What did Clark Howard say about lifecycle funds?

October 3, 2011 7:33 AM

Clark Howard fans--If you watched last week's show, what was his advice on diversification with lifecycle mutual funds?

I've been wondering for a while if putting all of my 403b and IRA money into a "Lifecycle Fund" was enough diversification. Then, in a bout of insomnia, I watched part of Clark Howard's show at 5am on Saturday night and saw that someone was asking my EXACT question. Stupid me, I fell asleep again before I heard the answer.

Long story short, does anyone recall what his advice was or know of transcripts available online? There doesn't seem to be a rerun scheduled on HLN.

Alternatively, if you just want to weigh in on the question of diversification with lifecycle funds, that would be good, too.

posted by parkerjackson to work & money (2 answers total)

There are bunches of lifecycle funds out there, so YMMV, but they typically offer plenty of diversification. The Vanguard funds, for example, usually offer some combination of Vanguard's Total Stock Market Index (which is basically every stock in the US), Total International Stock Market Index, and a variety of bonds.

You don't need more diversification than this.
posted by griseus at 7:50 AM on October 3, 2011

parkerjackson: "Alternatively, if you just want to weigh in on the question of diversification with lifecycle funds, that would be good, too."

I've come to the conclusion that they're generally a loser investment. I mean, anything that the banks lobby to make a default investment has to be, amirite?

More seriously, they're a less than perfect investment. Firstly, they're a fund of funds. This means they take your money and allocate it to other funds you could have invested in yourself. In the Lifecycle funds I've looked at, the expense ratios are higher than you could choose for yourself. So they're already guiding you into less than optimal investments. It also provides an opportunity to double dip on expenses, tacking fees on on top of the fees you're paying to the underlying investment. They also make it really hard to decipher, with diversification buys of like .1 percent in foreign markets.

There's also a question of whether the core principal of lifecycle funds, the shift from equity to bonds, is of merit. I've seen a few papers arguing that a static mix provides equal or better performance. I've seen one economist suggest that the glide path hurts rather than helps, as if you assume a 10 percent rate of return on the market, you're sacrificing 5 percent or more of your total retirement balance by investing only in bonds.

Now if your question was whether you should diversify by buying different lifecycle funds, the whole point of these mutual funds is to diversify for you. Technically speaking, diversification only works on uncorrelated returns, and I'd be surprised if the different funds were all that uncorrelated.
posted by pwnguin at 6:59 PM on October 4, 2011