Lifestyle Funds, Lifecycle Funds: Are They Right for You? Part I

Do you find the idea of creating a plan for allocating your assets overwhelming? How about choosing a mutual fund? Or designing your investment portfolio? If you’re like many people, investing in your future can be confusing.  

• Too many choices - With over 9,500 mutual funds in the United States in 2016 and thousands of other investments, how do you know what to choose?

• Too much data – With an abundance of stock market news and economic information available, how do you know what to pay attention to or what to ignore?

• Too much work – With markets constantly changing, how do you stay on top of managing all your investments?

Do these remarks sound familiar to you? Has anyone recommended you try investing in lifestyle funds or lifecycle funds?

According to Zacks Investment Research, both lifestyle funds and lifecycle funds were introduced in the 1990s as a way for investors to rely on a process to help plan their investment. These funds evolved out of the concern that many individual investors were not making informed investment decisions in their retirement accounts, primarily, and were unlikely to rebalance their accounts. This process provides employees with a way to choose their employer retirement plan investments that are aligned with their risk tolerance, time horizon and/or expected retirement year. But they do have limitations.

Both funds consist of a blend of stocks, bonds and other investments options aimed at simplifying your investment strategy. But how does it work? And is it too simple? To make that determination, it’s important to first understand what these funds are.

What is a Lifestyle Fund?

A lifestyle fund, also known as a target risk fund, is an investment fund featuring an asset allocation determined by your accepted level of risk and return. You’re given the choice of whether you want a conservative, moderate or aggressive investment risk strategy. Often, the way this is determined is through a questionnaire that is processed through a computerized program, which spits out a plan. Your investment portfolio is then managed based on your selected risk profile.

Generally, lifestyle funds are static, meaning they keep the same asset mix and risk strategy for the entirety of the investment. This means that with lifestyle funds, you won’t usually monitor the stock market or adjust your portfolio.

What is a Lifecycle Fund?

A lifecycle fund, also known as a target date fund, is an investment fund featuring a long-term asset allocation strategy that becomes more conservative over time. A lifecycle fund comes with a specific end date attached to it – most often this is your planned retirement date. Lifecycle funds are designed to make it easy for the do-it-yourselfer to invest for a specific timeframe.

Lifecycle funds automatically reduce risk by redistributing your allocation of stocks, bonds and cash within the fund as it gets closer to your end date. For instance, as your target date approaches your lifecycle fund will change to favor less risky assets, such as bonds, over riskier growth-oriented securities, such as stocks. This automatic fund adjustment takes you mostly out of the loop in the decision-making process.

While lifestyle funds and lifecycle funds might seem like the paths of least resistance, are they really what you need? In “Lifestyle Funds, Lifecycle Funds: Are They Right for You? Part II,” we’ll examine some answers to that question to help you decide how you want to approach your investment strategy. Stay tuned!

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

“Finance Made Simple” blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.