|
Portfolios must change over time to reflect an investor's needs and goals, but selecting, rebalancing and keeping up
the proper mix of investments can be time-consuming and confusing for many individuals. Asset allocation funds aim to accomplish the
dual goals of creating diversification and meeting growth or income needs in one fund.
But, as with any investment, these aren't meant to be put on autopilot. Investors still have to watch the performance
of the fund, even if the portfolio was constructed to meet risk tolerance or a target retirement date.
There are several different types of asset allocation mutual funds, but the most common are referred to as life-cycle
funds and lifestyle funds.
 |
| 2 main types of asset allocation funds |
|
|
| Life-cycle: Created with a future date in mind, the portfolio
rebalances to become more conservative as the investor gets closer to the target date. |
| Lifestyle: A portfolio of cash, stocks and bonds that remains
fixed and is designed to meet the risk tolerance of the investor. |
|
Life-cycle: target date funds
Life-cycle funds are created with a specific future date in mind, such as retirement. "For example, a 2030 target date would mean
the investor expects to retire in that year," says Kevin Morris, director of marketing for Principal Funds, a member of Principal
Financial Group based in Des Moines, Iowa.
"From an academic point of view, it generally holds true that a shift from equities to fixed income as you age is a
good idea," says Tony Cherin, professor of finance at San Diego State University College of Business. In a life-cycle fund, the mix
generally starts out with a higher proportion of equities and gradually reallocates to include more fixed income as the investor
ages and/or nears the target date.
Lifestyle: balanced mix of funds
Lifestyle funds, also called balanced or target-risk funds, are a fixed mix of stocks, bonds and cash equivalents usually split into
three risk-oriented groups: aggressive, moderate and conservative. Unlike life-cycle funds that shift their risk profile over time,
the mix of investments in lifestyle funds stays the same.
"In lifestyle funds, typically the consumer makes choices based on individual risk tolerance," says Morris, adding
that there is usually a questionnaire to help consumers determine their risk profiles.
What mix of investments is right?
At various stages in life, different investment strategies are required to achieve long-term goals. Asset allocation is the strategy
to minimize risk and maximize returns by putting money into different investment instruments.
For example, when an investor is young, growth and its associated risk are often more palatable because the time horizon
is typically long. Toward retirement, many investors are looking for income and preservation of capital.
"With allocation funds, you don't have to think about the risk and rebalancing as much as if you are doing it on your
own," says Alan Goldfarb, a Certified Financial Planner with Weaver and Tidwell Financial Advisors in Dallas.
These funds can be particularly helpful for busy or novice investors who don't have the time or desire to manage their
fund mix regularly, but who still recognize the need for ongoing diversification in a portfolio that gradually shifts from growth to the
generation of income that is generally required later in life.
|
