If you're used to riding a regular two-wheeled bicycle, and you've ever headed to a hotel gym or health club, you've probably confronted the "Lifecycle"—a computer-monitored cycling machine that is supposed to simulate bike riding while measuring your heart rate, calorie burn rate, cadence and the like.

Lifecycles are supposed to be good for your health, but in fact they can be horrible for those who are accustomed to riding bicycles.

Investing in one of the many "life-cycle" funds at Vanguard funds:

It may feel like you're doing your money some good. But in fact you could be simply spinning your wheels...and going nowhere.

Let me explain.

Vanguard offers several different life-cycle funds—the five original STAR funds, which include STAR and the four STAR LifeStrategy funds, plus 11 so-called Target Retirement funds. (Diversified Equity (VDEQX), a fund of equity funds, could also fit into this category, but it's truly an equity-only offering with no logical connection to these other life-cycle funds.)

All of these life-cycle funds are "funds of funds," meaning they are funds that invest in other mutual funds, and, except for the original STAR, are all invested predominately in index funds.

Only the three most conservative Target Retirement funds, Target Retirement 2005 (VTOVX), Target Retirement 2010 (VTENX) and Target Retirement 2015 (VTXVX), currently use the actively managed Inflation-Protected Securities (VAIPX), though within something less than 10 years we can expect to see Target Retirement 2020 (VTWNX) and Target Retirement 2025 (VTTVX) begin to allocate some assets to the inflation fund as well.

It turns out that investors in retirement plans such as 401(k)s have increasingly been sinking their money into targeted-maturity funds rather than fixed-allocation funds.

These are people who don't want to think about their investments at all—who really do just want to "put it away and forget about it." Obviously, if you simply tell someone to pick the fund whose date most closely matches their expected year of retirement, you've made things ultra simple.

This is lowest-common-denominator investing—and Vanguard loves it! For one thing, it's attractive to folks who just aren't interested in their investments. And once those investments are made, they stick. All fund companies like "sticky" assets.

But Are These Funds a Good Idea?

I don't think so. For one thing, the investing assumptions you had at age 20 are probably not the same as the ones you'll have at age 30 or 40.

Plus, they're NOT safe.

I calculated the risks these funds would have experienced invested at their initial allocations over the past 20 years and compared them to the original STAR and its offspring.

There's nothing "safe" about investing in these retirement-oriented funds—mindless, yes. Safe, no.

Target Retirement 2045 (VTIVX) is a mighty risky offering, with almost 90% of assets allocated to stocks, and the bulk of that in Total Stock Market (VTSMX), which is overwhelmingly large-cap in nature and has vastly underperformed many of Vanguard's other equity funds. No wonder it would have lost almost 40% during the most recent bear market, had it been around the entire time, and would still be working to recover the loss today.

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No, people investing for retirement should ignore these gimmicky Vanguard funds. Instead, they should invest in the very best funds that Vanguard has to offer, dividing their portfolio allocation according to their financial goals and risk tolerance.

In each and every issue of The Independent Adviser for Vanguard Investors, we present not one but FOUR model portfolios of the very best Vanguard Funds—Growth, Conservative Growth, Income and Growth Index.

Each of these portfolios contains between 6 and 10 carefully balanced, risk-adjusted Vanguard funds—and each outperformed the S&P 500 Index in the past 10 years.

Can You Cut Your Taxes?

Here's my tax mantra: Don't strive for tax efficiency; strive for after-tax returns.

Now Vanguard has finally gotten the after-tax return religion. Tax maven Joel Dickson, who also helps run the quantitative side of Vanguard's index shop, said that "at the end of the day, the question is whether you have created wealth, not how much you have reduced taxes."

Amen to that.

For years now, I've told my Independent Adviser readers that investing in index funds is not the path to guaranteed outperformance. Just because many index funds are "tax efficient" and have low turnover doesn't mean they'll make you richer, faster.

I've always been particularly pained by the focus on turnover ratios (the speed with which a fund churns its holdings). The old-think was that funds with low turnover, whose managers held onto stocks for years rather than months, were more tax efficient than funds with higher turnover. But higher turnover could mean a fund manager is harvesting his or her losses.

So turnover is not the be-all, end-all indicator of tax efficiency.

What Can You Learn From Last Year?

Even though we've had much more volatility this year, 2008 can be very instructive.

In early May 2006, many of Vanguard's index funds hit highs for the year, with gains of 11.0% for MidCap Index, 6.8% for 500 Index, 7.9% for Total Stock Market, 19.9% for Total International and 25.1% for Emerging Markets Index.

Wow! 35 days later, every one of these funds had lost ALL their gains for the year. Many shareholders saw losses. Some pulled their money OUT. What a mistake! That 5-week dive was a terrific buying opportunity…by December 2006, every one of those funds posted higher rates than ever.

Personally, I think we're going to have a good 2008 but say that with my eyes wide open. You should keep your eyes peeled, too. In fact, hope you'll cut that green paragraph out. Keep it on your desk or night table. It could come in handy if you start feeling jumpy.

It isn't enough to pick the right funds to achieve the retirement you want...you also have to put them together in a sound strategy that meets your goals for growth, income and safety. And knowing which Vanguard funds to choose and which to avoid requires investors to really dig out the facts hidden beneath the hype. You can learn to ferret out the plain unvarnished facts—if you have the time, energy and inclination. OR you can hire your own personal Mutual Fund Detective. That's Dan Wiener. Accept a risk-free trial subscription to The Independent Adviser for Vanguard Investors today and receive up to five free bonus reports, including: How to Double Your Retirement Income at Vanguard. Get more details here.

For more great retirement advice, check out our Retirement Section. Looking for top retirement tax strategies? We've got them. Want to make sure your portfolio is insulated from the volatile market? Find out how to shock-proof your retirement here. Want to know how to get the most out of your 401(k)—go here now. Whether you're in retirement, close to retiring or hope to be there someday, you'll find all the tips, tools and advice you need to reach your retirement goals!

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