if the fund charges just 1%, you'll have $560,000.

Target-retirement funds

Of all the types of one-stop funds, so-called "target-retirement funds" are the most popular. These funds become more conservative -- with fewer stocks and more bonds -- as you grow older, so they match your need for more financial stability as you approach retirement. The simplicity of target-retirement funds makes them a popular choice for 401(k) plans.

Ray Steward, 43, and his wife, Sandra, 40, own a target-retirement fund called T. Rowe Price Retirement 2030 -- 2030 being the approximate year they plan to retire. The fund holds about 90% stocks and 10% bonds and cash. The portion that's in stocks is divided among eight actively managed T. Rowe Price stock funds. Together they cover the stock market from every useful angle: small, midsize and large companies; value and growth stocks; and international companies.

MORE: Kiplinger.com | Investing | Mutual Funds

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