With 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 Lifestyle fund; an extremely diversified package designed to be single fund in an investor's portfolio.
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 other, assets are held through other funds.
Fidelity's Freedom 2030 is an example of first type. It targets a specific retirement date, and 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 same period:
Fidelity Freedom 2020: -34% Fidelity Freedom 2010: -22%
So much for perceived safety. The other Wall Street bright idea is fund of funds (FOF). It sounds good, but it actually creates a double layer of costs; cost of purchasing fund itself, and then expenses of mutual funds FOF purchases.