Lifecycle mutual funds are designed to be easy, but if you don’t use them correctly they can throw your portfolio off balance.
Lifecycle funds offer a mix of assets designed to fit a particular investor’s time horizon. The asset allocation is changed over time as a certain goal, or “target date,” gets closer.
As a result, lifecycle funds can be good options for investors who want to take a hands-off approach to investing. But there are two potential pitfalls.
First, a one-size-fits-all approach seldom works in investing.
You may have the same expected retirement or withdrawal date as your neighbor, but you probably have different financial goals and different tolerances for risk.
The same fund, then, is probably not right for both of you.
Second, many investors don’t use lifecycle funds in the hands-off manner for which they were intended. Instead, they also own other mutual funds, stocks and bonds. This can open investors up to more risk. For example, if your desired asset allocation is 50% stocks and 50% cash, and your lifecycle fund achieves that, buying more bonds in addition to the fund will throw your portfolio off balance.
If you like the idea of a lifecycle fund’s simplicity but also want to invest elsewhere, you may want to put the bulk of your assets in a lifecycle fund and then allocate a smaller amount to other investments that aren’t likely to be represented in the lifecycle fund – such as sector-specific stocks.