Investors Fail to Use Lifecycle Funds Properly

Rather than using lifecycle funds as they are intended - a way to achieve broad diversification and periodic reallocations with the broad stroke of a single investment - many investors are using them as a part of their portfolios, Vanguard found, according to an AP report. Worse yet, some are laddering their investments in multiple lifecycle funds.

In "How America Saves 2005," Vanguard found that while they are intended to be the sole or core holding in an investor's portfolio, "actual participant behavior is at odds with this goal, with many participants using lifecycle funds as just another part of their overall portfolio."

Twenty-nine percent of investors in lifecycle funds use them properly, as an all-in-one investment, but 49% combined a lifecycle fund with one or more equity funds and the remaining 22% invested in multiple lifecycle funds.

For all the popularity of lifecycle funds, Vanguard concluded, it appears that more than 70% of investors do not understand their intended use. Fidelity Investments has also found this to be the case. An article on the company's website notes: "Lifecycle investing can only really do the job for investors if it is used as the core strategy for most of the assets being earmarked for a given goal. Allocating a small portion of assets to a lifecycle investment program will neither provide the diversification nor the age-appropriate risk exposure that is so critical to this way of investing."

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.