Life-Cycle Fund
Categories: Investing
A lot of things change as we age, like our eyesight, our metabolism, and our taste in fashion. So why shouldn’t our mutual fund investments change with us?
Well, they should, say financial institutions, which is why life-cycle funds exist.
Life-cycle funds, also called “age-based funds,” are mutual funds that automatically adjust their risk tolerance as we get older. They start out all daring and risky, but then gradually become less aggressive over time…kind of like us.
It works a little like this: we come up with a financial goal, and then we pick a date when we want that goal to be realized. That goal could revolve around retirement, but it doesn’t have to. For example, let’s say we’re thirty now, but we want to be able to buy a ranch in Texas by the time we’re fifty. We can set up a life-cycle fund that is specifically geared to help us meet that goal: it will automatically reduce its level of risk as we get closer and closer to our target utilization date—the date we want those funds to be available for use—and then, when that glorious day arrives, we can cash it out, move to the Lone Star State, and make all of our cattle-running dreams come true.
The drawback here is that, since these puppies automatically adjust over time, they’re not specifically tailored to our individual needs. This makes them low-maintenance—we can pretty much just set ‘em up and forget ‘em—but it also means that we have less day-to-day control over how the fund is allocated and invested.