Lifestyle vs. Life-Cycle Funds

by Andy Hough on May 1, 2008

A Lifestyle Fund and a Life-Cycle Fund are two totally different types of mutual funds, despite the presence of “life” in both of their names. In fact, they are so radically different that to invest in one when you meant the other could be classified as a very bad move.

Life-cycle Funds

Life-cycle funds, or target-retirement funds, are mutual funds that have a future target date and adjust its own risk profile from aggressive to conservative as the date approaches. They’re most popular when used in conjunction with retirement, and first introduced with that in mind, but any target date will work (such as children’s educational expenses). The idea is that when the date is far away, the fund will be more aggressive and have a greater share in stocks. As the date nears and income generation and capital preservation as more important, it’ll shift more and more into safer investments such as bonds and commercial paper.

Lifestyle Funds

Lifestyle funds are like a snapshot in time of life-cycle funds. Lifestyle funds are often known as target-risk, meaning they match the risk profile of the investor (or rather the investor selects the lifestyle fund that matches his or her risk profile). Aggressive investors will want an aggressive lifestyle fund, conservative investors will want conservative lifestyle funds, and the lifestyle fund won’t change its risk profile as the investor ages.

As you can see, lifecycle does not equal lifestyle… and you could be in trouble if you pick lifecycle when you meant lifestyle. :)

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