Life Cycle and Target Date Retirement Funds May Be Simple, But They Dont Pay

Ill say this for life-cycle investing: For something that was supposed to be a simple trading strategy and fool-proof investment strategy, life-cycle funds like Vanguards STAR LifeStrategy and Target Retirement funds sure turned out to be complicated and fraught with problems, not the least of which were huge, unexpected losses suffered during the last bear market, which was the first bear for most life-cycle funds and shareholders.

By my count, Vanguard offers 14 different life-cycle funds. Fully 10 different Target Retirement funds (all but Target Retirement Income) are in the category of target maturity funds. Finally, there are the three Managed Payout funds with allocations that vary with the whims of the management committee that runs them.

All but one of Vanguards life-cycle funds rely heavily on indexing for their underlying investments. The Managed Payout funds do venture a bit further afield with investments in commodities, for instance, but they still are index-based. The variety of allocations Vanguard has built almost defies logic. So, why?

The answer is that Vanguard has simply been following the money and investor preferences. It turns out that investors in retirement plans such as 401(k)s have increasingly been sinking their money into targeted maturity funds rather than fixed allocation funds. People who dont want to think about their investments are really just putting it away and forgetting it.

This is lowest-common-denominator investing, and Vanguard loves it. For one thing, its attractive to folks who just arent interested in their investments. And once those investments are made, they stick. All fund companies like sticky assets.

Obviously, if you simply tell someone to pick the fund whose date most closely matches their expected year of retirement, youve made things ultra-simple. Vanguard hopes that, like the investors theyre intended for, many corporate 401(k) plans will pick up the Target Retirement funds as options for employees and then forget about them. Maybe the simple approach is simply what corporate benefits managers are looking for.

Whats missing, of course, is the ability for the investor to choose their allocation and the funds they will use to achieve that allocation and unless were in a bear market, theres little to no discussion of risks.

Before the 2008 bear mauled the markets, I had calculated risks for all of Vanguards funds based on the historical performance of the underlying portfolio components. It wasnt pretty, with many funds having the potential to lose almost 40% of their value.

Well, it got worse as time progressed. No wonder set it and forget it investors awoke with a start.

Investing in one of Vanguards many life-cycle funds is nowhere near the same as investing in a well-tuned portfolio of individual Vanguard funds geared to your objectives and risk tolerance. It may feel like youre doing your money some good by investing in a life-cycle fund, but in fact you could be spinning your wheels in simple investing strategies that dont pay off.