Lifecycle Funds: Does One Size Fit All?

Lifecycle funds (or target-date funds), are gaining popularity these days and become an ideal vehicle for retirement savings for people who don’t have the time or knowledge to do their own research in selecting funds to build a well diversified portfolio. With lifecycle funds, the biggest advantage is automatic asset allocation. By investing in a lifecycle fund, which is a basket of funds that cover every investment style, you leave the job of finding the right asset allocation to the professionals, the fund manager(s), who will adjust the mix of the fund’s components based on the time span to the target date. Lifecycle funds, particularly age-based lifecycle funds, usually have a large portion (80, 90, or even 100% of the assets) invested in equities to begin with and gradually shift the allocation to a more conservative style with more fixed income investments as the target date gets closer to preserve the assets. While investors get convenience by riding on a lifecycle fund, what they lose is flexibility as investors don’t have the control of what to invest and how to invest. You can’t choose which funds to invest in, neither can you change the percentages of each element fund.

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SmartMoney yesterday has an article on the lifecycle funds , making the case that lifecycle funds may not be an universal choice for every investor. The main arguments made in the article are that

  1. One size doesn’t fit all: Lifecycle funds determine the asset allocation only based the target date. For each investor, all the assets, inside and outside the fund, should be considered in order to find the right allocation, not just the fund itself.
  2. Limited choices: If one component fund suffers, there’s no way an investor can replace it with another fund to get a better return. You buy the fund as is, even though you are not happy with the components.
  3. Allocation is in the eye of the beholder: What appeals to investors is lifecycle fund’s automatic asset allocation. However, even with the same target date, different funds offer drastically different allocation, as shown in the figure below, all depends on the fund manager’s investment philosophy. Since there are so many lifecycle funds out there, which one are you going to choose? And what you choose today could make big difference 30 years later.


The article also suggest some work-arounds if the lifecycle funds do meet your particular needs. For example, select a longer than you expect target date to get a bigger exposure to equity if the fund isn’t aggressive enough.

I have a Fidelity Freedom 2035 in my 401(k) in account, but the fund doesn’t have enough small-cap exposure (only 4.53%). Therefore, I also invest in Fidelity Small Cap Value to increase the share of small cap, though the fund is already included in 2035.

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