Feb

26

Lifecycle Mutual Funds

Posted by cameron

February 26, 2007 |

I have been looking into these funds recently and these are my conclusions. In case you don’t know, these are funds that have a specific retirement year in mind and are balanced in nature, meaning they are a mix of stocks and bonds with some cash. They share the same attributes as balanced funds in that risk is mitigated by the balance of stocks to bonds and diversification within each investment type. The balanced fund has a built in feature, which causes the owner to buy low and sell high. It does that by rebalancing. Say a fund has 60% stock and 40% bonds and there is a run-up in the stock market. The balance may move to 65% stock and 35% bonds but since the fund is a 60/40 fund it will sell some stocks and buy bonds to “rebalance”. This in effect is sell high/buy low. What sets the lifestyle fund apart is the injection of time as a factor. What the investment company does is change the mix as you get closer and closer to retirement. For example, a fund that starts at 70% stock and 30% bonds may end at 40% stock, 40% bonds and 20% cash. The investment company shifts the mix over the years as the number of years to retirement diminishes. The fund becomes more and more conservative.

Money has been moving into these funds because yields are reasonable, although not outstanding, and the investment company takes care of rebalancing. It’s basically on autopilot as far as the investor is concerned.

Following are my thoughts on these lifecycle funds:

Pros

  • The fund is on autopilot, which will be attractive to those who want someone to take care of it for them.
  • The investment company handles rebalancing which is a good thing.
  • The fund becomes more conservative as time goes by, which is a good thing.

Cons

  • It’s not conservative enough for me at the retirement date
  • It’s not aggressive enough when retirement is far away (ten years say)
  • When changes are made in the mix with advancing years it is far from clear these will be done when stock is high. Remember, money moves from stocks to bonds over the years.
  • Investment companies put the money in a wide array of stock and bond funds. Not all these funds are winners and some never will be.

My take.

I can use this for mid term investing but not short term or long term.


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