Here’s how they work: Each lifestyle fund is tailored to a specific stage in life, usually based on age — like the peak-earning thirtysomethings or pre-retirement fiftysomethings — and its assets are weighted accordingly. For instance, a fund for the peak earner would be comparatively aggressive, with a mix of 70 percent stocks, 30 percent bonds, and no cash. For near-retirees, the mix might be 20 percent stocks, 40 percent bonds, and 40 percent cash.
But they aren’t problem-free. Lifestyle fund managers pick both stocks and bonds, where most managers specialize in one instrument. These funds also tend to be conservative — they may not get hit as hard when the economy tanks, but they won’t rake in the returns in an up cycle, either. Plus, most investors don’t fall neatly into a category, says Dennis Hebert, CFP and vice president of the upstate New York Financial Planning Association. “They’re the lazy person’s planning tool,” he says. “They’re not necessarily bad, but they don’t allow much flexibility.”
If you’re still interested, analyze each fund manager’s long-term performance before you buy. “In lieu of doing all the research yourself, lifecycle funds may be a better option,” Hebert says, “but you’ve still got to do some homework.”