Life cycle plans to revolutionise
retirement planning
Some shoppers know when and where to hunt for bargains, while others act on impulse with no plan. Likewise, some investors enjoy researching and selecting funds that fit their investment objectives. Yet others lack the slightest clue as to which funds to choose, from the ever-expanding array of options.
Enter the era of fund-selection simplification. "Life
cycle" funds do the work for you. Like an asset allocation
fund, a life cycle portfolio mixes its investments among stocks,
bonds, and money market instruments.
Life cycle funds are marketed to investors according to their
ages or risk profiles.
Some relieve you of having to make any further investment decisions until you reach your golden years by automatically switching into increasingly conservative investment mixes with the passage of time. Others give you the responsibility of switching from more aggressive funds to more conservative ones as you progress through your life cycle.
Life cycle funds are relatively new and are expected to be introduced
in the Caribbean soon. Currently, investors consult with their
brokers who adjust their clients investments over time to achieve
the same result. 
In the US, life cycle funds total just $4 billion of assets, and
none can boast as much as a three-year performance record. Several,
however, sport credible short-term track records. Dreyfus LifeTime
Growth tops the list, boasting a 23% return over the last twelve
months versus 20% for the average stock fund. Runners up include
Price Personal Strategy Growth (up 19%) and Oppenheimer LifeSpan
Growth (up 18%), whose bond and money market holdings produce
a drag on performance. But those fixed-income holdings also reduce
risk. As a result, life cycle portfolios fell an average of just
5% during the mid-1996 mini-correction versus 7% for the S&P
500.
All life cycle funds emphasize the importance of asset allocation
in achieving financial goals. But allocation strategies vary significantly-
some are options of larger funds.
Life cycle funds with target retirement dates, don't require investors
to make any investment decisions after they sign up. Their asset
classes gradually and automatically shift into more conservative
positions as the indicated retirement year approaches. Investors
in funds whose names suggest risk levels - e.g., "Growth"
or "Conservative Growth" - must manually switch into
more conservative portfolios as they age and their investment
goals change.
Steve Savage, editor of Value Line Mutual Fund Survey, believes
life cycle funds featuring a target retirement date in their names
provide a valuable service to investors. "It relieves the
investor of the burden of having to reallocate his assets periodically,"
he says.
Many life cycle funds, however, loosely establish investment parameters
within asset classes. For instance, the stock component of Time
Horizon Portfolio 3, designed for investors planning to retire
around 2025, can vary from 40% to 100%; the bond component, from
0% to 60%.
"I don't mind managers actively managing within [prescribed]
sectors and trying to add some value and maybe modestly over or
underweighing some of the allocations among those sectors,"
says Savage, "but I don't want managers making big calls
on asset classes and big shifts in and out of asset classes based
on their forecast for which class is going to outperform."
Morningstar analyst Cebra Graves observes that the life cycle
fund approach to investing has its good and bad points.
"They're off the rack, versus the tailored suit," he
says.
"Nobody fits exactly one of these portfolios. At the same
time," he adds, "these funds are accessible to all investors.
"It used to be that asset management was only available to
the rich. Mutual funds have democratized it."
The bottom line is that since life cycle funds vary so much, you
still can't completely avoid doing research to find the ones to
fit your investment goals. It's important to get acquainted with
them before committing to a life cycle investment program.
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