Patillo Brown & Hill

There has always been a lot of information available on how to save for retirement if you start somewhere around the time you get your driver's license or have your first child. There is not a lot of information about what to do with your money if you are near retirement age or if you are not comfortable creating and babysitting your own portfolio. Several questions have been asked about "lifestyle funds" and how they work. If you don't have the time or the confidence to maintain your own portfolio, lifestyle funds might be what you are looking for.

A lot of people have a retirement plan with their job like a 401(k). A 401(k) is always a good idea but not if you use this only as a savings tool and not a way to "build" your retirement funds. A great number of people do not recognize the need to plan for retirement until they are past the point of higher return investments because they can no longer afford the risk. Lifestyle funds are low-maintenance investments that provide diversification through asset allocation. These funds give investors broad exposure to each major asset class and various sectors within each class.

Diversification has been preached to all of us for years. History has proven this to be good advice but diversification takes time and not everyone has the time or the experience. Lifestyle funds provide enough diversification that some people feel comfortable enough owning just a single fund. These funds are attractive to investors who are uncertain about how to structure a portfolio or those who know they cannot manage their own portfolio on an ongoing basis. Every investor needs to take a look at their goals and objectives and factor in the risks they feel comfortable with at their age.

Asset allocation is something else we hear all the time. The objective of asset allocation is to provide most of the return of an un-diversified portfolio with significantly less risk. Good stock or bond picking is not usually enough to offset a poor asset-allocation strategy. Not everyone can afford to invest for maximum return by positioning himself or herself in a high-risk situation. Most investors need both a bond and a cash component in their investment portfolio to minimize risk and provide a cushion for a financial emergency. Lifestyle funds are designed to work as a single investment. These funds are tailored to your specific needs and change as your age and financial obligations change. Unless you actively monitor the asset-allocation ratio of your investments and make necessary adjustments at least once a year, your asset-allocation strategy will probably become outdated and therefore ineffective. Lifestyle funds solve this problem by maintaining the desired ratio within the parameters set forth by each fund.

Not all lifestyle funds work the same. Some lifestyle funds expect the investor to choose an investment profile while others make the decision for you. Some funds have a series of dates that indicate a maturity date, which is usually your retirement age. Over time, as the maturity date approaches, the funds will gradually become more weighed in bonds, which are less volatile than stocks.

Nobody can predict what the market is going to do. If you could do this, you would not be reading this article. Most people invest only after something has happened and that is why mutual funds are good investment vehicles. Mutual funds have inherent diversification, which means you don't need to try and guess what the market is going to do. As you get older, your investment objectives change and these stock, bond and cash ratios are crucial. Your financial obligations change and lifestyle funds are designed to change with you. As you reach retirement, the need for growth clashes with the need to lower your risk. Long term, the most asset-allocation fund will be less volatile and most likely produce lower returns but can insure a better nights sleep.

Talking with a professional about your objectives is always a good idea. Lifestyle funds may be the perfect vehicle for you if you want a cross-section of investments. This one-stop investment is perfect if you want to make sure your portfolio is adequately diversified. If there was ever a time to make sure you did not put all your eggs in one basket, this would be that time. If you could look into a crystal ball and see what the market was going to do, you would concentrate your investments in that area. Since market timing is still the investors' dream, your decisions mixed with a little luck will create your financial future. As you get older and close to retirement, the perfect balance of stocks, bonds and cash becomes more important. Lifestyle funds may be the answer for you.


Note: Fees are to be taken into consideration when looking at any fund investment. Many companies are keeping their fees to a minimum to be competitive so make sure to ask these questions.

Some companies refer to lifestyle funds as "lifecycle" funds.