CNN/Money 
Retirement
graphic
Wanna simplify your nest egg?
If you don't enjoy investing, here are two ways to streamline your work.
December 17, 2003: 8:36 AM EST
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) When it comes to managing investments in your 401(k) or IRA, would you say you're:

A) too busy?

B) confused?

C) fed up?

If you're like a lot of people, you answered "yes" to one or more of the above.

All you know is you don't want to dine on cat food decades from now and you're willing to save money to fund your future. But beyond that, you wouldn't mind the portfolio equivalent of a set-it-and-forget-it strategy.

Well, there's nothing quite that simple, but there are ways to streamline your portfolio.

One-stop shopping

The simplest way to streamline is to invest your money in what's called a life-cycle fund. About 55 percent of Fortune 500 companies offer them in their 401(k) plans, according to a 2003 survey by Hewitt Associates.

There are two types, both of which offer diversity by investing in a host of funds from the same fund family. Their main theme is an asset allocation (investment across different classes of stocks and bonds) that's appropriate to one's time horizon and/or risk tolerance.

The first type of life-cycle fund offers a static asset allocation and is billed according to a fund's investment objective. For example, Vanguard LifeStrategy Growth Fund (VASGX) puts 87 percent of its assets in stocks and over 12 percent in bonds.

YOUR E-MAIL ALERTS
Follow the news that matters to you. Create your own alert to be notified on topics you're interested in.

Or, visit Popular Alerts for suggestions.

It invests in four Vanguard index funds (Total Stock Market Index Fund, Asset Allocation Fund, Total International Stock Index Fund, and Total Bond Market Index Fund) and is geared toward investors with a long time horizon who are seeking maximum growth in their investment.

Vanguard also offers three other LifeStrategy funds with more conservative allocations -- that is, a higher bond weighting.

With static allocation funds, the onus is on you to move your money into increasingly conservative funds as you approach retirement.

You're relieved of that responsibility in the second type of life-cycle fund, which is often called a target maturity fund.

Target maturity funds, identified by the year in which you aim to retire -- for example, Fidelity Freedom 2020 (FFFDX) or Vanguard Target Retirement 2025 (VTTVX) -- offer an asset allocation that automatically shifts and becomes more conservative as you near the target year.

So, for example, T. Rowe Price Retirement 2020 (TRRBX) currently allocates 61 percent to U.S. stocks, 15 percent to non-U.S. stocks, 18 percent to bonds and 5 percent to cash. The allocation to bonds and cash will increase as 2020 approaches.

As simple as they sound, not all life-cycle funds are alike. Here are three things to consider:

Asset allocation: Two funds with similar target dates may have different allocation strategies, said Kerry O'Boyle, a fund analyst with Morningstar.

For instance, Vanguard's 2025 fund has only 60 percent of its total portfolio in stocks, which may be too conservative for someone with a time horizon of 20-plus years. By contrast, T. Rowe Price's Retirement 2020 allocates more than 75 percent of assets to stocks.

Strong bones: Since life-cycle funds typically invest in the funds of their own fund family, make sure you're using top names. "It's as much about picking a solid firm," O'Boyle said.

But even solid firms can have dud funds. So make sure your life-cycle fund is investing in funds that have good performance track records and below-average expenses, since your annual expense ratio will be based on the expense ratios of the underlying funds and high expenses can eat away at returns. (Check a fund's prospectus to find out the expenses you'll be charged.)

Expenses: The average expense ratio for lifecycle funds is 1.5 percent, according to Morningstar. But O'Boyle believes that's much too high and that you should never pay more than 1 percent for such a fund. Vanguard has some of the lowest-cost life-cycle funds.

Most life-cycle funds don't have a track record longer than five years and some have much less than that. But because of their diversified allocations, their returns aren't likely to beat out an all-stock fund or a stock-index fund over time, O'Boyle said.

At the end of the day, he added, "I think (life-cycle funds) are a good idea for a beginner." And they may even work for some battle-weary investors, too, since the fund automatically diversifies your investments thereby preventing you from chasing performance, he added. "They discourage bad habits."

Index your way to simplicity

If you'd like a bit more control over your portfolio, but you don't want to fuss over it more than once a year, if that, then you might opt for an indexing strategy.

Index funds, which track the performance of a given stock or bond index, are an inexpensive to diversify your portfolio. Their expense ratios tend to be much lower than actively managed funds. And they're tax-efficient since index managers don't do a lot of trading. (Tax-efficiency is more critical for your taxable accounts than it is in your 401(k) or IRA, which are tax-deferred.)

RELATED ARTICLES
graphic
Index it and forget it?
Are all index funds created equal?
The virtue of ETFs
Money 101: Hiring financial help

The simplest approach is to figure out what your stocks-to-bonds mix should be given your time horizon, and then buy a total stock market index fund tracking the Wilshire 5000 Index as well as a total bond market index fund tracking the Lehman Aggregate Bond Index to match those allocations. (For help finding out your best allocation mix, click here.)

The other way to index is to buy exchange-traded funds (ETFs), which are funds that trade like stocks. These are best held in accounts that you're not contributing small amounts to on a regular basis, however, since you'll pay a commission for each trade.

You'd be better off investing this way if you invest in increments of $10,000 or more, since the cost of doing the trades would be the same or just slightly more than if you were investing $100. (For more on how ETFs work, click here.)  Top of page




  More on RETIREMENT
5 steps to making sure you're ready to retire
The best way to boost retirement income
Why are women only saving half as much as men for retirement?
  TODAY'S TOP STORIES
7 things to know before the bell
SoftBank and Toyota want driverless cars to change the world
Aston Martin falls 5% in its London IPO




graphic graphic

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.