What it means
Lifestyle funds are usually offered as a small family of options. A cautious fund holds mostly bonds and cash, a balanced one holds a mix, and an adventurous one holds mostly shares.
The investor chooses based on how much risk they can tolerate and how long they plan to invest. The fund manager then keeps the mix close to the target by buying and selling when markets move it out of line.
This approach is simple and gives broad diversification (spreading money across many investments to reduce risk) in a single holding. It suits people who do not want to pick individual investments.
The difference from a life cycle fund is that the mix does not change automatically with age. Investors need to review their choice from time to time and switch to a more cautious fund as they approach the point of needing the money.
Fees and quality vary across providers, and some funds hold only the provider's own products. Comparing the annual charge, the holdings and the past behaviour of the fund in market falls is worthwhile.
A final nuance is that risk labels are not standard between providers. One company's balanced fund might hold 50% in shares and another's 70%, so the label alone is not enough.
In practice
Real-world examples.
Example
A 45-year-old teacher with a moderate attitude to risk puts her pension contributions in the balanced lifestyle fund. She expects average returns with moderate swings. She reviews her choice once a year. She is comfortable that her savings are spread across many holdings.
Example
A 30-year-old engineer selects the adventurous lifestyle fund for his retirement savings because he will not need the money for 35 years. The fund holds mostly shares. He accepts bigger swings in return for higher expected growth. He plans to review the choice every few years or after a major life event.
Example
A 62-year-old shop owner moves from the adventurous fund to the cautious one as she nears retirement. She makes the change herself because the fund does not shift automatically. The move reduces her exposure to a market fall. The cautious fund holds mostly bonds and cash, so its value moves less from month to month.
Formula
Calculation
Fund return = (Share weight x Share return) + (Bond weight x Bond return)
Suppose a balanced lifestyle fund holds 60% shares and 40% bonds, and invests $100,000. In a year when shares return 10% and bonds return 4%, the fund return is (0.60 x 0.10) + (0.40 x 0.04) = 0.060 + 0.016 = 7.6%. The gain is 100,000 x 0.076 = $7,600. If shares instead fall 15% while bonds return 4%, the return is (0.60 x -0.15) + (0.40 x 0.04) = -0.090 + 0.016 = -7.4%, a loss of $7,400. The two outcomes show how the share weight drives both gains and losses. A cautious fund with only 20% in shares would have lost (0.20 x -0.15) + (0.80 x 0.04) = -0.030 + 0.032 = about 0.2% in the same bad year, but it would also have gained less in the good year.Case study
Seen in the real world.
Evergreen Plans is an illustrative, fictional pension provider offering three lifestyle funds: cautious with 20% shares, balanced with 60% and adventurous with 85%. A fictional member, Tomas, puts $50,000 into the balanced fund.
When shares have a strong year, the balanced fund drifts to 66% shares, so the manager sells some shares and buys bonds to restore the 60% target. In a later weak year the manager does the opposite. Tomas keeps the same risk level without any action on his part, and the numbers here are invented.
Evergreen also reports each year how far each fund drifted from its target before rebalancing. The report helps members see that the manager is enforcing a discipline of selling after gains and buying after falls, which most individual investors find hard to do on their own.
Watch out
Common mistakes.
- Assuming the fund changes risk as you age. A lifestyle fund holds a steady mix, so you must switch yourself. Setting a calendar reminder to review the choice each year is a simple safeguard.
- Comparing funds by label alone. A balanced fund at one provider can differ from another provider's.
- Ignoring fees. A higher annual charge reduces returns every year. Over 30 years, an extra 0.5% a year in charges can take a noticeable share of the final balance.
Questions
People also ask.
What is the difference between a lifestyle fund and a life cycle fund?
A lifestyle fund keeps a fixed risk level, whereas a life cycle fund reduces risk as a target date approaches.
What does rebalancing mean?
It means buying and selling to bring the mix back to its target after markets move. Many funds do it automatically each quarter or when the mix drifts by a set amount.
Who are lifestyle funds suitable for?
Investors who want a ready-made mix and are willing to review their risk level from time to time. They are less suitable for people who want a plan that changes automatically with age.
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