Comments on: Question of the Day – Investing

By: AllFinancialMatters » Blog Archive » Deciding the Trade-Off Between Volatility and Return

Thu, 12 Apr 2007 17:51:51 +0000

[...] 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. [...]

By: db

db — Wed, 11 Apr 2007 22:00:08 +0000

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.

By: db

db — Wed, 11 Apr 2007 21:54:26 +0000

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.

By: sam

sam — Wed, 11 Apr 2007 21:12:11 +0000

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.

By: Duane

Duane — Wed, 11 Apr 2007 20:32:13 +0000

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.

By: pfodyssey

pfodyssey — Wed, 11 Apr 2007 20:14:21 +0000

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.

By: Savvy Steward

Savvy Steward — Wed, 11 Apr 2007 18:43:28 +0000

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.

By: Dylan

Dylan — Wed, 11 Apr 2007 18:35:57 +0000

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.

By: samerwriter

samerwriter — Wed, 11 Apr 2007 18:16:02 +0000

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..

By: Jesse

Jesse — Wed, 11 Apr 2007 17:15:11 +0000

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.