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Question of the Day – Investing
By JLP | April 11, 2007
Today’s Getting Going column (free) by Jonathan Clements is about how people are using lifecycle funds. Although my wife’s 401(k) has several lifecycle funds to choose from, I have yet to use one. I enjoy investing and I enjoy picking my own funds. I also don’t want to own bonds at this stage in my life and the all of the lifecycle funds have at least 15% bond exposure, which is too much in my book. However, I can understand why lots of people would like them, which brings me to today’s Question of the Day:
Topics: Investing, Question of the Day, Retirement Planning | 13 Comments »
April 11th, 2007 at 9:55 am
We use Fidelity at work and I have 70% of my 401k allocated to their Freedom 2040 fund. I’m tempted to lower it and do more on my own, but I’m not overly confident.
April 11th, 2007 at 10:04 am
I’m already retired, and I don’t use any lifecycle funds because they all allocate too little to stocks. For example, Fidelity’s Target 2010 has only about 50% allocated to stocks, with 40% to bonds and 10% to cash. I think something more like 75% stocks, 20% bonds, and 5% cash is more appropriate.
April 11th, 2007 at 10:41 am
When I started my IRAs, lifecycle funds were not an investment option. Consequently, none of my retirment savings is invested that way.
However, I just began a new 403(b) this month, and I did indeed choose a T Rowe Price Lifecycle 2035 fund for that.
So I guess I can give the sort of contradictory answer: yes, I’m using a lifecycle fund for 0% of my portfolio.
I have recommended lifecycle funds for my family and friends in ther 401(k) and 403(b) accounts, because it will probably be a better choice than they would themselves make.
For IRAs, which usually get only a few relatively large contributions per year (often only one) I have recommended using a discount broker and investing in low cost ETFs like VTI, EFA, and AGG.
If I were to start my IRA today, I would use ETFs; they didn’t exist when I started. I am also more savvy now than then about investing. I wouldn’t have been as comfortable about it then as I am now. But if I were in ETFs now, I’d be saving about $150/yr in fees.
April 11th, 2007 at 11:15 am
We have about 70% of our retirement assets in Vanguards Target Retirement Fund 2045 – though we hope to be retiring much sooner, I didn’t want anything more conservative than that.
It sure is nice to just focus on earning a lot of money, dumping it in, and repeating the cycle.
April 11th, 2007 at 12:16 pm
I think lifestyle funds are great, and I have no doubt that I’ve saved money by using one.
While this is less of a problem in a 401k, in my taxable savings account I would periodically move money between funds, add a new fund to the mix, etc..
I generally wouldn’t think about the ramifications until the end of the year when I’d get whacked with taxes. My target retirement fund does throw off some dividends that I get taxed on, but it’s pretty small relative to the value of the fund.
I haven’t yet moved all our funds in tax deferred accounts into TR funds, but that’s largely because I have a significant affinity for the Dodge & Cox stock fund offered by our 401k. I hate to sell that..
April 11th, 2007 at 12:35 pm
I’m not a big fan of lifecycle funds mostly because they can start out more aggressive than someone might actually need, and they often end up becoming too conservative, too soon for others. They don’t take into account changes in cash flow or non-traditional life cycles which are pretty common for most people. My belief is that *ALL* of your goals and the progress made toward those goals should dictate changes to asset allocation, not a mutual fund’s investment policy based on a preset timeframe. All that said, they are better than doing nothing.
April 11th, 2007 at 12:43 pm
My 401k is managed by Fidelity. When I first started my job, I chose a target fund, but after a few months I chose to hand select my investments.
Since my retirement plan has a lot of options, I’ve been able to choose funds with low expense ratios and beat the overall expense of the target funds.
April 11th, 2007 at 2:14 pm
I don’t use a lifecycle fund for several reasons:
1) Allocations – both the overall allocation in an investment category (ex: stocks vs. bonds) or the allocations within a category (ex:small, large, foreign, etc. for stocks) are decided for you and may not align with what you want to do.
2)Fund Composition – the investments chosen for a lifecycle fund are often just a mixed group of individual mutual funds cobbled together to create the “lifecycle fund”. The fund selection may include funds that may not be tops in their category, etc.
3) Expenses – While I think you can get some savings, I have not found these funds to be extraordinarily cheap or a “no brainer” compared to finding top notch, low expense funds on your own.
Generally speaking, I think you can put together your own “lifecycle” fund that provides you with the best collection of funds and the flexibility to allocate them according your needs with only a small difference on the overall expense side (if at all).
However, this does require an investment of time / effort on the part of the investor. Therein lies the real attraction of the fund. So, I would not suggest “lifecycle” funds are inherently inferior or not worthwhile. I think it really depends on how you want to manage your portfolio…either for yourself (thinking YOU can do better) or have someone do it for you (thinking THEY can do better). It’s probably a crapshoot either way. Honestly, as long as someone chooses to do SOMETHING, then I’m happy either way.
April 11th, 2007 at 2:32 pm
I seem to recall reading that a 90/10 balance between stocks and bonds has on average the same rate of return with less volatility. By that measure, a lifecycle fund with a minimum of 15% in bonds may not be a bad thing.
April 11th, 2007 at 3:12 pm
The Federal Thrift Saving Plan (401k for Federal employees) has life cycle funds, but I don’t use them. I am happy with my current allocation among the 5 available funds. My wife, also a Fed, has started putting her contributions into a life cycle fund. At my suggestion, she is putting it into a 2040 retirement date fund, which is the most aggressive, even though she hopes to retire in a couple of years. If she had followed the TSP advice and put her contributions in the appropriate fund, she would be putting about 80% of her contributions into government and corporate bonds, vs. 15% for the 2040 fund.
April 11th, 2007 at 3:54 pm
I have my Roth IRA with TRowe Price in TRRDX. I am satisfied with it so far. I am not particularly confident that I can do a good enough job stock picking at this point to risk my retirement money on it — I’d be happier making those choices with funds that are less essential to me.
I like these funds for my retirement funds the simple reason that I can “set it and forget it” — I just have one thing to monitor and at least with TRRDX I think I’m getting really great built in diversification. The expense ratio on TRRDX is pretty low although I’d love if it were still lower (0.76%). Since it is direct through TRowePrice there are no transaction fees either.
I would put my self-directed 401(k) into either a TRowePrice or Vanguard life cycle fund (I happen to greatly prefer the TRowePrice allocation) but my brokerage account charges a ***$50 transaction fee** per transaction into or out of either TRowePrice or Vanguard mutual funds (YIKES). Instead of doing this I’ve opted for a simple basket of Vanguard ETFs and have abandoned DCA for larger purchases farther apart to minimize the $12.95 transaction fee for ETFs (there are no really good choices in the brokerage’s mutual fund options, I tried and never was happy with my selection — at this point I’d pull it back into my company’s managed set of funds if I didn’t have the option of Vanguard ETFs).
I don’t have the werewhithal yet to have anything but savings outside of retirement investments.
DB
April 11th, 2007 at 4:00 pm
P.S. — After reading Clements’ article I’d add that my ideal configuration for my 401(k) would be if I could have 85-90% in a Vanguard or TRowePrice lifecycle fund, and the remaining 10-15% in an international or world REIT. Putting a bit into the real estate basket is the only way I’d modify the investment.
April 12th, 2007 at 11:51 am
[...] In yesterday’s Question of the Day post, I stated that I didn’t like lifecycle funds because most have a 15% allocation to bonds, no matter what your age. A reader named Duane left the following comment regarding that statement: I seem to recall reading that a 90/10 balance between stocks and bonds has on average the same rate of return with less volatility. By that measure, a lifecycle fund with a minimum of 15% in bonds may not be a bad thing. [...]