Ryan Fuchs, Financial Planner
@RyanFuchs
My biggest complaint about lifecycle/target date funds is the fact that funds that are targeting retirement in the same year can vary quite a bit as far as allocation is concerned from company to company.
For example, comparing three target date 2055 funds we find the following:
American Century 2055 (AREVX) has about 84.92% in stocks and 15.08% in bonds.
Vanguard Target 2055 (VFFVX) has about 89.81% in stocks, 9.96% in bonds, and 0.23% in short-term reserves.
Fidelity Freedom 2055 (FDEEX) has about 93.51% in stocks, 5.19% in bonds, and 1.30% in short-term options.
So, as you can see, three funds that supposedly target the same retirement year, can consist of nearly a 10% difference in the different asset areas.
Another issue I have is that within a fund company, the allocation may not vary much from year to year.
For example, comparing three target date offerings (as of 6/30/2015) from Vanguard (2050, 2055, and 2060) we find the following:
Vanguard Target 2050 (VFIFX) has about 89.89% in stocks, 9.96% in bonds and 0.15% in short-term reserves.
Vanguard Target 2055 (VFFVX) has about 89.81% in stocks, 9.96% in bonds, and 0.23% in short-term reserves.
Vanguard Target 2060 (VTTSX) has about 89.87% in stocks, 9.98% in bonds, and 0.15% in short-term reserves.
So while they are all nearly 90% in stocks, technically, the 2050 fund is the most aggressive followed by the 2060 fund. The point here is that in all honesty, I would expect to see a somewhat wider disparity between the allocations in funds from the same family, particularly when looking at the 2050 and the 2060 where these is a 10-year difference.
As to your second question, I definitely would not recommend that the target date funds be the core of your portfolio. For one thing, the theory behind them (or at least the way they are marekted) is that you can hold one fund with the target date at which you want to retire and it will do all the work for you. In other words, select the fund for the year you wish to retire and they will allocate it properly and automatically rebalance to become more conservative over time. But as you can see, you have to be cognizant of what you are buying with the target date funds. So ultimately, I would tend to suggest that you build the core of your portfolio with index-style funds or ETFs. Though that should not be viewed as specific advice in your situation since we do not have a complete financial picture of your overall situation and a core of index funds or ETFs may not not always be the best option for everyone.
Eric Schaefer, Financial Advisor
@EricSchaefer
Though they aren't perfect, they do have many benefits. Most of these lifecycle funds are simply a fund-of-funds, meaning the mutual fund manager constructs a portfolio made up of other mutual funds. This is where they aren't perfect: that's two layers of fees.
On to the benefits. A lifecycle fund is a good option for someone who is just starting out investing in their 401(k) because it provides a good amount of diversification through a single account holding. The funds are typically made up of index funds investing in large and small US company stock, international company stock, bonds and sometimes other holdings. They call them lifecycle funds because as you get older, and closer to the target date, the risk of the portfolio is reduced. This is a good option for many people who do not have a relationship with an advisor who can provide regular and ongoing advice about asset allocation.
Of course, just because your lifecycle target lines up with your intended retirement date doesn't mean this is a good option for you. The lifecycle funds have no consideration for your individual needs, risk tolerance or goal for this savings.
Charles J. Stevens, Principal, evergreen financial, LLC
@CharlesStevens
My knowldge of "life cycle funds" leads me to believe that they are not good investments. I don't know when you plan to retire nor if you are destined by genes to live a long, productive life. But if you plan on retiring and living to a ripe old age, bonds or fixed income securities are not a viable way to cope with inflation. With a life cycle fund as you advance in age, a greater portion of your holdings automatically go to fixed income (bond) investments. Granted, there is risk in the stock market, but there is also a risk of outliving your retirement savings. I personally would not make them a core nor a part of any client portfolio.
If you are considering Index Funds, be sure to know what you are buying. An all to common investor reaction is to buy " an S&P 500 index funds". All S&P 500 index funds own the same 500 securities. But one variety of S&P 500 Index funds for the last several years has grown more than its kin. Same risk; better returns. The difference is in how the funds are constructed.
Most knowledgeable financial professionals should be able to help you develop a viable portfolio to meet your needs and concerns at a reasonable price.
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