Retirement investing—whether it’s decades off, approaching fast or you are there already—is daunting. The unfortunate truth is that many people facing this challenge have ignored it until late in the game.
Last week, in What Kind of Investor Are You?, I wrote about the mutual fund industry’s (Vanguard included) silver bullet for the retirement puzzle: life-cycle funds. At Vanguard, there is much to like about the firm’s Target Retirement series, which are low-cost, diversified and transparent. Investing in one of these funds is certainly a better long-term proposition than simply holding cash.
However, as I detailed last week, I have some serious issues with life-cycle funds’ one-size-fits-all philosophy. Basing an investment portfolio on one metric, your age, just doesn’t cut it, in my view.
That said, funds like the Target Retirement series have become a popular portfolio choice, particularly for retirement plans like 401(k)s and 403(b)s, where they are often the default option and occasionally the only option for plan participants.
So, let’s pop the hood on Vanguard’s life-cycle options—specifically, the Target Retirement as well as the LifeStrategy funds. After reading this, you’ll be able to make your own informed decisions about whether any of these one-size-fits-all funds work for you.
- LifeStrategy funds have fixed allocations to stocks and bonds through time, while Target Retirement funds shift allocations over time.
- The funds are low-cost, diversified and straightforward.
- Buying a life-cycle fund based solely on your age could be a big mistake.
Static or Target
The basic premise (and promise) of a life-cycle fund is that with one purchase, an investor gets a broadly diversified portfolio that can be held forever—at least, the mutual fund companies hope you’ll hold it forever. One decision, and the investor is done for life. Can it get any easier?
Probably not. But it’s not as simple as the fund companies would have you believe. By my count, Vanguard offers 18 different life-cycle mutual funds, all of which are funds of funds, meaning their portfolios are built of other funds rather than individual stocks and bonds. These funds fall into one of two buckets: static allocation or target maturity strategies. So, how do you choose one over the other?