In the myriad of ways to invest your money, one touted to young people is to invest in a lifecycle fund. Essentially, you go to Charles Schwab and say, “I’d like to retire at the age of 60.” Chuck says, fine, and you hand him your money. If you’re 20, then he creates a more aggressive portfolio (more stocks), and as you get closer to 60, your portfolio becomes more and more conservative. All you have to do is continue to put money into the fund. Ramit Sethi, who writes the awesome personal finance blog, “I Will Teach You to be Rich,” loves these things, and he recommends them to young people almost universally. You can watch him talk about them in this two-minute youtube clip.
A fund you never have to worry about re-balancing that is perfectly suited to your retirement goals? Sounds great, right? Well, an interesting post from seekingalpha.com, an in-depth market-analysis site, argues that lifecycle funds have several shortcomings, the first of which is assuming that age should be the only factor when deciding how to balance your portfolio. Other factors, such as one’s 401(k) or IRA, one’s nest egg, and one’s health and job must also be considered. Another issue is cost: The average fee for a lifecycle fund is around 2.5%, which over a span of 40 years can really add up.
Investing in stocks is still important, however, especially for younger folks, but for those of us that cannot or chose not to spend hours a day poring over balance sheets or searching for the next hot stock pick, what is the answer? The answer seems to be low-cost index funds or exchange traded funds (ETFs). These funds are composed of every stock that is included in a certain market or stock exchange (e.g., by investing into an S&P 500 index, you are investing in all 500 companies included in the index). Markets tend to beat individual investors about 80% of the time, and the fees for these funds are around 0.5% (much better than the 2.5% of a lifecycle fund). By spending a little more time on research, you can save a lot of money on fees.
Obviously, there is a lot more to be said about both lifecycle funds and ETFs, and I am sure this blog will come back to them in the future. In the mean time, has anyone had any personal experience with either of these investment strategies that they would like to share?