Investment strategy with lifecycle funds

Source: JONATHAN CLEMENTS of wsj.com

Lifecycle funds were designed to be the ultimate buy-and-forget investment.

You purchase a lifecycle fund that targets your expected retirement date, and then sit back and let your money ride all the way to retirement and beyond.

But it turns out that lifecycle-fund investors have other ideas -- some good, some not so good.

Adding on

One sensible strategy: Stick maybe 80% of your retirement money in a lifecycle fund and then tack on smaller stakes in intriguing sectors such as emerging-market stocks, foreign small-company shares and high-yield junk bonds.

You might even buy more than one lifecycle fund. Suppose you plan to retire in 2017. You might purchase a mix of, say, Schwab Target 2010 and Schwab Target 2020.

Aiming elsewhere

Lifecycle funds were designed for retirement investors, who might draw down their nest egg over 20 or 30 years. But some shareholders are using the funds to amass money for a home purchase, where they will need their savings on a single day, or college, where costs should be over in just four years.

The problem: When lifecycle funds reach their target date, they typically have 50% to 60% of their money in stocks. You run that horrific risk of having too much equity exposure when you get that tuition bill.

A solution: there are lifecycle funds designed for college expenses.

Laddering funds

Some investors are laddering lifecycle funds in the same way folks ladder individual bonds. It could help you manage your retirement spending.

Suppose you plan to retire in 2015, when you turn age 65. You might buy a 2015 fund to cover the first 10 years of retirement, a 2025 fund to pay for the years from ages 75 to 85, and a 2035 fund for your final years.