Do Lifestyle Funds Provide Greater Security?|
by Ulli G. Niemann
With the stock market stubbornly refusing to settle down
and smooth out, Wall Street has been scrambling to come up
with "product" they can sell to gun shy investors. One
such new concept is the Lifestyle fund; an extremely
diversified package designed to be the single fund in an
There are two general types of these funds, in which
assets are spread out across a wide range of stocks and
bonds. In one, securities are held directly, in the other,
assets are held through other funds.
Fidelity's Freedom 2030 is an example of the first type.
It targets a specific retirement date, and the cash and
bond stakes rise as that date approaches. This type of
fund has created a perception among investors that its
value will not drop and that it is safe. But, in fact,
these are no safer than a standard mutual fund.
Since we sold all of our investment positions on October
13, 2000 and preserved our capital, Fidelity Freedom 2030
has lost 39% (through 2/21/03). Do you think that's an
isolated incident? I'm not picking on Fidelity, but here
are some of their other Lifestyle funds with returns over
the same period:
Fidelity Freedom 2020: -34%
Fidelity Freedom 2010: -22%
So much for perceived safety.
The other Wall Street bright idea is the fund of funds
(FOF). It sounds good, but it actually creates a double
layer of costs; the cost of purchasing the fund itself,
and then the expenses of the mutual funds the FOF
Take for example, the Enterprise Group of Funds. It shows
an expense ratio of almost 2% plus a sales charge of 4.75%
according to Morningstar. Tack on the underlying expenses
and you're paying out more than 3% a year in investment
If you're a new investor (with less than $10k), and have
your account at a discount broker, you can add a minimum
of 1% per year in fees just for the privilege of having an
account. That brings the total up to 4% in annual
expenses. Talk about adding insult to injury.
FOFs are sometimes being touted as the only fund you need
no matter what the investment climate. So, let's compare
to see how the Enterprise fund of funds performed during
the same period as mentioned above for the Freedom funds:
Enterprise Group of Funds: -35%.
The bottom line is that no matter what type of mutual fund
you choose, or what anybody claims it will do for you, you
must be vigilant and see if it does what you were told it
would. In investing, there is simply no such thing as a
sure thing. Sure you need to know how to recognize a good
investment. But just as important~maybe even more
important~you must know when to recognize that a good
investment idea didn't work out, cut your loss, and sell.
Ulli G. Niemann
Ulli Niemann is an investment advisor and has been writing
about objective, methodical approaches to investing for
over 10 years. He eluded the bear market of 2000 and has
helped countless people make better investment decisions.
To find out more about his approach and his FREE
Newsletter, please visit: www.successful-investment.com.
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