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Author: NutellaBear Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: Lifecycle Funds Retirement Accounts Date: 1/16/2008 11:01 AM
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Hello, I a new here and my name is Tim. I wanted to get some opinions about possible ways to handle Lifecycle Funds in retirement accounts.

I moved my account funds to one of the Lifecycle Funds about two years ago. These were new options recently added to our investment options and it seemed a good idea.

Normally, they suggest that you select an investment mix based upon the date of your anticipated retirement. I listened to that but I viewed it a little differently and chose one of the funds based upon the investment risk I was willing to live with regardless of the date I expected to retire. This seemed a good rational because from what I've read it seems these funds are very conservative in their investment strategies.

What I am questioning right now is whether it is a good idea to change to one of the less risky Lifecycle Funds for the time being since there seems to be a lot of volatility in the markets right now. I know market timing is usually a bad investment strategy and that the short term is meaningless. But with the markets seemingly making significant corrections lately I am questioning whether I wouldn't be making some adjustments today to my investment ratios if I was investing in individual funds.

Does it make sense to downgrade the amount of risk I am willing to take in the short, one to two year term?
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Author: joelxwil Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61006 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/16/2008 12:41 PM
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The short term is not meaningless: avoiding loss in the short term means that you have more money to invest in the future when the market looks better. Similarly, taking profits when the market begins a decline means that you have more money than if you rode out the decline.

Besides, the market does not always come back. Look at the Nasdaq, which once was more than twice what it is now.

I am very pleased to have gone to Treasuries some time ago.

Also, one to two years is not short term. A lot can happen during that time, such as having the S&P down 40%. If we do go into a recession, it may take that much time for it to play itself out.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61007 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/16/2008 3:46 PM
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While Joel is correct, I would disagree with that advice when it specifically relates to a lifecycle or target-date retirement fund - especially for someone that is still working, making consistent additions, and for someone - as most 401ks are - that is restricted from active trading in their account.

A lifecycle fund should be broadly diversified and should currently be down much less than the S&P, and even less so when compared to something more aggressive (and in my opinion not well diversified) as the NASDAQ. All aggressive asset allocation funds (basically the same as lifecycle funds without the trend toward greater conservancy) are down less than the S&P and the DOW. Last year, only the most conservative grew less than the S&P.

In my opinion, you may be too late to make significant changes. You already rode it down by 10%. We may fall further but you only lose when you sell so selling now is the surest way to guarantee a loss. Going more conservative now will not give you the opportunity to regain whatever you have lost so far.

My assumption is that you will be invested for at least the next 20 years. If that is true, why make significant decisions today based on information that represents less than 1% of that time frame?

Personally, as someone that has a 20+ year timeline, I plan to be even more aggressive this year than I was last year. At some point, this is going to look like 2003 all over again. When the DOW fell from 12k to 8k, I really didnt care if I bought in too early when it was still 9k with a 1000 more points to fall. My belief remained that I would ride it back up regardless - and I would rather be in than out when it happens.

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Author: NutellaBear Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61009 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/16/2008 4:39 PM
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Well, so far one yes and one no! :)

My actual retirement horizon is actually 15 years. The choices I have are "Income Only", 10 years, 20 years, 30 years, and 40 years. I chose the 30 year Lifecycle Fund. The main difference seems to be how much the fund is invested in Government Securities. Bond investments seem pretty constant in all the funds. The 30 year fund is already in Government Securities 18 percent.

If I was going to do it myself I'd probably pick more bonds and less Government Securities.

Hummmmm.....

/Tim

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Author: iamdb Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61019 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/17/2008 3:56 AM
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Tim,

What you're talking about is market timing, and there has been ample discussion of that on the web. The consensus seems to be that it's usually a loosing strategy, but there are always some like Joel who claim to have a clear crystal ball that guides them in such timing. Sound advice seems to be to develop an asset allocation that makes sense for your situation and stick with it.

db

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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61021 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/17/2008 3:33 PM
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My actual retirement horizon is actually 15 years.

I kinda disagree with the whole Lifecycle Fund concept. You can easily do what they do by yourself. Have one bond fund and one S&P500 index fund, and pick your desired asset allocations. Easy and cheap. I've heard (but not bothered to check myself) that many of these Lifecycle funds have higher fees than the bond & index funds. If that's the case, why pay an extra fee for something that is trivial to do yourself?

Actually, with 15 years to go before retirement, you should be 100% in equities anyway.

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61024 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/17/2008 3:51 PM
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>> I've heard (but not bothered to check myself) that many of these Lifecycle funds have higher fees than the bond & index funds. If that's the case, why pay an extra fee for something that is trivial to do yourself? <<

Keep in mind, though, that most TMFers are very "hands on" with respect to their investing and are probably less likely than the general public to want to put their portfolio on "auto-pilot" for 30-40 years.

Usually the lifecycle funds only add 5-10 basis points above the underlying funds. For someone who's not inclined to tinker with their own allocation as they age, that's really not too high a price to pay.

The real issue is that lifecycle funds usually use a lot of managed funds, so their expense ratios (total, including underlying fees) are usually closer to 1%. If they used more index funds in their allocations, the expenses could be very low. Vanguard, for example, uses index funds in their lifecycle funds and their total expense ratios are about 0.2%.

#29

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61027 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/17/2008 5:10 PM
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I kinda disagree with the whole Lifecycle Fund concept. You can easily do what they do by yourself. Have one bond fund and one S&P500 index fund, and pick your desired asset allocations. Easy and cheap.

The Target Retirement funds at Vanguard are a mix of 5 - 7 index funds, including several international funds (European, Pacific, Emerging Markets). At Vanguard, each index fund has a minimum investment of $3k. And with some of the percentages being less than 3%, you would need a minimum of $100k - $200k to 'mimic' the same asset allocation model. So, not so cheap.

I've heard (but not bothered to check myself) that many of these Lifecycle funds have higher fees than the bond & index funds. If that's the case, why pay an extra fee for something that is trivial to do yourself?

Well, it might be good to check. At least in Vanguard's case, they're very comparable. The fees are 0.19%, which is a bit over the S&P 500 Index fund investor shares fee of 0.15%, the same as the Total Bond Market Index fund of 0.19%, and less than the Total International Stock Index fee of 0.27%.

Since that's the case, why not have someone else do the reallocations, as long as the fund fits closely with your desired model?

Actually, with 15 years to go before retirement, you should be 100% in equities anyway.

Well, that's one view. Personally, I like an allocation that has a bond component, to cut down a bit on the volatility.

AJ

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Author: Lea77 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61030 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/17/2008 8:12 PM
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It sounds to me like the original poster is talking about the federal government TSP program's LifeCycle funds, which are supposed to have pretty low fees and are made up of the same 5 funds available, just with them picking the percentages of each fund.

I'm not sure if I should create another post, but I was actually wondering if I should put all of my new money this year into the International Fund or otherwise change my current allocation (10% "G", 30% Common Stock, 30% Small Caps, 20% International). I'm actually not sure if this is the best plan at all, but that's what I've got. Of course, everything is down now but I haven't moved anything. I'm at least 30 years out from retirement.

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Author: Rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61034 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/18/2008 12:09 AM
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Actually, with 15 years to go before retirement, you should be 100% in equities anyway.

Well, that's one view. Personally, I like an allocation that has a bond component, to cut down a bit on the volatility.


Yeah, it takes differences of opinions to make a market. Or a horserace.

With 15 years to go, volatility is your friend. IMHO. The time for lesser volatility is when you are retired and withdrawing from your portfolio, not when you are growing it.

Hit up this S&P500 chart: http://finance.yahoo.com/q/bc?s=%5EGSPC&t=my&l=on&z=m&q=l&c=

1973 to 1975 sucked, as did 2000 to 2003. But note that the peak in Sept 2000 of 1550 was reached again in Jul 2007, albeit with a drop down to 850 in Sept 2002. Pick any 15 year period and the overall gain is good, even though there were drops in the interim. In fact, take any 15 year period, and show your wife/mother/yourself only the beginning and ending values--without showing them any intermediate values--and see if they like the gain.

If you are investing a fixed amount of money with each paycheck, those drops are good for you, because you buy more shares at the lower price. For example, in Jan 2003 I decided that the bear market was probably just about over, so I bumped up my 401(k) contribution from 6% of my salary to the max (20% up until the dollar amount ceiling which I hit near year end). It dropped from 950 down to 825, and then marched upward to 1560. Each share that I bought at the bottom is worth almost twice that much now. Heck, I wished that it had stayed at 825 for the whole year, instead of rising to 1100.


...some of the percentages being less than 3%...
IMHO, such a small allocation is meaningless. It's just too small to make any significance in dollar terms. Also, I doubt that you need "several international funds" in a decent allocation. One should be good enough. Additional ones are mainly to impress the yokels with razzle-dazzle.

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61037 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/18/2008 7:14 AM
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You are asking about Market Timing - perhaps you have some magic knowledge or ability, but a whole lot of studies over a whole long time say market timing may win in the short term sometimes, but it looses the vast majority of times over a period of 10 or more years.

I would suggest there are other aspects of Lifesytle accounts you might want to look at. Take the LifeSytle accounts at T Rowe Price and Vanguard as an example. If you compare the 2020 and 2030 funds you will notice huge differences in allocation. Life a factor of two on the portion of equities between the firms. Many 65 year olds will live 95 years - so the idea of planing for a 10 or 15 year retirement is dangerous to your financial health.

You need stocks probably more then 50% to keep up for a 25 to 40 year retirement. So take a look at where your funds are and will be. What is the allocation for a 2010 or 2015 account? Assume that retirement will be more conservative - does that look reasonable for 25+ years? What I am saying is you may decide even though your retirement date is 2025 you would be better off with a 2030 or 2035 fund in some families.

As always watch fees. There is good reason a more aggressive (i.e. 2035) fund will require more work/costs than say a 2010/2015 fund.

Gordon
Atlanta

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Author: Dwight103 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61040 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/18/2008 9:24 AM
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I've been a member for a few years, but this my first visit to the boards, and my first post (as far as I can remeber anyway). This thread is very close to the reason I checked the board, I'm wondering about the Vangaurd Target retirement funds. My 401k is restricted to Vangaurd funds and the Target funds were just added to the mix this year. I've had the bulk, close to 100%, of my money in an S&P index fund, and I'm wondering if the Target funds are a good choice. reading this thread, I the Vangaurd Target funds are probably a good choice, but now I wonder how to get into them. Should I just move the whole of my funds into the Target fund today, or does it make more sense to move a little bit each month over the course of the year, or should i wait until the S&P moves back up a bit?

Thanks in advance for any help. Oh yeah, I'm 48, plan to work until 65, and I'll be back on boards for next 40 years or so... with any luck.

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61041 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/18/2008 9:34 AM
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>> Should I just move the whole of my funds into the Target fund today, or does it make more sense to move a little bit each month over the course of the year, or should i wait until the S&P moves back up a bit? <<

Moving all of it out of a stock index and moving it into a target fund appropriate for a 48-year-old would probably mean selling 20-30% of your stock into a down market. The one positive is that you'd also be better diversified, getting exposure to small cap and international as well. But you'd also be selling a lot of stock (low) and moving it into bonds (high).

>> Oh yeah, I'm 48, plan to work until 65, and I'll be back on boards for next 40 years or so... with any luck. <<

Assuming this is the case and your health holds up, I'm really not sure you need much of a bond allocation yet, as your time horizon to retirement is still 17 years away. I would like to see you include a small cap index fund and an international index fund, though, something like 50/25/25 or 60/20/20 in S&P 500, small caps and internationals. Once the market recovers some, I'd consider selling a little to establish a 10-20% stake in bonds (or exchange it all for a target fund for 2025 or 2030 if you'd rather go low-maintenance).

#29

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61047 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/18/2008 11:41 AM
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I would change future contributions and leave your current allocations alone until your S&P index gets a chance to recover.

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Author: vickifool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61048 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/18/2008 11:44 AM
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Dwight,
Welcome to the boards!

My 401k is restricted to Vangaurd funds and the Target funds were just added to the mix this year.
You are fortunate. Most 401ks don't have choices that good.

S&P index is good. (It's not that different from the Total stock market, however.) Target funds will reduce the volatility, and may or may not do better over the long haul.

Taking a look at Target 2025, it has about 20% bond fund, and 15% foreign. You don't need bonds with almost 20 years to go to retirement except for maybe the sleep factor, and bond funds leak value compared to holding bonds themselves (although Vanguard can get some really good deals, I'll bet.) The foreign bit may do very well, but might not--I'm putting more in these days myself.

All of your choices are good, so don't fret too much about which way you go.

Vickifool

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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61049 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/18/2008 12:04 PM
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While the comments by Vickifool and Hawkin are correct, I would change today into as far out of a Vanguard Target Market Fund as I could tolerate.

1. There's never too bad a time to get into a better asset allocation IMO, and Target Market Fund is better than just a S&P 500 fund.

2. While the S&P 500 fund does have a lower cost it is less volitle these last 8 years (lower ups and downs) because it doesn't have exposure to mid- and small-caps. These will be hit hard now, BUT long term they are a better asset allocation. Hence Vicki's advice is good to go with a Total Stock Market Index IMO.

3. The S&P 500 does have exposure to foreign investments because these large cap US companies do. But in our global world you need more exposure to the companies that Vanguard includes.

Could you fare worse by doing this. Yes, I think the S&P will bounce back first, but I also think the broader diversification is more important. I'd bet on the broader diversification, especially long-term, but no one can predict the short-term.

Could you pick a better allocation by doing it yourself within Vanguard? Again, probably yes, but this is a very good start AND you shouldn't move forward with individual funds until you more fully buy into your own "model" allocation.

No bad decisions with any of these choices. This is what I'd do and have done.

Hockeypop

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61052 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/18/2008 4:39 PM
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The idea of moving a little at a time vs. moving it all is just another version of market timing. Over long periods of time, the target funds will go up faster than the S&P. In any short period, it is a crap shoot. Frankly right now I would move it -- yes the stock market will go down and with it the S&P. But your LifeCycle fund probably has some foreign stock/bond exposure. So the decreasing value of the dollat will be a gain.

You can and should visit Vanguard.com and look at the composition of the various Vanguard Life Cycle Funds. You will see they a composed of other Vanguard Funds. Myself, I drilled down into the underlying funds to determine both holdings and fees. For Vanguard 2025, see:

https://personal.vanguard.com/us/funds/snapshot?FundId=0304&FundIntExt=INT

The Holdings tab, https://personal.vanguard.com/us/funds/holdings?FundId=0304&FundIntExt=INT

Shows a much more diversified holding than the S&P index.

Even if your retirement date is 2025, there is no "rule" saying you must choose the 2025 -- choose 2035 or 2015 if those more closely match your investment needs.

I suggest you compare the Vanguard funds to T Rowe Price. I found the Vanguard a bit more conservative than my desires. I would assume you can switch from 2035 to 2025 in a few years if you want.

Do some reading at the Vanguard website -- they have lots of good advise and information.

Gordon
Atlanta

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Author: Dwight103 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61092 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/19/2008 8:41 PM
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Thanks everyone... for all the things to think about. Now I'm going to think for a bit, read for a bit, but I'm going to act pretty soon. I'm going to go to Vangaurd's site and see how the target funds have been performing relative to the S&P index fund. If they've been moving up as well, but seem to hold better on the way down, then I'll feel better about making the switch. However, if they haven't recently fallen as much as the S&P, than I'll be buying fewer shares with my precently lower priced S&P shares.... oh, oh it's all so tricky. Anyway, I've got some work to do.

Thanks all. I'll be watching these boards. I figure it won't take more than a few years to get a little better at retirement investing. Funny how I didn't care much about this when I was younger... who'd a guessed?

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61097 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/19/2008 10:37 PM
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Dwight there is nothing wrong with looking at the comparisions. But do not be influenced by the last few weeks. Look at as long a period of time as the data allows. You are going to be at this for longer than a few years.


If you look at the Vanguard site, they have the ability to compare any of their funds with others -- There is an S&P index fund at Vanguard, so you can get a comparison.

Gordon
Atlanta

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Author: NutellaBear Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61145 of 76237
Subject: Re: Lifecycle Funds Retirement Accounts Date: 1/22/2008 1:37 AM
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Yes, I am a TSP'er but I wanted to phrase my question in a way that might be useful to others. I think MF likes the TSP program a lot. I guess a disadvantage is that you are limited in what you can select. I wish I could more closely follow some of the investment suggestions made on MF. I am also grateful though for what I have, because a lot of people have nothing from their employers these days. Nothing or "somethings" that stink.

/Tim

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