Lifestyle Funds: Choosing a Strategy that Fits You Best

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Every investor’s portfolio is subject to the vagaries of the financial markets. Inevitably, a portfolio’s value—and its mix of asset classes—will shift up and down in response to market movements, making it a challenge for individual investors to pursue a personal asset allocation strategy on their own. As a result, lifestyle funds and lifecycle funds, both of which have diversified asset allocation strategies, are growing in popularity. Lifecycle funds (often called target-date funds) are a convenient way for investors to save for retirement because they have a “glide path”—a planned progression of asset allocation changes over time, so that the investor’s portfolio becomes more conservative as the target date approaches. Lifestyle funds (often called target-risk funds), in contrast, are customized to an investor’s risk/reward profile, and managed so that they maintain that profile no matter how long an investor owns a fund.

The following article answers some questions about lifestyle funds and what benefits they can provide to investors.

Article Highlights

  • Lifestyle funds (often called target-risk funds) offer a single, straightforward solution to investing based on an investor’s personal situation and risk profile.
  • Each fund’s asset allocation is automatically rebalanced to preserve its particular risk/return profile.
  • Lifestyle funds effectively serve as single solution pre-packaged, diversified investment portfolios with embedded advice.

What are lifestyle funds and how do they work?

After determining your individual risk profile, you then select the lifestyle fund that most closely matches it. Lifestyle funds cover the risk/reward spectrum and range from lifestyle income funds, which invest 20% of their assets in equities and 80% in fixed income, to lifestyle aggressive growth funds, which have a 100% equities allocation. Each fund’s asset allocation is automatically rebalanced to preserve its particular risk/return profile. That means you are assured that the assets you’ve invested in the fund are continuously managed according to your chosen level of risk.

What are the main advantages of investing in lifestyle funds?

A lifestyle fund can serve as a cornerstone investment—especially for investors who have neither the time nor the specialized knowledge to design and manage a diversified, risk-appropriate portfolio. Each lifestyle fund is professionally managed by experienced portfolio managers, who understand the opportunities and challenges of the financial markets. This dedicated portfolio management team works to create and manage a fund that is diversified across a range of asset classes and investment styles. They also regularly rebalance the fund so that it maintains its targeted risk profile.

How do you decide which lifestyle fund is most appropriate for you?

To select a lifestyle fund, begin by considering your investment goals, risk tolerance, and time horizon by asking a series of questions:

  • What do you need your money for? Lifestyle funds can help you save for a specific purpose, which may include retirement but might also involve an intermediate goal such as funding your child’s education or buying a new house.
  • How much time do you have before you need the money? For example, you might have more time to save for your retirement than you have to save for your son’s or daughter’s college tuition.
  • What is your risk tolerance? That is, how comfortable are you with short-term shifts in the markets or in the value of your investment portfolio?

Based on the answers to questions like these, you can choose the lifestyle fund most appropriate for your circumstances.

Of course, your preferences can change over time. Some people may grow more cautious as they get closer to retirement, while others may decide they can tolerate more risk. There can also be a triggering event, such as the birth of a child. It is essential to reassess your risk tolerance on a regular basis and if you find it has changed, you should move into a lifestyle fund that matches your new risk profile.

What is TIAA-CREF's investment approach to lifestyle investing?

TIAA-CREF’s lifestyle funds invest in all major asset classes—such as U.S. equity, international equity, emerging markets and fixed income—as well as investment styles, such as growth and value. Our investment approach also blends fundamental and quantitative equity funds, which serves to further diversify risk and potential sources of return.

Do you have any take-away points for investors?

Lifestyle funds effectively serve as pre-packaged, diversified investment portfolios with embedded advice. An investor chooses the lifestyle fund based on their personal risk profile and a team of professionals will manage that fund on a day-to-day basis, regularly rebalancing the fund to maintain its target asset allocation—relieving the investor of the need to do it.