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FUNDS THAT CHANGE WITH YOUThey can make the task of shifting your asset mix easierBuilding a retirement nest egg with mutual funds can be daunting. Even if you assemble what is an ideal portfolio today, you're far from done. As you near the time when you'll start drawing on the money, you'll have to shift your asset mix periodically to more conservative investments. Internet highfliers may be acceptable risks when you're 30 years from retirement, but not when you're months away from a gold watch. Time-targeted funds can help make this asset shift easier. Indeed, given the graying of America's baby boomers, it's surprising that more mutual-fund companies haven't followed Wells Fargo and Fidelity Investments in developing such funds. Wells's Stagecoach funds have been around for four years, Fidelity's Freedom funds, just two. The idea is this: If you are 35 today, you would choose Stagecoach LifePath 2030 or Fidelity Freedom 2030. Each has a heavy weighting of equities now, but by changing the portfolio, they dial down the risk over the years. They reach their most conservative posture--mainly, but not entirely, bonds--by 2030, when you'll be 67. The two families offering these funds take different approaches (table). The Stagecoach funds use asset-allocation models that incorporate 17 different investment categories, such as large-cap growth stocks, small-cap value stocks, international stocks, long-term government bonds, and mortgage-backed securities. By contrast, the Fidelity Freedom portfolios invest in the money manager's huge array of mutual funds. Wells Fargo and Fidelity also differ in how they sell the funds. Stagecoach's A shares have a 4.5% sales charge on investments of less than $50,000. The one exception is the no-load Opportunity Fund, formerly known as the 2000 portfolio. (That conservative fund is about half in intermediate government bonds and one-quarter in equities.) All the Stagecoach funds have a 1.2% annual expense ratio, about 0.1 percentage point below the average for asset allocation funds. The B shares have no up-front load but have higher expenses, 1.7%, plus declining redemption charges on shares sold in the first six years. The Fidelity funds are no-load, with an expense ratio of just 0.08%. But this is no free lunch. Shareholders indirectly bear the expenses of the funds inside the Freedom portfolios. Will these funds do the job? The concept behind them makes sense, but their track records are short, and none has gone the distance to termination. To evaluate them, you should consider the alternatives. For younger investors who might choose the 2030 or 2040 portfolios, an all-equity-fund portfolio could work as well for many years until you need to take in bonds and money-market securities. ''If you just select equities, you may maximize return,'' says Mark Fujii, Wells's director of mutual-fund products. ''But you haven't managed risk. Through diversification, we try to maximize return for a given level of risk.'' That risk--the volatility in the value of your investment--is generally determined by the time to the fund's termination date. Many more fund companies--including Vanguard, T. Rowe Price, Oppenheimer, and BT Investment--run ''life cycle'' funds, which are also asset allocation portfolios geared to investing for retirement. But those funds are managed to be aggressive, moderate, or conservative, and investors using them need to determine on their own which one to start with and when to shift to another. Robert Reynolds, president of the Fidelity Institutional Retirement Group, says Fidelity launched the Freedom funds because many customers, even with the help of questionnaires and brochures, had a hard time grasping the concept of risk tolerance. ''Everybody understands time,'' he says. ''So we created funds that focus on a time horizon.'' A packaged product such as Wells Fargo's or Fidelity's assumes one size fits all: that your needs and ability to take risks are similar to others of your age. That may not be true. Most financial advisers suggest you seek a more personalized investment plan. But if your alternative is amassing a lot of funds with no overall strategy, a time-targeted fund might make a worthwhile investment.
By Jeffrey M. Laderman in New York RELATED ITEMS
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Updated July 9, 1998 by bwwebmaster
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