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Lifecycle Funds: Cruise Control for Your Investing Strategy

Matching your asset allocation to your time horizon is one of the most basic investing principles, but many
investors either forget or neglect it. How you divide your assets among stocks, bonds, and cash based on
your risk tolerance and time frame has an enormous impact on your investing results.
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Advantages of the lifecycle approach ...

If the idea of rebalancing your portfolio yourself periodically makes you yawn or if
the thought of making investing decisions on your own is overwhelming, a lifecycle
fund keeps the process simple.
Asset allocation is critical to your long-term returns. The automatic asset allocation
of a lifecycle fund may give you a better chance of achieving a long-term goal than
if you tried to go it alone without investing experience or good financial advice.
(However, remember that diversification alone doesn't guarantee a profit or insure
against a loss.)

... and the disadvantages
A lifecycle fund doesn't take into account your individual financial situation, including
any tax concerns.
If you have other investments outside a lifecycle fund, you may need help from a
financial professional to achieve an appropriate overall asset allocation for your
portfolio.
Don't be fooled by look-alikes
A lifecycle fund--sometimes called a target maturity fund--attempts to tailor your
investing strategy to your time frame for a particular goal, such as retirement. For
example, if you plan to retire in 2020, you might choose a fund with a target maturity
date of 2020. Between now and then, the fund will gradually shift its asset allocation.
The closer the target date, the more conservatively the fund would invest. A lifecycle
fund with a target maturity date of 2040 would be likely to have a much higher
percentage of its assets in stocks now than a fund targeted at 2010 would.
A lifecycle fund doesn't take into account your individual financial
situation, including any tax concerns.
If you have other investments outside a lifecycle fund, you may
need help from a financial professional to achieve an appropriate
overall asset allocation for your portfolio.
Don't be fooled by look-alikes

Just because a lifecycle fund targets a particular time frame
doesn't mean your choice is a slam dunk. Even if they have the same target maturity
date, lifecycle funds from various companies may have very different approaches to
achieving their goals. Most take a "fund of funds" approach, investing in an assortment
of stock or bond funds from the same fund family. However, the number of funds used
can vary widely. One series of lifecycle funds may use only one or two stock funds,
while another may include many more funds that invest in more narrowly defined categories of stocks. The
selection may include index funds, actively managed funds, or some combination.

Also, the asset allocations used to target a particular date vary widely. An aggressive allocation for one
portfolio with a 2040 target date may have a significantly greater percentage of stocks than another. Another
important difference among funds is the way asset allocations are shifted over time, particularly after the
target date has been reached. Some reach their most conservative allocation at the target date and then
keep those percentages static. Others continue to become more conservative after the target date is
reached.

Hang in there

With lifecycle funds, it's particularly important not to jump in and out of your choice in response to market
changes. The fund's objective is a long-term one, and short-term moves undercut its overall strategy.

Check your assumptions

Just because a lifecycle fund has a certain target date doesn't mean it's necessarily the right choice for you.
People are living longer, and you may need a more aggressive allocation to provide a sufficient nest egg.
Your financial professional can help you estimate your needs and gauge what strategy is most likely to meet
them.
The 401k Dr
Martin S Schneider
a Licensed Investment Advisor
5677 Water Spring Way
Mason, Ohio 45040
877-401KDOC (5362)
fax: 877-401-5362
martin@the401kdr.com
www.the401kdr.com