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Should I use Lifecycle funds or pick my own investments inside my company's retirement plan?

I am 27, with a wife and two kids, and I recently got a job where my employer will match a contribution to a TIAA-CREF Retirement plan. I can either use their Lifecycle funds, or pick my own allocations between equities, real estate, fixed income, money market accounts, and annuities. What makes the most sense for someone like me?

Financial Planning, Asset Allocation
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January 2017

Glidepath funds (AKA Lifecycle funds) are great for the investor who wants to put their retirement investing on autopilot. Lifecycle funds are meant to adjust the asset allocation from more aggressive to more conservative as you approach retirement. What this means is that you get professionally managed pre-set allocation portfolios that gradually shift from a growth strategy to a principal preservation strategy.

Unfortunately, there is a bone I have to pick with lifecycle funds. My issue is that you are unintentionally setting your portfolio up to time the market. What if the timing of your gradual decline in stock exposure happens at an inopportune time? You are SOL, that is what! And the fund didn't do what it was meant to do. Furthermore, not all lifecycle funds use the same steepness in slope in terms of their shift away from stocks to more conservative asset classes like bonds and cash. 

On the other hand, lifecycle funds are usually a better alternative to letting an amateur investor select their own funds. The reason is that most novice investors chase yesterday's winners, buy high and sell low, and don't properly diversify their accounts. 

Customizing a portfolio and selecting the right lineup of funds is usually best saved for the investor who knows what they are doing or the investor that has a financial advisor assisting them. An advisor can be especially helpful by matching assisting the retirement plan participant in matching the fund mix to their risk tolerance and overall goals. 

However, if you choose to DIY, the best way to figure out the right mix of investments is to take a risk tolerance questionnaire - Vanguard has a free tool or you can click the previous hyperlink to mine and see how you score out.  Once you have your risk score, use the results to map over the right amount of exposure to each investment asset class (i.e. large cap, small cap, international). In addition, I recommend you set up your investment allocation to automatically rebalance at least annually. This ensures you stay within the risk range you are most comfortable with, as well as accomplishes the old adage of "buying low, selling high." 

The bottom line is this, like most things in life, choosing a lifecycle fund versus a custom allocation within your retirement plan is very much tied to each person's individual circumstances. What's right for one person isn't going to be right for another person. Really the best thing you can do as an investor is to stay diversified and keep a long-term perspective. For those who remain disciplined and stay patient, the intended results usually follow. 

January 2017
January 2017
January 2017
January 2017