Aside from cash reserves, the entire portfolio is in a Vanguard mutual fund that has a good split between domestic stocks and bonds. The split is at the target ratio the investor is looking for. Is there any inherent danger of having everything in this one fund? Does this undermind some aspect of diversity?
There are only a couple of issues with this, and if you are okay with them then you are fine with a single fund.
The first is allocation, currently VBIAX is 40% bonds. When I was young, I would have found this allocation unacceptable in my retirement accounts, I wanted to be 100% stocks. But as I said, if you are comfortable with that allocation that this fund is perfectly acceptable.
The second is that this fund is actively managed and thus has higher fees. Proponents of the "three fund portfolio" would not like that about this scheme. But again, if you are okay with this fund being actively managed then fine. Vanguard traditional has low expenses, and this fund is no exception.
So if you are okay with the above caveats, then you have a good plan. It is also a good plan if you are very risk adverse. Event though I am more diversified now a days, this has been a really rough month for my investments!
Diversification relates to the underlying investments, not the fund managers.
For example, if one fund invests in shares A, B, C and D in some proportion, and a second fund does the same, then investing in both funds doesn't gain you any further diversification compared to investing in one of them. To diversify, you need the underlying investments to be different. (There is often discussion about one investment tending to give you good returns in a climate where another gives you bad returns, but I'll just leave it at "different" for the purpose of this answer.)
So if you are happy with the underlying choices, then the number of funds you have in your portfolio is irrelevant. So in the scenario you described, having just one fund achieves your objectives as far as diversification is concerned.
Note: having a diverse set of underlying assets helps mitigate risks associated with performance. Having a diverse set of funds/managers helps address the risk of any one manager not doing their job properly (eg not trading to mandate, or operator errors when they type in the number of shares to buy or sell).
No- nothing wrong with a single fund, as evidenced by the fact that most 401k plans have the option of retirement target date funds. (2025 fund, 2045 fund, etc.) The point of these funds is that employees can put their entire 401k portfolio into one of these funds and leave it until they retire, even if retirement is 40 years out. Those funds are automatically adjusted to slowly change over time from very aggressive (if your target date is 30 years or more out), to very conservative (if your retirement date has already passed). Even though these appear to be a single fund, they are well diversified because behind the scenes they are actually invested in 10-15 funds. These funds are the perfect "set and forget" allocations, and very few people will be able to beat their long term performance without getting lucky. As an added bonus usually these funds have very low fees.
These funds aren't for everyone, as some people like to be more active participants, or may have religious limitations on what funds they can invest in, etc. But for most people, it's a decent strategy.