Life-cyle funds gettin' risky? Nope.

According to an article in today's Wall Street Journal, life-cycle funds (one-stop shopping for investing, with a the mix of funds becoming less aggressive as the investor ages) are increasing in popularity and their asset allocation strategies are becoming more aggressive. At the end of October, $104 billion were invested in life-cycle funds, up from $70 billion at the end of 2005.

A few years ago, most of these funds started investors with 80% of their funds in stocks and gradually reduced that number to 45% by the time they reached retirement age. Today, most life-cycle funds start with 90% in stocks and switch to 50/50 bonds/cash and stocks by 65. But the question is: is this still too conservative?

I think it's absolutely too conservative. In my opinion, there is just no intelligent reason for a 25-year-old with a couple thousand dollars in savings to be investing in T-bills for income. When you have 40 years of job income ahead of you, YOU are your own bond. If a 25-year-old has $5 thousand in one of these funds (far more than most 25-year-olds have to invest), and 10% is in bonds providing an income of 5% per year that's...$25 per year in income!

In her Money Book for the Young, Fabulous, and Broke (a terrific resource for recent college grads by the way), personal finance guru Suze Orman recommends that 20-somethings who have a few bucks to invest (most don't) invest 100% in low-cost stock index funds, and I agree with her 100%. If you're 25, not independently wealthy, and working, it is just silly to be investing retirement money in bonds. I'd like to see those life-cycle funds up it to 100% in stocks prior to age 30.

If you're interested in target-retirement funds, take a look at thestreet.com's guide to the "Top-rated life cycle funds" at the bottom of the page.