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Using 'Lifecycle' Funds to Better Manage Your Investments

"Lifecycle funds" are attracting significant investor attention and money—for good reason. These funds allow you to invest your money, even in small amounts, in a single fund with self-stabilizing features, including:

  • Diversifies across several important investment categories
  • Holds mutual funds with solid performance histories or individual stocks and bonds that are actively managed
  • Regularly rebalances your holdings


Rebalancing involves the fund manager making small adjustments to the various investments so the fund arrives at the desired (target) percentages. For example, if the percentage of stocks should sink below the target due to a declining stock market, the manager would rebalance the overall portfolio to get back to the allocation target by buying more stocks and selling bonds or cash.

While buying stocks in a declining stock market may seem dangerous, periodic rebalancing rarely involves big investment shifts. Plus, adding to stocks after they've declined and vice versa has proved time and time again to be an excellent investment strategy.

Many mutual fund families have introduced a stable of lifecycle funds. They are becoming particularly popular among those who participate in workplace retirement plans (such as 401(k)s and 403(b)s) and tax-sheltered annuities (TSAs). Any investor can own these funds either in a retirement plan or in a brokerage account.

The main attraction of target or lifestyle funds is the investor's ability to choose a single, all-purpose fund instead of having to pick from among a long list of investment choices. Most lifecycle funds range from pretty good to excellent, but you need to evaluate them just like any other investment.

If you don't want to be bothered with investing, they're a wonderful solution. But if you're into investing, you also might want to consider lifecycle funds. If you're frightened by today's turbulent market conditions, use lifecycle funds to invest conservatively while still maintaining a well-diversified portfolio of stocks and interest-earning securities.

 There are two different kinds of lifecycle funds:

  • Lifestyle funds. These are the older siblings of lifecycle funds and consist of funds that take a different and pretty consistent approach to way the money in the fund is invested. Lifestyle funds are usually offered as a series of mutual funds and are usually labeled "conservative," "income," "balanced," "growth," and "aggressive." Each individual fund is managed against a particular mix of stocks, bonds, and cash. For example, a "growth" fund would hold a much higher percentage of stocks than a "conservative" fund, which would be heavily invested in bonds. Most lifestyle funds hold individual securities.

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