Enter the effortless, stress-free option of Life Cycle funds. They are low cost and pay attention to you—not only what degree of risk feels best for you, but also your age. All you have to do is decide what is comfortable for you, pick your fund, invest your money and you are done. Then, you can pay attention to your life and let your money grow.
There are even other advantages. These funds are no slouch. They put your money to work where it historically has counted. Each pays attention to asset allocation, the process of combining stocks, both US and international, with bonds and cash. According to Markowitz, Miller and Sharpe, who won the Nobel Prize in 1990, this strategy accounts for 90%+ of an investors’ return. The funds also are diversified, another important investment concept, the equivalent of utilizing many stocks and bonds rather than just a few.
Now for the nitty-gritty. Reading this might be easier if you think about your potential return for doing it. Like, maybe lopping a couple of years off your planned retirement date because you invested your expendable dollars and made them grow, while you did nothing. Then, the extra money, gleaned through investment return, can be used for whatever you choose including retiring early.
Target Funds Life Strategy Funds
Simple to use
Simple to use
Modest fee for many funds: 0.2%
Modest fee for many funds: 0.26%
Maintains asset allocation which grows more conservative with age
Maintains asset allocation of your choice—does not become more conservative as you age
Life Cycle funds are divided into two categories, strategy and target. These subdivisions are not only straightforward, but also their names pretty much indicate what they do. Strategy maintains investments appropriate for your risk tolerance* until you take your money out. Target funds change proportions of the investment categories with time and become more conservative as you age so that you have ready monies at retirement. If you are young (less than 35 years of age) a life strategy alone might work for you. As you age though (more than 35 years of age) adding a target fund is a good idea and in an increasing proportion as you reach retirement age. There are many target and life strategy funds available including the lower cost Vanguard, Fidelity, and T. Rowe Price.
When you invest in a Strategy fund, you pick the tactic that fits your needs and the fund maintains it for you. There are generally four to select from-- income, conservative growth, moderate growth and growth. In choosing which is best for you, remember that bonds are considered less risky than stocks and that generally US stocks are considered less risky than international stocks. For example, let’s look at the Vanguard options. This fund company offers life strategy for the most conservative investor (top below) to the least (bottom below):
Life Strategy Income Fund—30% stocks, 50% bonds, 20% short term reserves (like cash).
Life Strategy Conservative Growth—50% stock including international, 30% bonds and 20% short term reserves (like cash).
Life Strategy Moderate Grow—70% stocks, 30% bonds.
Life Strategy Growth Fund –90% stock including international, 10% bond.
Notice that the top most conservative fund contains 50% bonds whereas the bottom least conservative contains 10% bonds. This is because bonds are generally considered the least risky component of an investment portfolio so they are a major component of a conservative one. The two funds that are sandwiched between the least and most conservative contain a figure mid way-between 10 and 50% bonds, 30%.
A cautious or older entrepreneur may choose the more conservative funds in an effort to sleep at night. This person is fearful she will lose money in an economic downturn and this possibility is less likely with conservative funds. The older person, who is nearing retirement, can’t afford to lose money when she is about to retire because then she won’t have money available to her when she needs it. Therefore, the older entrepreneur has to be more conservative.
Others feel more comfortable with the less conservative funds, knowing that historically they tend to bring a better return over time. Alternatively, if you are the type of person who cannot decide which camp you are in, an investment advisor may be more suitable for you.
Most people invest in target funds because they are building their next egg for their golden years. Target funds become more conservative as the investor reaches retirement age. The target date for the fund is the date at which you plan to retire. For example, if you are 43 years of age and plan to retire when you are 65, you could safely choose a target retirement 22 years from now, which would be 2030. If you are 50 years of age and plan to retire when you are 60 years of age, you would want a target 10 years from now. Therefore, you would have to split you target between 2015 and 2020.
With each of these target funds, the percentage of bonds increases as the fund gets closer to your retirement date. Again, this is because bonds provide safety from the fluctuations of the market. In this way, you know you will have ready monies when you do retire. The Vanguard target funds below go from eminent retirement (top, 2010) to a distant retirement date (bottom, 2025):
Target Retirement 2010: 54% stocks including international, 46% bonds.
Target Retirement 2015: 63% stocks including international, 37% bonds, 5% short term reserves (including cash).
Target Retirement 2020: 71% stocks including international, 29% bonds, 12% short term reserves (including cash).
Target Retirement 2025: 78% stocks including international, 22% bonds and 14% short term reserves (including cash).
This is the type of pattern that continues through 2050 every five years. Stocks go up in the portfolio as the target date lengthens. Conversely, they go down as the target date shortens. In other words, as the entrepreneur reaches her target date, the mangers of the portfolio will automatically make it more conservative (more bonds) for her every five years.
There are some downsides for the life cycle funds, but for a person with little time, they are minor in my opinion. One is that “One size fits all.” They also tend to be under weighted in certain areas like small stocks. In addition, they don’t contain any real estate and other investment classes that could lead to a better return over a prolonged period. Nevertheless, the convenience is attractive, and in many cases, better than other more costly options for the time starved entrepreneur who wants to invest and needs straightforward options.
*The risk tolerance I referred to indicates your comfort level with the relative safety, or not, of your portfolio. In general, a portfolio with more bonds is considered safer than one with fewer. This means it fluctuates less with market ups and down. The reverse is also true.
Copyright 2008 Shirley M. Mueller; MyMoneyMD
Easy Investment Ideas for the Time Starved Entrepreneur - To learn more about this author, visit Shirley Mueller's Website.
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Shirley M Mueller turned every doctor's
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