Even though the investment industry might have you think otherwise, investing for your retirement does not have to be difficult. Still, many people turn to investment advisors for help.
Unfortunately, because of how advisors are compensated, there may be conflict between what is best for them and what is best for their clients.
Life-cycle funds offer a viable solution. Here we'll examine what these funds are, compare different ones and finally look at some issues to consider before using these funds for your retirement portfolio.
What Are Life-Cycle Funds?
Life-cycle funds are the closest thing the industry has to a maintenance-free retirement fund.
Life-cycle funds, also referred to as "age-based funds" or "target-date funds", are a special breed of the balanced fund. They are a type of fund of funds structured between equity and fixed income.
But the distinguishing feature of the life-cycle fund is that its overall asset allocation automatically adjusts to become more conservative as your expected retirement date approaches. While life-cycle funds have been around for a while, they have been gaining popularity.
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Example of asset allocation (Vanguard)
Target Equity Bond
maturity
2025 59% 41%
2015 51% 49%
As the fund approaches the target maturity date, a higher proportion is invested in bonds.
Rule of thumb: The proportion invested in bonds should be equal to your age!
Life cycle investing has been around for sometime now. The banks have been marketing them. It is a no brainer. The asset allocation is fixed according to age bands. As one one ages towards retirement the allocation gets more conservative.
ReplyDeleteIncome already has this in the forms of combined funds. But unfortunately, the agents have not used this approach to plan for clients retirement.They are selling funds;recommending hot funds.
I would like to add that the agents sell what pays them the most commissions besides what is hot (typically what is bad for the investor).
ReplyDeleteMost are driven by sales commissions. If the client so happens to buy something good for themselves, it is just pure luck.
Someone said this sometime ago; it is not we fail to plan but the agents fail our plan.
ReplyDeleteHi i admire what you are doing, please keep up the good work. There too many ignoratnt youngster like me. Q: i read something life cycle fund from a US blogger saying its the no-brainer option for investment , where can i buy it? was it a worthy investment for begineer investor, i at my late twenties?
ReplyDeleteHi, i admire your work here, you have been very informative for ignorant youngster like me. i read an article about this Lifecycle fund being a no-brainer option for investment as it will automatic adjust to your age. Q: was it true? and where can i find it in the market?
ReplyDelete