Retirement plan decisions made easy
Drill Down: Lifestyle Funds and Life Cycle Funds
Their name may not help you understand what they mean, but they are becoming increasingly more popular for 401k investments.
A lifestyle fund is diversified across asset classes, so it includes both stocks and bonds, and usually has international exposure as well. What’s different is that each lifestyle fund defines itself in terms of risk: aggressive, moderate, or conservative. You figure out what your risk tolerance is, pick the corresponding fund, and the fund manager takes it from there.
That’s not a bad choice. If the fund manager is doing his job, you are likely to come out well. My only hesitation is that I’m a hands-on guy. I like to know for sure that the manager is doing a good job. I’d like to pick my own asset allocation. But hey, I’m an economist.
If your 401k choices include lifestyle funds, and you are comfortable with using them, then go ahead. If you’d rather make your own asset allocation decisions along the lines outlined earlier, that’s fine too.
Life cycle funds, also called “target date funds,” are a little different. They start with the basic attitude toward risk that lifestyle funds take: aggressive, moderate, or conservative. Then they add a target date for your investment horizon. When that target is decades away, the fund manager will invest heavily in stocks, just as I recommend that younger people weight their portfolio toward stocks. As the target date nears, the asset allocation gradually shifts to include more bonds, matching my recommendation that folks closer to retirement hold more bonds.
Life cycle funds take over the decisions about changing your asset allocation as you age. My advice here is the same as my advice about lifestyle funds. Life cycle funds are not a bad choice. I personally prefer to make my asset allocation decisions myself, but that doesn’t mean you have to. If you’re comfortable with this approach, go for it. But neither is there anything wrong with doing it yourself.
After stating my preference for selecting asset allocations yourself, let me add the best reason for using either lifestyle or life cycle funds: they don’t take much courage. Some people have a hard time investing as much in stocks or overseas markets as they need to. These folks would be better off picking a lifestyle or life cycle fund and calling it good. Do it yourself only if you are sure that you will, in fact, do it well yourself.
Bill Says: Life cycle funds are fine. Or you can select your own asset allocation through time. Either way will work.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
» Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
Lesson 9: Your 401k, Your Other Assets, and Your Life
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