No time or financial savvy to deal with your retirement investments? Can't afford a financial adviser? Don't sweat it.
For folks who would rather stand on the sidelines when it comes to managing their retirement money, there's a "no fuss, no muss" mutual-fund option that might eliminate some of the worry about putting the right stuff in your portfolio.
Consider investing in a life-cycle fund.
Life-cycle funds hold stocks, bonds and cash in proportions that are considered appropriate for investors at certain stages of life. There's virtually no fretting about the correct asset allocation because the fund already is diversified based on your age or retirement date.
"You're on ultimate cruise control," said Victoria Collins, an Irvine, Calif., certified financial planner. "Peace of mind may be the biggest appeal, because there is less to think about as opposed to modeling your own portfolio of funds."
The funds usually are good choices for investors who don't have the time or expertise to handle their investments or who can't get to an investment adviser for help. Because life-cycle funds have built-in diversification, they're also good for people who might be reluctant to move from the safety of money-market funds and certificate of deposits to the higher, long-term potential of stocks, said Charles Rother of American Strategic Capital in Los Alamitos, Calif.
Young investors who won't retire for decades are looking for growth, so their life-cycle fund would hold mostly stocks. Older investors in retirement are more interested in income and less risk, so their fund would hold more bonds.
Assets in life-cycle funds tracked by Morningstar have reached about $25 billion so far this year. That's up almost 40 percent from the same time a year ago.
While many funds have solid returns, they often resemble other mutual funds by generally falling short of the performance of the overall stock market.
But it's the no-hassle approach that makes these funds appealing.
Investors have two types of life-cycle funds to consider.
A targeted life-cycle fund asks investors to select a fund named for the year they plan to retire if you think you'll retire in the year 2030, that's the fund you select. As the investor nears that retirement date, the fund automatically lowers its risk profile, slowly moving from stocks to bonds.
Paul Merriman, of Merriman Capital Management in Seattle, likes Fidelity's Freedom funds for their stock selection. Its Freedom 2030 an aggressive fund for folks who will retire in the year 2030 returned 28.5 percent last year. Its Freedom 2000 fund for people who will retire this year gained 12 percent.
Investors also can choose a life-cycle fund based on their age: An aggressive fund with more stocks than bonds (up to age 55); a moderate fund that's evenly balanced (age 55 to retirement); and a conservative portfolio with more bonds than stocks (for the retirement years).
Vanguard's LifeStrategy Growth, which aims for 80 percent stocks and 20 percent bonds, returned 17 percent last year. Its moderate growth life-cycle fund, which goes for a 60 percent stock/40 percent bond mix, returned 12 percent last year. The income fund the most conservative of the three returned 2.82 percent.
In theory, investors simply could use one life-cycle fund for their retirement, Collins said. But she and other experts suggest using other investments in essence, diversifying the diversification.
"Unless you have 100 percent confidence in the portfolio manager or team, it would be prudent to have assets in a couple of different hands," Collins said. "Portfolio managers are not all created equal and therefore will have some variation, which could prove to be an advantage or disadvantage to you."