Using 'Lifecycle' Funds to Better Manage Your Investments

Target funds.  Target funds are designed to take the mystery out of age-based investment diversification. All you need to do is to estimate your retirement date, select a target fund near the date, and the mutual fund company will gradually change the allocation over the years. Target funds are easy to identify, because they have the target dates in their names: 2015, 2025, 2035, for example. These "funds of funds" typically hold several different stock and bond funds within a single fund family in various proportions to suit investors, depending on their specific stages in life. For example a young person with decades to invest can afford to do so with more risk, while a pre-retiree invests a bit more conservatively, and a person who has already retired needs to receive certain investment income. 

You get more for your money with lifestyle and target funds, but the even better news is you probably won't have to pay a lot more. Most fund companies levy very small additional fees for these funds on top of the usual fees associated with the individual mutual funds. But check on the extra fees, because some companies do charge a hefty amount for their lifestyle and target funds.

Strategies for Investing in Scary Markets

Lifestyle funds and target funds are tailored for coping with turbulent investment markets. You can use lifestyle and target funds if you want to invest a bit more conservatively. They would help in a scenario in which you were more comfortable owning fewer stocks without haphazardly selling off individual investment holdings.

• Lifestyle Funds. The trick with lifestyle funds is to move from the fund you hold to one that is more conservatively invested. For example, if you hold a "moderate" lifestyle fund but want to lower your stock exposure, move all or part of your holding in the moderate fund into a "conservative" fund. If you are new to lifestyle funds, you might initially buy a fund that is one notch below the kind of fund you would own amidst more healthy investment markets. If you fancy yourself an aggressive investor but are afraid that the stock market will continue to suffer, you might initially opt for a "moderate" fund.
• Target Funds. If you're stunned by the amount of money you have lost during the stock market meltdown, you can also use target funds to establish a lower-risk investment mix. If you already own a target fund, simply move into a fund that has a shorter target date. Depending on the date you choose, you will reduce your stock exposure either a little or very much. For example, moving from a 2025 fund to a 2015 fund will reduce stock exposure by 21 percent while still maintaining a diversified investment portfolio. If you are new to target funds and want to be more conservative now than you would if the investment markets were more fruitful, simply pick a target date closer to your desired retirement age. So if you were planning to retire around 2025, rather than opting for a 2025 target fund, choose instead a 2020 or 2015 fund for lower stock exposure.