If you hold a dinner party and invite two people who don't get along, you're likely to wind up with a dreary evening.
If you build a fund portfolio and put two incompatible fund types together, you're likely to end up with dreary performance.
Yet industry data shows that millions of people are improperly using "lifestyle funds" in retirement plans, mixing them with other funds to disappointing results.
Lifestyle funds - also known as life-cycle funds and sometimes including the more common asset-allocation funds - are the ultimate default choice in a savings program. If you lack the time, inclination, or expertise to manage a fund portfolio, simply match your time horizon and risk tolerance to one fund designed to serve people just like you.
Lifestyle funds either are managed toward a milestone - say retirement in the year 2020 - or invest based on goals for a certain age group, so that an "aggressive" fund might be almost entirely invested in stocks (for young investors), while a "conservative" option is half bonds (for pre-retirees).
Because they simplify investing, life-cycle funds are a lifeline, a helping hand extended by employers for workers who are intimidated by the idea of building a diversified portfolio.
Studies by both Hewitt Associates and the Spectrem Group indicate that life-cycle funds are available in about one-third of all 401(k) plans today and are rapidly becoming more common.
However, a study released by Hewitt Associates in September shows the problem faced by investors who own these funds, specifically, that almost 90 percent of the people using them in a retirement plan also hold other funds from the plan.
And that's when the disagreeable side of lifestyle funds becomes apparent.
On their own, life-cycle funds can be a good choice for novices; they're not world beaters, but they're not meant to be. Instead, they are an all-in-one investment portfolio.
Mixed with other funds, however, lifestyle funds become the core holding in a portfolio of mush.
These funds aren't just one-size-fits-all, they're one-size-makes-everything-else-a-bad-fit.
According to Lori Lucas of Hewitt Associates, when investors couple a life-cycle choice with the other options in their retirement plan, their average asset allocation tends to be the same as if they just held a lifestyle fund with a "moderate" label. That's a problem for people who bought the lifestyle fund with either an aggressive or conservative posture in mind.
"Plan participants don't seem to differentiate between a lifestyle fund and anything else that's available in their retirement plan," says Lucas, defined contribution consultant for Hewitt, the nation's largest employee-benefits consulting firm. "The [investor] may be trying to make lifestyle funds more customized by building around them, but they're not making the results any better, and probably will make things worse."
Part of the problem, Lucas and others note, is that lifestyle funds operate under a broad label system. You can find one firm's life-cycle fund that has just 2 percent bonds in its aggressive allocation, while a competitor's aggressive fund has 10 times that weighting in bonds.
Experts believe that the less savvy investor generally drawn to lifestyle funds doesn't necessarily spend much time learning how the funds work, what the allocations are, or how the investment strategy could change over time.
Says Lucas: "Once you understand that these funds are supposed to be a turnkey solution, they're really only appropriate as your only choice, the one fund you own. If you want two funds, don't make either one a lifestyle fund."
If you must augment lifestyle funds with other offerings, experts suggest tilting the way the lifestyle fund leans. So if you want to turbocharge an aggressive lifestyle fund, augment it with the most aggressive stock fund in the retirement plan; conversely, the conservative life-cycle fund could be even more stodgy paired with a bond fund.
If you want a more middle-of-the-road approach, stick to the moderate lifestyle choice alone.
Any other way of mixing and matching ordinary funds with lifestyle issues defeats the purpose of investing in the specialized funds in the first place.
Says Geoff Close of Spectrem Group: "People think they have to divvy up their money into a lot of choices in their retirement plan, and the lifestyle fund concept sounds good, so they throw some money there. Once they know enough to make any type of asset allocation decision on their own - to say they want 80 percent of their money in stocks, for example - they know enough so that they don't need a life-cycle fund.
"At that point, they can own however many funds they want in the 401(k), but they probably don't want any of those funds to be the life-cycle choices."
Charles Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at firstname.lastname@example.org or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.