Life Cycle Funds?


A

amkeller

I'm just starting to save for retirement and considering buying a life
cycle fund - Vanguard Retirement 2045. At this point I'll only be able
to invest 4k a year into my IRA/fund. I'm 26 and I have no other
investments other than my savings at ING. Anyone have any thoughts on
these life cycle funds? They seem diversified, but too risky to put all
of my retirement eggs in this one basket? Or maybe its too
conservative? Any advice appreciated.

Thanks,

A.K.
 
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B

BMS

The problem with life cycle funds is that they are on auto pilot. They move
from equities and into fixed income. Therefore you can have situation where
they are selling you out of a falling stock market and into fixed income in
a rising interest rate environment. That would be a double bad.

Your young enough that you can be aggressive, look at a quality mutual fund
family like American Funds.
 
E

Elle

Have you considered learning what the criteria are behind the allocations in
the Vanguard Retirement 2045 fund (a.k.a. VTIVX), and then setting up your
own collection of mutual funds?

VTIVX (with exactly four positions in Vanguard's fine index funds) is
probably just fine for someone who doesn't want to bother learning about
investing. It has a great expense ratio, and I like that it uses only index
funds. But there are some people who would not want the 11% bond mutual fund
position VTIVX has right now. Rising interest rates mean the principal of
this position will decline; one is effectively locking in a certain dollar
return with an investment grade bond mutual fund right now. If I wanted
bonds, I'd have them in a ladder. No loss of principal; it captures the gain
of rising interest rates.

It might pay to play with some free online portfolio allocation tools and
better establish exactly what percentage of your portfolio you want in
domestic stocks, international stocks, and bonds. I suggest taking 20
minutes or so each weekend for the next several weekends and trying each of
the portfolio allocation tools I list at
http://home.earthlink.net/~elle_navorski/id4.html . (Questions about
portfolio allocation come up so often here that I threw together this list
of allocation tools a few weeks ago.)

Also, just a quick check: Does your employer offer a 401(k) plan?

Good for you for being able to sock away several thousand each year into
your retirement plan.
 
A

amkeller

"But there are some people who would not want the 11% bond mutual
fund position VTIVX has right now."

Does this suggest that someone at my age can/should avoid bonds all
together?

"Also, just a quick check: Does your employer offer a 401(k) plan?"
No, I work freelance.
 
E

Elle

fund position VTIVX has right now."

Does this suggest that someone at my age can/should avoid bonds all
together?
It suggests this, but as you will see from some of the asset allocation
tools I suggested, plenty feel that someone your age, with about 40 years to
retirement, should still have some bonds.

My personal, bigger gripe is with the fact that your money is in a bond
_mutual fund_, as opposed to individual bonds that you would hold to
maturity and so lose no principal on.

It's a matter of personal risk tolerance, which itself is hard to measure,
particularly if one has not been investing long and so has not seen full
recoveries (and then some) like that after Black Monday, 1987, or lived
through the 1970s, when stocks were flat yet with dividends, still posted
positive returns, IIRC.

As you may be noticing, this is not an exact science. Being entirely in
stocks until the age of 40, and with 25 more years to retirement, may prove
to be a better move than having, say, 15% bonds and 85% stocks. But it may
prove "wrong," too; one just can't say for sure. Given the inevitable
uncertainty involved, the overriding principle is to be diverse to some
extent, and so capture the gains of several asset categories, while
minimizing losses.

You made a perfectly good decision going with VTIVX. Now, IMO, you should
keep adding to your investment knowledge and learn why VTIVX is made up of
the four funds it is. Then maybe strike out a bit on your own, if you're not
happy with, say the bond mutual fund part of VTIVX. (But don't let me push
you around.)

I am a do-it-yourselfer who has been investing for over 20 years in
individual stocks, bonds, CDs, hybrids, and mutual funds (bonds and stocks),
with a bit of home owner's real estate investment experience, too. Keep
checking back for a good mix of advice reflecting diverse experience.
 
J

james92c

I'm just starting to save for retirement and considering buying a life
cycle fund - Vanguard Retirement 2045. At this point I'll only be able
to invest 4k a year into my IRA/fund. I'm 26 and I have no other
investments other than my savings at ING. Anyone have any thoughts on
these life cycle funds? They seem diversified, but too risky to put all
of my retirement eggs in this one basket? Or maybe its too
conservative? Any advice appreciated.
First, my advice would be to NOT waste your money on mutual funds. The
vast majority of mutual funds do not beat the index they use as a
benchmark, but you pay 2% or more in fees per year. And don't fool
yourself, there is no expert advisor giving you valuable information
and tips -- these guys are just salespeople who earn a comission on
mutual fund product sales.

The superior alternative in almost every respect are exchange traded
funds (ETFs) which you can buy or sell on the stock market using any
discount broker. The fees are more like 0.5% or less, and since the ETF
will perform the same as a mutual fund you have immediately saved the
2% or whatever difference in annual fees. These are traded like stocks
but are actually very much like mutual funds.

That is the most important tip I can give to anyone young. Your savings
just by avoiding costly mutual funds will add up to 100% or more over
your lifetime. The second most important tip I can give is, you should
be actively involved in where your money is and familiarize yourself
with the markets. A problem with any kind of generic fund (as someone
else pointed out) is they could be in entirely the wrong type of
vehicle over time.

This is why you want control over where your money currently is. For
example, at this moment it is a very bad idea to have money in a bond
fund. I won't go into further detail about where you should put your
money right now, but you absolutely MUST start spending the time
researching these investment vehicles and markets to understand the
overall picture. Some leads to start you off:

SPY - an ETF that tracks the S&P 500 index
QQQQ - an ETF that tracks the NASDAQ 100 index
DIA - ditto for Dow index
IYR - REIT index (real estate)
XLE - energy index
LQD - corporate bond index
AGG - aggregate bond index
There are hundreds of ETFs out there, even for non-US markets!

You should always diversify - so never expose yourself only to one
vehicle. Personally I do not own any of these currently as I think all
parts of the market are overvalued.

But don't let mutual fund salespeople talk you into "super
diversification or management" nonsense, time has shown that they
generally can't do either. If you hold some SPY, some AGG, and some IYR
you will be just as well diversified as the best mutual funds.

Again, my immediate advice is to not buy anything until you learn more
about the overall markets. I currently have minimial investments in the
markets because I feel that stocks, bonds, and real estate are all
overvalued. I'm going to wait a bit for the prices to come down.
 
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G

Gary

I have been considering going into ETF's, but I wonder if there are
organizations with great credentials like Morningstar that rate ETF's
much like Morningstar rates Mutual Funds.

Do you know?

First, my advice would be to NOT waste your money on mutual funds. The
vast majority of mutual funds do not beat the index they use as a
benchmark, but you pay 2% or more in fees per year. And don't fool
yourself, there is no expert advisor giving you valuable information
and tips -- these guys are just salespeople who earn a comission on
mutual fund product sales.

The superior alternative in almost every respect are exchange traded
funds (ETFs) which you can buy or sell on the stock market using any
discount broker. The fees are more like 0.5% or less, and since the ETF
will perform the same as a mutual fund you have immediately saved the
2% or whatever difference in annual fees. These are traded like stocks
but are actually very much like mutual funds.

That is the most important tip I can give to anyone young. Your savings
just by avoiding costly mutual funds will add up to 100% or more over
your lifetime. The second most important tip I can give is, you should
be actively involved in where your money is and familiarize yourself
with the markets. A problem with any kind of generic fund (as someone
else pointed out) is they could be in entirely the wrong type of
vehicle over time.

This is why you want control over where your money currently is. For
example, at this moment it is a very bad idea to have money in a bond
fund. I won't go into further detail about where you should put your
money right now, but you absolutely MUST start spending the time
researching these investment vehicles and markets to understand the
overall picture. Some leads to start you off:

SPY - an ETF that tracks the S&P 500 index
QQQQ - an ETF that tracks the NASDAQ 100 index
DIA - ditto for Dow index
IYR - REIT index (real estate)
XLE - energy index
LQD - corporate bond index
AGG - aggregate bond index
There are hundreds of ETFs out there, even for non-US markets!

You should always diversify - so never expose yourself only to one
vehicle. Personally I do not own any of these currently as I think all
parts of the market are overvalued.

But don't let mutual fund salespeople talk you into "super
diversification or management" nonsense, time has shown that they
generally can't do either. If you hold some SPY, some AGG, and some IYR
you will be just as well diversified as the best mutual funds.

Again, my immediate advice is to not buy anything until you learn more
about the overall markets. I currently have minimial investments in the
markets because I feel that stocks, bonds, and real estate are all
overvalued. I'm going to wait a bit for the prices to come down.

======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a few lines to add context, the previous post is deleted.
 
R

R.A. \Red\ Lawhern

I'm just starting to save for retirement and considering buying a life
cycle fund - Vanguard Retirement 2045. At this point I'll only be able
to invest 4k a year into my IRA/fund. I'm 26 and I have no other
investments other than my savings at ING. Anyone have any thoughts on
these life cycle funds? They seem diversified, but too risky to put all
of my retirement eggs in this one basket? Or maybe its too
conservative? Any advice appreciated.

Thanks,

A.K.
I don't think there is any investment strategy or tool that is free of
mental effort and learning -- or of expensive lessons if you refuse to
make that effort. One book that I've found helpful as a layman
individual investor in my early 60s is "Mutual Funds for Dummies" by
Eric Tyson. It's comprehensive and thoughtful, and it makes suggestions
about avoiding the worst excesses of the market place. You might also
consider talking with a Personal Financial Advisor, affiliated with
NAPFA. Unlike most advisers these days, members of NAPFA are required to
bill on an hourly basis only, rather than as a percent of assets under
management. See http://www.napfa.org.

Regards,

R.A. "Red" Lawhern, Ph.D.
http://www.lawhern.org
"Giving Something Back"
 
E

Elle

First, my advice would be to NOT waste your money on mutual funds. The
vast majority of mutual funds do not beat the index they use as a
benchmark,
Do the vast majority of mutual funds even have a publicly known index they
use as a benchmark? I don't think so. Every mutual fund has specific
objectives, but rarely, if ever, does a non-index mutual fund claim to have
some kind of index it's using as a benchmark. And aren't most mutual funds
non-index funds?
but you pay 2% or more in fees per year.
Have a citation for this?

Many reputable internet sites say the average expense ratio is around 1.5%.
Google. Loads seem to be down. Haven't Fidelity and Vanguard eliminated all
loads on their funds?

In other words, it is extremely easy today to find a mutual fund that has an
expense ratio below 1%. For index mutual funds, below 0.3% seems common.
The superior alternative in almost every respect
The numbers very much argue otherwise. See below.
are exchange traded
funds (ETFs) which you can buy or sell on the stock market using any
discount broker. The fees are more like 0.5% or less, and since the ETF
will perform the same as a mutual fund you have immediately saved the
2% or whatever difference in annual fees. These are traded like stocks
but are actually very much like mutual funds. snip
If you hold some SPY, some AGG, and some IYR
you will be just as well diversified as the best mutual funds.
The ETF "SPY" has an expense ratio 0.11%, plus transaction costs every time
one sells or buys shares. Compare to Fidelity's equivalent fund, FSMKX,
0.1%, no transaction costs for selling/buying shares. Fidelity requires a
minimum of $10k to avoid a $10 annual fee, IIRC. Vanguard's equivalent fund,
VFINX, has an expense ratio of 0.18% , but also no transaction costs for
buying/selling shares. Or consider VTSMX, which the original poster would
potentially hold within VTISX, and with an expense ratio of 0.19%, and
arguably superior to an S&P 500 index fund.

The ETF "IYR" has an expense ratio of 0.6% . Compare this to Vanguard's REIT
index fund VGSIX with expense ratio = 0.2% .

The ETF "AGG" has an expense ratio of 0.2% plus transaction costs. Compare
this to Vanguard's equivalent VBMFX, also with an expense ratio of 0.2% but
no transaction costs.

Vanguard has certain minimum amounts required in certain positions to avoid
small annual fees. However, since the original poster would hold VTSMX and
VBMFX via her/his life cycle fund VTIVX and in an IRA, her minimum required
to avoid a fee is a paltry $5000. (Paltry because s/he is going to put in
$4000 a year.)

In summary, the costs of indexed mutual funds are highly competitive and can
even beat ETFs.
 
J

james92c

First, my advice would be to NOT waste your money on mutual funds. The
Do the vast majority of mutual funds even have a publicly known index they
use as a benchmark? I don't think so. Every mutual fund has specific
objectives, but rarely, if ever, does a non-index mutual fund claim to have
some kind of index it's using as a benchmark. And aren't most mutual funds
non-index funds?
It's almost always the S&P 500 for stock funds, and a Lehman bond index
for bond funds. It's published in the prospectus, possibly in the fine
print. Even if it's not an index fund there is a way to evaluate the
performance in the long term and that is usually comparing against the
S&P 500.

Mutual funds can and do claim that their benchmarks are different, but
if over so many years they can't beat the S&P 500 then what good is the
fund?
Have a citation for this?
The MER has a wide range, and here in Canada the average is quite high
around 2%. The lower, the better.
In other words, it is extremely easy today to find a mutual fund that has an
expense ratio below 1%. For index mutual funds, below 0.3% seems common.
That is good news -- then those index mutual funds are a good option.
The ETF "SPY" has an expense ratio 0.11%, plus transaction costs every time
one sells or buys shares.
You'll have to find a cheap broker then. I pay about $1 per trade. If
you're buying and holding for the long term, these fees are very
minimal.
In summary, the costs of indexed mutual funds are highly competitive and can
even beat ETFs.
I agree, some index funds do have competitive rates and personally,
those are the only kinds of mutual funds I own. Other mutual funds have
higher fees.
 
M

Mark Freeland

It's almost always the S&P 500 for stock funds, and a Lehman bond index
for bond funds. It's published in the prospectus, possibly in the fine
print.
You are right that it is published in the prospectus. Major rule of
investing - know what you are investing in, including reading the
prospectus (that goes for all securities, whether funds, stocks, bonds,
REITs, LPs, etc.)

The benchmark however often is not the S&P 500. It is an index, or
management-specified blend of indices, that represents the investment
objective of the fund. This is an important point, because not only
does it serve as a performance benchmark, but the particular benchmark
can give you more insight into what the management of the fund is trying
to do than the written words in the objective, which often sound like:
the objective of this fund is to make money by investing in stocks that
will go up in price.

Look for the prospectus section that shows annual performance for the
past 1/5/10 (or lifetime) of the fund.

Since the question was about Vanguard Target Retirement 2045, let's look
at that:
"Target 2045 Composite Index: ... Derived by applying the Fund's target
allocation to the results of the following benchmarks: for stocks, the
DJ Wilshire 5000 index; for int'l stocks, the MSCI EAFE Index; and for
bonds, the Lehman Bros. Aggressive Bond Index."

So that says to multiply the gain (or loss) in each index by the
fraction of the fund corresponding to the specified index, and add them
up. While Vanguard doesn't say exactly what that "target allocation"
is, it does say under risks that about 10% of the fund is allocated to
bonds; if one looks at the current allocation and rounds, one sees that
it is investing in equity around 70% domestically, and 20%
internationally.

Another, more simple example: Fidelity Value fund compares its
performance to the Russell Midcap Value Index, not surprisingly, since
it is a mid cap value fund.

Some fund families, notably Fidelity, but Bridgeway also comes to mind,
base part of their management fees on fund performance relative to a
benchmark. So obviously they must specify a benchmark, and it's not
going to be one that doesn't match the fund objective.

Curiously, Fidelity Value uses a blend of the S&P 500 and the Russell
Midcap Value Index as its performance benchmark. The prospectus
explains this, however, by noting that prior to December 2002, the
fund's benchmark was the S&P 500, and since the "look back" period for
performance fee calculations is three years, one needs to prorate
between old and new benchmarks accordingly. That also tells you that
the fund shifted its style almost three years ago.
 
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M

Mark Freeland

They are usually heavily diversified, as the underlying funds are
themselves heavily diversified. So generally I would not consider this
"putting all of one's eggs in one basket". The only counterargument I
can think of is: If the fund contains actively managed funds from a
single family, there is a risk of management non-diversification - that
is, all the funds may share a common style of stock selection.

At Vanguard, its lifestyle funds hold index funds, so that isn't a
problem. (And even when Vanguard provides funds of actively managed
funds, see its Diversified Equity Fund, it uses managers from different
fund families, so management diversification isn't an issue.
http://flagship.vanguard.com/VGApp/..._Views/news_ALL_diveqtipsadm_06102005_ALL.jsp
)

Vanguard lifestyle funds, like Fidelity's, tend to keep more in bonds
for a given target date than does T. Rowe Price. I prefer something a
bit more aggressive, so you might want to look at the Price funds (the
current mix for 2045 is similar to Vanguard's, but it will stay more
heavily invested in equities for a longer period of time).
http://news.morningstar.com/doc/article/0,1,129126,00.html
http://news.morningstar.com/doc/article/0,1,126677,00.html
SPY - an ETF that tracks the S&P 500 index
QQQQ - an ETF that tracks the NASDAQ 100 index
DIA - ditto for Dow index
IYR - REIT index (real estate)
XLE - energy index
LQD - corporate bond index
AGG - aggregate bond index
If one is going to invest in the NASDAQ, why so narrow an investment as
QQQQ, as opposed to ONEQ (the full NASDAQ composite)? If one applied
the same "top 100" thinking to S&P indexes, one would seem to favor OEF
(S&P 100) over SPY (S&P 500).

If I were to use index funds (whether ETFs or "normal" open end funds),
I would be more inclined to use a total market index - broader
diversification than the large cap funds you see above. None of the
funds listed above include a significant number of mid-to-small cap
corporations.
There are hundreds of ETFs out there, even for non-US markets!
Point of clarification - there are "only" 175 ETFs (according to
Morningstar) offered for sale in the U.S. market (including ETFs
investing in foreign companies, like IEV - iShares Europe 350 Index).
There are hundreds of ETFs out there, but most are not available within
the U.S.
[...]
But don't let mutual fund salespeople talk you into "super
diversification or management" nonsense, time has shown that they
generally can't do either. If you hold some SPY, some AGG, and some IYR
you will be just as well diversified as the best mutual funds.
See above.
 
H

HW \Skip\ Weldon

You'll have to find a cheap broker then. I pay about $1 per trade. If
you're buying and holding for the long term, these fees are very
minimal.
To me, "per trade" means every purchase/reinvestment/sale regardless
of size. If you mean the same thing and your broker charges you and
the general public $1 per trade, I hope you'll consider posting the
name and contact information for the broker.

I've always thought that even though ETFs have some advantages for
specific investors, for the general public who invests frequently (and
reinvests dividends), the trading cost/commision is a major factor.
Per trade costs of $1 would force me (kicking and screaming) to
re-evaluate my view.

I'd also wonder about the broker's business plan, but that's another
matter. <grin>


-HW "Skip" Weldon
Columbia, SC
 
E

Elle

It's almost always the S&P 500 for stock funds,
Oh I see. Maybe you should have just said "the vast majority of mutual funds
do not beat the S&P 500."

No big deal.
You'll have to find a cheap broker then. I pay about $1 per trade. If
you're buying and holding for the long term, these fees are very
minimal.
In Canada. Okay. Haven't seen prices quite this cheap in the U.S. Yet. :)
I agree, some index funds do have competitive rates and personally,
those are the only kinds of mutual funds I own. Other mutual funds have
higher fees.
Agreed. Bloody highway robbery.
 
J

james92c

Curiously, Fidelity Value uses a blend of the S&P 500 and the Russell
Midcap Value Index as its performance benchmark. The prospectus
explains this, however, by noting that prior to December 2002, the
fund's benchmark was the S&P 500, and since the "look back" period for
performance fee calculations is three years, one needs to prorate
between old and new benchmarks accordingly. That also tells you that
the fund shifted its style almost three years ago.
Funds sometimes play with the published benchmark to improve their
relative performance. The benchmark is as much a part of the game as
the rest of the advertising. I mention S&P 500 as an overall stock
benchmark -- even for non-index funds -- because no matter what a
mutual fund claims to track, if it can not outperform the overall stock
market then it is just about useless. Ditto for bond funds versus the
overall bond index.

If you go back to the two ingredients of investing, you have risk and
reward. Mutual funds are a black box, since you are handing your money
over to someone else and don't know what stocks you are actually
invested in so I would say the risk is rather high, or in any case,
unknown to you. That leaves you with reward as the only measure of
whether a mutual fund is worthy.

I mean, you can have the best technology investment in the world for
the past 10 years but if it's underperforming the overall market by
-50% then why are you bothering in the first place?
 
D

Douglas Johnson

Mutual funds can and do claim that their benchmarks are different, but
if over so many years they can't beat the S&P 500 then what good is the
fund?
Diversification?

-- Doug
 
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R

Rich Carreiro

HW \"Skip\" Weldon said:
To me, "per trade" means every purchase/reinvestment/sale regardless
of size. If you mean the same thing and your broker charges you and
I was under the impression that most brokers these days do
reinvestment of dividends thrown off by stocks for free.
Fidelity (my broker) certainly does, and considers ETFs to
be stocks. So my ETF dividends get reinvested w/o any commission.
 
A

amkeller

"You made a perfectly good decision going with VTIVX. Now, IMO, you
should
keep adding to your investment knowledge and learn why VTIVX is made up
of
the four funds it is. Then maybe strike out a bit on your own, if
you're not
happy with, say the bond mutual fund part of VTIVX. (But don't let me
push
you around.)"

Lets just say for argumet sake that i am comfortable with the more
conservative returns of the VTIVX and choose it to be my main
retirement vehicle. Aside from money market and CD reserves what might
be a good stategy to diversify this potential portfolio? Or rather,
what might be a stategy to make this more aggressive while i have the
time to be more aggressive? How do i do this without being redundant?
 
M

Mark Freeland

Curiously, Fidelity Value uses a blend of the S&P 500 and the
Russell Midcap Value Index as its performance benchmark.
[...] [P]rior to December 2002, the fund's benchmark was the
S&P 500, and since the "look back" period for
performance fee calculations is three years, one needs to prorate
between old and new benchmarks accordingly.
Funds sometimes play with the published benchmark to improve
their relative performance. The benchmark is as much a part of the
game as the rest of the advertising.
That's a fairly cynical view. Do you have concrete examples of funds that
changed benchmarks for advertising purposes (as opposed to reflecting the
actual style of the fund)?

Fidelity Value may have switched benchmarks, but since its management fee is
performance-based, changes to its benchmark may be scrutinized by the SEC,
under the Investment Advisers Act of 1940, 15 USC 80b-5(b)(2) (requiring us
of an appropriate index).
http://www4.law.cornell.edu/uscode/html/uscode15/usc_sec_15_00000080---b005-.html

Further, this particular change was something approved by the shareholders.
Here's the proxy statement:
http://www.sec.gov/Archives/edgar/data/275309/000027530902000014/main.htm#ref16384

In particular, the proxy shows that Fidelity changed the benchmark to an
index against which the fund looked even *worse*, not better for the prior
2.5 years (2000 through July 2002).

If you scroll down a little, you'll see a graph showing the fund, the S&P
index, and the benchmark that Fidelity changed to. Right below that is a
bar chart showing that the new benchmark did better than the S&P 500 from
2000 on (making it harder for the Fidelity fund to beat the new benchmark).
 
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H

HW \Skip\ Weldon

I was under the impression that most brokers these days do
reinvestment of dividends thrown off by stocks for free.
Fidelity (my broker) certainly does, and considers ETFs to
be stocks. So my ETF dividends get reinvested w/o any commission.
That certainly would be a plus for Fidelity. While I do see instances
of automatic reinvestment, most accounts have the ETF and stock
dividends going to a cash fund with the investor having the option to
spend now or reinvest later. Those later reinvestments would involve
new purchases and a commission.

This points out the advisability of discussing this with your broker
*in advance* and seeing how receptive he/she is to automatic
reinvestments without cost. I suspect this will vary with how much
stroke you have with the broker (meaning the size of your account).


-HW "Skip" Weldon
Columbia, SC
 

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