Life-cycle mutual funds have benefits

By George Chamberlin | Tuesday, June 17, 2008 4:03 PM PDT ∞

Question: I've been hearing a lot lately about life-cycle mutual funds as a good investment for retirement funds. How do they work and are they appropriate?

Dan, Bonsall

Answer: To be sure, these funds, also known as target-date funds, have become a very popular way to invest in a portfolio of stocks and bonds that automatically adjust the balance as the target date gets closer.

For instance, the Vanguard Milestone 2015 fund allocates 65 percent of its funds to stocks and 35 percent into bonds. By the target year of 2015 it will cut the stock holdings to 30 percent and move the remainder to fixed-income investments.

On the other hand, the Vanguard Milestone 2045 fund has 90 percent of its portfolio committed to the stock market.

The idea, of course, is to reduce the risk in the portfolio as the retirement date draws closer and closer. And, by having a predetermined plan to adjust the portfolio over time, it eliminates the emotions that often sabotage an investment plan.

In addition to date-specific funds, there are now target-date funds available in different risk profiles that range from aggressive to moderate to conservative.

Accordingly, one fund with a target date of 2030 could have 80 percent of its portfolio dedicated to stocks and another fund with the same date could have only 50 percent in stocks. As the investor, you have to not only determine your likely date for retirement but also select the risk level that matches your own tolerance.

The mutual fund industry has realized these funds are a pot of gold. Nearly $500 billion is invested in the hundreds of various lifestyle and target-date funds that are available. And, brokers are promoting these funds as the perfect retirement tool.

While they may be just right for certain people, others may find them to be a bit limiting. My biggest concern is that they could be too conservative. With people living longer these days, a portfolio heavily tilted toward bonds could fail to provide the protection against inflation ---- the biggest threat to people on fixed incomes ---- that ordinarily is achieved through stocks.

So, if life-cycle funds sound like the best place for your IRA or 410(k) dollars, by all means, proceed. But remember, no two target-date funds are created equal. Be sure to compare investment strategies and, of course, fees and expenses.

George Chamberlinis a regular contributor to the North County Times and also is a TV and radio commentator. Contact him at georgeccsd@yahoo.com.

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