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

Last week, we discussed two types of funds – lifestyle funds and lifecycle funds – that aim at simplifying investment strategies for individual investors who may be choosing their employer retirement plan investments with limited options, or just beginning to invest. Lifestyle funds blend stocks, bonds and other investments in order to maintain a consistent level of acceptable risk. Lifecycle funds on the other hand, focus on managing your investments towards a target end date. This week, we will look at whether or not these are options that will best help you meet your financial planning goals.

Lifestyle Funds

• Choice of Risk Level - Opportunity to select a conservative, moderate or aggressive risk strategy is based on your level of comfort and goals.

• Consistent Level of Risk - Selected risk level strategy is maintained for the duration of the investment. Higher risk investments offer more potential for return.

• Less Monitoring - Sustained asset allocation means less adjusting of your portfolio.

• Designed to Be Your Main Investment - Supplemental investments may alter the risks and rewards that your lifestyle fund aims to achieve.

• Sustained Level of Risk - Risk doesn’t decrease as you approach retirement.

Lifecycle Funds

• Targeted Date - Investment funds are designed to grow steadily for a set timeframe, usually until retirement.  

• Declining Risk - Investment funds shift from riskier growth-oriented options to more conservative income producing options as your target date approaches. The Investment Company Institute refers to this as the fund’s glide path. The glide path is the asset allocation path that the target date fund follows to become more conservative over time.

• Adaptive Changes - Investment funds automatically rebalance periodically to adjust for variations in the market.

• Individual Risk Tolerance - Doesn’t account for an individual’s risk comfort level or progression. Your risk profile may evolve at a different rate that the fund’s glide path.

• Inconsistent Glide Paths - Paths can vary based on assumptions and calculations different fund providers use.

Okay, these sound like fairly good options, right, especially if you don’t have time to work on a plan yourself or have confidence in your own abilities? But consider what is missing here. These plans are for the most part auto-generated. They do not take into consideration the complex nuances that a full-fledged financial plan developed by a trusted advisor can provide. Unless you are just getting started in a new employer retirement plan or investing small amounts of money to start saving beyond a bank account, these types of funds will provide limited long-term resources for investors who want to “set and forget” with their accounts. But they are better than guessing based on limited understanding of the complexities of the markets.

A quality financial advisor will at a minimum:

• Do a complete and thorough financial analysis of your current situation

• Analyze your risk tolerance, time horizon and liquidity needs for investing

• Develop a specific strategy to achieve your objectives

• Provide specific advice and recommendations to make the strategy work

• Recommend financial plan updates annually, or when major changes occur

• Assist in implementing recommendations

• Conduct regular check-ins to touch base

While automation and templated plans might seem like the way to go in terms of simplicity and convenience, they are not always the plans that take into consideration your changing needs, inflation rates, market flux, gender, status or other variables specific to your situation. And they are not holistic. Even in this age of technology, a knowledgeable, caring professional is still your best resource. Find a credentialed advisor you can connect with and see the difference yourself.  

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.