What Are Lifecycle Funds?
Lifecycle funds, according to Fidelity, are
"Globally diversified investment funds with different percentages of
equities, bonds and short-term instruments."
Without
all of the fancy terminology, it basically means you have a collection
stocks/bonds all rolled into one fund. Then, as you grow older, the
amount of stocks/bonds automatically changes so you can take less risk
as you're nearing retirement.
Still confused?
I don't
blame you. Wall Street is known for making things sound way more
complicated than they really are. After you finish reading this page, I
hope you will have a good understanding of what a lifecycle fund is...
Also, why this type of fund will likely be your best investing strategy as you prepare for your retirement.
Why A Lifecycle Fund?
Stocks are generally considered as risky, with a higher chance of
winning/losing money. Bonds on the other hand are much safer.
Nevertheless, bonds are something that are good to own in case something goes wrong
in the stock market. Which we all know can happen in a bad economy.
The real challenge is finding a balance between the two.
The experts like to call this "asset allocation." Which basically means "how much of what" are you investing in.
To make matters worse, you have to decide what stocks you want to own and what bonds
you want to own. That's a whole different discussion itself. Wouldn't it be nice if you could have all of this
handled automatically without having to worry about it?...
Introduce the lifecycle fund!
A lifecycle fund gives you a rock-solid investing strategy without ever having to know anything about investing. You buy into a
system that has been proven to work over the last 90 years! (more on
this later)
What The Skeptics Say
When you are dealing with
anything related
to investing, you're going to run into someone that thinks that what you are
doing is completely wrong. Lifecycle funds are no exception to this.
The
skeptics will ask, "Why don't you manage everything yourself?" For
example, let's say your lifecycle fund invests in the following:
- 70% in US stocks
- 10% in European stocks
- 10% in Emerging Markets (China, etc.)
- 10% in Bonds
Skeptics
will wonder why you don't simply invest in these four things
individually, that way you can have more control over what you are
investing in the future.
I'll agree, having this type of added
control could be beneficial. But if you are anything like me, you don't
want to spend your days studying stocks and investing books so you
can extract a few more pennies. Trust me, the time is nowhere near the
return on investment.
Instead, with a lifecycle fund you have a solid strategy in place which has been created by people far more educated in investing than you and I would ever dream of.
My argument to this is if you decide later that you want to branch out and invest in something else, you can still easily do that. Simply buy that stock/fund or whatever you have your eye on, in addition to the lifecycle fund.
Hopefully, you'll have plenty invested already when you decide this. You'll be very thankful when you realize that the "backwards robe" you invested in wasn't quite as cool as you had originally thought.
What Kind Of Returns Can I Expect?
The rule with investing is "past performance does not indicate future results." Which is absolutely true in case you were wondering!
However, if something has worked for over 90 years (the entire life span of the stock market), I'm fairly confident that the future will provide at least similar results. So what has performed well over the last 90 years?
The entire stock market as a whole!
Today, we have funds we can invest in called "index funds" which basically own stock in every company that the index is trying to mimic.
If you invest in a lifecycle fund that is a collection of index funds, you are bound to see nice results over the long run because historically that is what has happened. According to Vanguard's website, an analysis of one of their funds in the early stages where it invests 90% in stocks and 10% bonds had the following historical risk/return from 1926-2008...
- Average return: 9.4%
- Best Year: 49.8% (1933)
- Worst Year: -39% (1931)
Now, Vanguard hasn't been around for that long. This is only "theoretical" if the lifecycle fund had been around. But as you can see, over a long term span an average of 9.4% is pretty tough to beat!
Once again, this is no indication of what will happen in the future. However, you have to like that 82 year's worth of data!
Which One Do I Choose?
There are many different lifecycle funds to choose from. Believe me, I've done plenty of research!
Of all of the lifecycle funds, I have to give my highest recommendation to Vanguard. They are simply in a league of their own when it comes to expenses, customer satisfaction, and pretty much everything else related to investing.
Vanguard has a .19% fee while the industry average is somewhere around 1.22%. While this may not seem like a big deal, over the course of your lifetime, this small percentage difference could result in tens of thousands of dollars when it comes time to retire!
In fact, the closest competitor I could find at the time of this writing was T. Rowe Price with a .74% fee.
Also, you can't beat Vanguard's customer support and easy to use website. When I called their support number for questions, I felt like I was speaking with someone who just received their Harvard MBA! Their website is incredibly easy to navigate around. And setting up automatic payments couldn't be easier as well.
Setting up automatic payments makes investing even easier!
The only drawback to Vanguard is the $3,000 minimum fee to open up an account. I understand that this is a lot of money for most people. As a young kid out of college, it took me two years before I was able to save up enough money to open an account. However...
What I did was I took 10% of what I had and put it into a savings account. Then, with every dollar I earned afterwards, I put 10% of that into my savings account as well. It's not quite as fast as robbing a bank. But eventually I got to where I could open up my account.
I realize that a lifecycle fund isn't get-rich-quick. However, it is the perfect solution for those that want a nice retirement nest egg with the least amount of effort possible.
By going the lifecycle fund route, you will out perform around 90% of the people that sit around all day and try to "beat the market."
Sadly, that's too true!
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