Should I “hedge” my IRA portfolio with a life cycle / target date mutual fund?
"First of all, it's great you're now taking full advantage of your employer match – i.e. free money. Next, on the question of the use of a life cycle / target date fund as a ""hedge"": Life cycle funds were introduced for hands-off, one-stop-shopping investors who don't like a hassle or don't understand.  Such funds are gaining in popularity: employers can use them as a default choice for automatic enrollment, which results in more participation in retirement savings plans than if employees had to opt-in.  I think life cycle funds are a good innovation for that reason. But, the added service and convenience typically comes with higher fees.  If you are going to be hands-off, make sure you're cost-conscious:  Fees can devastate a portfolio's performance. In your case, it sounds like you are willing to do some work for your portfolio.  If you are confident that you've chosen a good equity glide path – that is, the initial and final stock/bond allocations and the rebalancing plan to get from one to the other  – then you're not going to benefit much by having a life cycle fund in your portfolio duplicating your own effort with inferior components.  (I assume you are selecting great low-cost, liquid index funds for your own strategy!)  Life cycle are neat, but replicating them isn't rocket science. However, I see a few cases in which life cycle funds may still be useful even if one has made a decision to be more involved in portfolio construction: Similar to your case: You have a company savings plan that you're taking advantage of because of a matching contribution.  Chances are your company plan doesn't offer a wide variety of funds.  Since a life cycle fund is available, it can be a good choice for that account.  But make sure fees aren't out of hand.  If much lower-cost equity and bond funds are available, consider them instead. Let's say you had another smaller account that you were unable to consolidate into your main account.  (e.g. a Traditional IRA vs. your Roth, and you didn't necessarily want to convert it.)  Even if that account had access to a wide variety of funds, it still might not be worth the added hassle or trading costs of owning and rebalancing multiple funds inside the smaller account.  There, perhaps, the life cycle fund can help you out, while you use your own strategy in your main account. Finally, let's assume you had a single main account and you buy partially into the idea of a life cycle fund and you find a great one with low fees. Except: you want a bit of something else in your portfolio not provided by the life cycle fund, e.g. some more emerging markets, international, or commodity stock exposure.  (Is this one reason you're doing it yourself?) In that case, where the life cycle fund doesn't quite have everything you want, you could still use it for the bulk of the portfolio (e.g. 85-95%) and then select one or two specific additional ETFs to complement it.  Just make sure you factor in those additional components into the overall equity weighting and adjust your life cycle fund choice accordingly (e.g. perhaps go more conservative in the life cycle, to compensate.) I hope that helps! Additional References:" I choose lifecycle funds because I am placing faith (perhaps foolishly) that a full time fund manager knows better what to pick than I.  The same reason I go with mutual funds in general apply to to why I also have the lifecycle funds.  Presently my diversification strategy is really just index funds and lifecycle funds. The radio advice guy Clark Howard often promotes them. http://www.wacotrib.com/none/content/shared/money/stories/clark/0601/060425money.html (I count in the intimidated group) I like that you are hedging ONLY the Roth IRA - more than likely you will not touch that until retirement.  Looking at fees, I noticed Vanguard Target retirement funds are .17% - 0.19% expense ratios, versus 0.04 - 0.14% for their Small/Mid/Large cap stocks.
The investments offered in 401K are usually limited to a selection of mutual funds offered by a 401K provider.  The 401K providers and the mutual funds charge fees.  The mutual fund industry has a lobbying group that will push for increased 401K contributions to direct money into their mutual funds to collect fees.  The top 401 K provider in 2005 was fidelity.  It managed $337 billion in 401Ks of which $334 billion was directed into mutual funds. Although I would have to use some of the same providers to open an IRA, I would not have to invest in the providers' mutual funds when I open an IRA.  I can buy a stock and hold onto it for 10, 20, 50 years inside of my IRA.  Thus, the only fee the investment company would collect from me would be from when I purchased the stock and when I sold the stock.  Not nearly as profitable as mutual fund fees. Let’s compare your target fund, FFFFX to a well-known ETF, SPY; SPDR S&P 500 ETF. Source: Yahoo Finance The difference in performance over a longer time-frame is significant, You can and should carefully research better funds in order to improve performance. FULL DISCLOSURE: My own IRA is at Fidelity. Less than 10% of my IRA is in Fidelity mutual funds. None is in FFFFX. There are fund of funds,e.g. life cycle funds or target retirement funds, that could cover a lot of these with an initial investment that one could invest into for a few years and then after building up a balance large enough, then it may make sense to switch to having more control. "Your retirement PLAN is a lifelong plan and shouldn't be tied to your employer status. Max out your 401(k) contribution to the maximum that your employer matches (that's a 100% ROI!) and as much as you can afford. When you leave the work force rollover your 401(k) to an IRA account (e.g.: you can create an IRA account with any of the online brokerage firms Schwab, E-Trade, Sharebuilder, or go with a brick-and-mortar firm like JP Morgan, Stifel Nicolaus, etc.). You should have a plan: How much money do you need/month for your expenses? Accounting for inflation, how much is that going to be at retirement (whatever age you plan to retire)? How much money do you need to have so that 4.5% of that money will provide for your annual living expenses? That's your target retirement amount of savings. Now figure out how to get to that target. Rule #1 Invest early and invest often! The more money you can sock away early in your career the more time that money has to grow. If you aren't comfortable allocating your investments yourself then you could go with a Targeted Retirement Fund. These funds have a general ""date"" for retirement and the assets are allocated as appropriate for the amount of risk appropriate for the time to retirement." Without making specific recommendations, it is worthwhile to point out the differing tax treatments for a Roth IRA: investments in a Roth IRA will not be taxed when you withdraw them during retirement (unless they change the law on that or something crazy). So if you are thinking about investing in some areas with high risk and high potential reward (e.g. emerging market stocks) then the Roth IRA might be the place to do it. That way, if the investment works out, you have more money in the account that won't ever be taxed. We can talk about the possible risks of certain kinds of investments, but this is not an appropriate forum to recommend for or against them specifically. Healthcare stocks are subject to political risk in the current regulatory climate. BRICs are subject to political risks regarding the political and business climate in the relevant nations, and the growth of their economies need not correspond with growth in the companies you hold in your portfolio. Energy stocks are subject to the world economic climate and demand for oil, unless you're talking alternative-energy stocks, which are subject to political risk regarding their subsidies and technological risk regarding whether or not their technologies pan out. It is worth pointing out that any ETF you invest in will have a prospectus, and that prospectus will contain a section discussing the risks which could affect your investment. Read it before investing! :) Some years your portfolio may perform better than the benchmark, and some years it may be the other way around.  Without a benchmark you will never know. And by the way if you choose poorly, you will never beat the benchmark. If the benchmark goes up 20% but your fund/investment only went up 3% you did make money, but you might want to reevaluate your strategy. From The Prospectus for VTIVX;  as compared to the Total Stock Market Fund;  You can see how the Target date fund is a 'pass through' type of expense. It's not an adder. That's how I read this. You may want to move money between your investments within the plan, rebalancing money to maintain your diversification. You don't have to deal with the details if selling and buying, just tell them how much to move where. Many plans offer investments that automatically rebalance for you such as Target Date accounts. You may be able to select one of those and just ignore the 401k until retirement, or at most rebalance even less often. Look at what's offered, look at what it costs as fees, run the numbers and decide whether you can do better.