__Commentary on "Lifecycle Funds – When to (and not to) Use Them" (Original Article by Neil Frankie)_
by Kevin L. Coppola
Life Cycle funds continue their stay in the line-of-fire of the financial services community with this latest article appearing in the Wealth Pilgrim blog. These former “darlings” of the industry are suddenly not so attractive. The fact that life cycles, or Target Date Funds (TDFs) as you may know them, have many warts will come as no surprise to our customers as we published a white paper way back in 2007 outlining the inherent flaws in these – or for that matter – any approach to traditional asset allocation.
Understand that there is a very clear division amongst the financial community: Those that love life cycles because they are a money-minting machine for them (i.e., to those that SELL life cycle products), versus those that have clients whom they advised to invest in life cycles and who now have to explain the “whats” and “whys” of that now questioned counsel.
The author of the article highlights 3 reasons why life cycles are NOT a good choice for all but the very few – none of whom are future retirees which I assume means almost everyone.
First, life cycle funds don’t actually deliver what they promise, namely, the implication that by investing in a life cycle fund you will achieve Retirement Income Security. Why? Because they will always hold some percentage – and for most life cycle funds, a majority percentage – of their value in stock funds. So when stocks were taking a beating back in 2001, 2008, 2011, investors saw the MAJORITY of their accounts go down proportionately. So even those people who were “only” 10 years out from retirement, found themselves absorbing terrific losses at the worst possible time.
Second, the entire concept of a life cycle fund is contrary to the facts facing retirees, namely that actuaries give relatively healthy retirees 2 decades (or more) of life without employment income. As such, in order to ensure the investment return needed to deliver Retirement Income Security, the first move that most retirees will have to make if they want to ensure they don’t outlive their money is to move back INTO the so-called “aggressive” strategy of investing in stocks. This comes immediately after having followed the life cycle’s decades-long path of moving them OUT of stocks. What? Does this make sense to you?
The bottom-line is this: in order to achieve Retirement Income Security, you need to have investment returns that eclipse those possible following any traditional, fixed asset allocation approach, including life cycles. The solution to generating the level of returns needed is to take an ADAPTIVE and ACTIVE approach to monitoring the world and market around you and making moves at the appropriate times to ensure that you are going with—not against the market—as often as possible.
Kevin L. Coppola