Different investors have varying needs. That's why lifestyle funds are a good way to take some of the guesswork out of investing. A lifestyle fund is a fund that features an asset allocation based on an individual investor's age, tolerance for risk, and investment objective. Lifestyle funds work best as the core holding of an investment portfolio.
What's your investment personality?
When it comes to investing, there's no such thing as a one-size-fits-all approach. That's why lifestyle funds cater to the varying needs of individual investors. They take into account such factors as age, risk aversion, and investment goals, and then they automatically manage your investments based on the strategy you select.
Usually, you're given the choice between an aggressive, moderate, or conservative growth strategy. An aggressive strategy, for example, might invest more heavily in high-growth stocks, while a more conservative strategy might be more bond-heavy. Aggressive growth funds are typically better for investors in their 20s and 30s, while conservative growth funds are usually targeted to investors in their 50s and 60s.
However, no two investors are exactly alike. For example, a 50-year-old investor who needs to catch up on retirement savings might opt for a more aggressive approach, while a risk-averse 30-year-old might want to go conservative. When you choose a lifestyle fund and stick with it, your level of risk will not change significantly over time.
How to use lifestyle funds
Lifestyle funds are designed to be the main investment in an individual's portfolio, because they are meant to provide the ideal asset allocation and risk profile for their investors. Other investments can throw off the balance that lifestyle funds aim to achieve, thereby defeating the purpose of investing in a lifestyle fund in the first place. That's not to say, however, that a lifestyle fund can't work in combination with other investments to create your perfect portfolio.
Benefits of lifestyle funds
One major benefit of lifestyle funds is that when you invest in one, you can be relatively confident that your investments will match your desired level of risk. Furthermore, lifestyle funds are designed to sustain their specific asset allocations. As an investor, this saves you the hassle of constantly having to monitor market conditions and rebalance your portfolio.
Lifestyle versus target date funds
Target date funds are investment funds that are designed to simplify the process of saving for retirement. Target date funds come with a specific date attached to them and typically contain a mix of investments. As that target retirement date gets closer, the fund's investments shift from riskier, growth-oriented vehicles like stocks to conservative, income-producing vehicles like bonds. The goal of target date funds is to minimize investors' risk as they get closer to retirement.
Lifestyle funds, by contrast, don't necessarily seek to lower investors' risk as retirement nears. Rather, they allow investors to choose a specific strategy at the onset and then maintain that approach for the life of the investment.
While both target date funds and lifestyle funds offer investors an easy way to save for retirement, target date funds tend to be a bit more cookie-cutter, whereas lifestyle funds often do a better job of catering to individual investors' needs. On the other hand, choosing an investment strategy for a lifestyle fund can be a challenge unto itself. It's important to carefully consider the implications of whatever strategy you select, especially if you're using a lifestyle fund as your primary long-term investment.
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