Lifestyle or Target Date Funds Can Provide Easy Diversification

Lifestyle or Target Date Funds Can Provide Easy Diversification

If you invest in your company retirement plan then you are probably familiar with these types of funds. Some are created with a target retirement date, others are based on where you are in your financial life such as an Intermediate-Term Horizon or Long-Term Horizon fund. One of the benefits of these funds is that it makes investing very simple for people who do not want to worry about their investments or regularly make changes.

In a target date fund, the investments are automatically rebalanced and the allocations are adjusted as the target retirement date nears. This eliminates the need for the investor to actively make adjustments to their holdings. The lifestyle funds are also similar in the fact that they are a fund of funds approach that is based on an asset allocation suitable for that particular time frame, taking some of the work out of investing.

There Are Some Drawbacks

One common issue can be when you use one of these fund types as your core holding, and in an attempt to diversify you invest in a few other more specific funds or index choices. If you don’t know what your target or lifestyle fund actually holds, you could be simply duplicating many of your holdings and paying additional expenses to do so. The whole point of diversifying is to create a broad investment mix to maximize returns and reduce volatility. If most of your funds have a sizable amount of overlap, the diversification is not going to be as effective.

Ultimately these can be good investment choices, but only if you take the time to understand the fund, how it works and what positions it holds. Then you can make additional investment decisions that will best benefit your diversification and investment objectives without paying additional expenses for overlapping.