Investments That Strive for High Performance and Low Maintenance

It’s no exaggeration to say that the automatic transmission revolutionized driving. By eliminating the need for drivers to constantly focus on the timing and techniques required for properly shifting gears, the automatic transmission allows them to relax a bit and concentrate more on other aspects of their travels.

In the world of retirement planning, another type of innovation has been designed to produce comparable results. So-called “balanced” funds and “lifestyle” funds relieve investors of some portfolio management duties by placing key decisions firmly in the hands of professional fund managers.

What’s in a Name?
Although their definitions may vary from one source to another, lifestyle and balanced funds typically have a great deal in common. Instead of investing exclusively in stocks, bonds, or cash, these funds simultaneously invest in a mix of securities from multiple asset categories. In theory, that strategy allows a fund’s management to pursue the best possible returns for investors while maintaining a predetermined and managed level of risk. A balanced fund generally invests a fixed portion of its assets in stocks and a fixed portion in bonds, such as 60% in stocks and 40% in bonds. Rebalancing usually occurs only when investment performance causes that mix to change.

Lifestyle funds are sometimes described as being tailored to the needs of individuals within a certain age group or risk profile and may be referred to as “life-cycle” or “retirement date” funds. Plans that feature lifestyle funds usually offer several different variations from which to choose. Each one is designed to meet the needs of particular investors. For example, the manager of a lifestyle fund based on year of retirement may gradually adjust its investment mix over time on the assumption that the fund’s investors want a more conservative asset allocation as they get older.

Some retirement plans do not offer either type of fund. Instead, they may strive for the same general effect by offering so-called “asset allocation models,” which are customized portfolios created by combining different types of funds offered by the plan. Typically, asset allocation models are automatically rebalanced on a periodic basis. The value of the individual funds used in an asset allocation model may grow at different rates, so rebalancing ensures that the fund mixes are regularly returned to their intended allocations.

Should You Leave It to the Pros?
For people who lack the time, confidence, or desire to closely monitor and manage a well-diversified portfolio, a lifestyle or balanced fund or asset allocation model may be a suitable choice. Of course, you’ll still need to determine whether the funds available to you are indeed appropriate for your needs.

For example, you should first determine the particular mix of investments that makes the most sense in light of your unique situation. Next, read the prospectuses of the various funds available to you to understand their investment strategies. Then you can choose the one that best complements your objectives, if that’s the approach you decide to take.

Finally, it’s important to remember that it may be counterproductive to invest in other funds simultaneously, since that could change your portfolio’s overall mix of assets and, by extension, alter its potential for risk and returns.

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