IF INVESTORS learned anything in the stock market swoon, it's that choosing the right mix of stocks, bonds and mutual funds is a lot more complicated than the bull market of the late 1990s had them believing.
It's not just a matter of choosing the hot stock or fund, but developing a diversified portfolio based on when investors will need the money and how much risk they can stomach.
For investors overwhelmed by these decisions, there's a simple solution: a lifestyle fund.
Basically, investors choose a single lifestyle fund based on their tolerance for risk and the amount of time they have to invest. The rest is left up to a professional manager, who chooses the mutual funds or the individual stocks and bonds that make up the lifestyle fund. The manager also maintains a certain asset allocation -- mix of stocks and bonds -- and regularly rebalances the portfolio.
Sometimes, the asset allocation stays the same throughout the fund's life. It's up to investors to decide whether they want to shift their money into a more conservative lifestyle fund as time passes.
Other lifestyle funds, though, will adjust the asset allocation over the years, gradually taking a more conservative stance. The asset allocation is based on the date the money is expected to be withdrawn.
For example, a lifestyle fund with a target date of 2030 might start with 80 percent stocks and 20 percent bonds. Over three decades, the manager will shift to 20 percent stock and 80 percent bonds, without investors having to lift a finger.
"It gives people a little bit of peace of mind," said Lars Schuster, a research analyst with Financial Research Corp., a mutual fund consulting group in Boston. "There is a clear objective. It's easy to use."
Because lifestyle funds are often broadly diversified, investors don't get the extreme high returns that a skyrocketing sector can deliver, but they also avoid the deep lows, experts said.
Some lifestyle funds are attracting more dollars because of the market downturn, experts said. For example, among the 401(k) plans administered by Fidelity Investments, the number of participants investing in lifestyle funds grew by more than 30 percent during the first eight months of last year.
And more lifestyle funds are coming on line. T. Rowe Price Associates in Baltimore launched a second set of lifestyle funds in September.
"Some investors feel overwhelmed by the number of choices they have and the number of factors they have to look at," said Jerome A. Clark, portfolio manager of Price's five new lifestyle funds. "We designed them for the investors who are looking for one-stop shopping."
Lifestyle funds are not suited for hands-on-investors who enjoy choosing their mix of investments. Some critics say lifestyle funds might be too simplistic, assuming that everyone in a fund has the same goals, risk tolerance and financial needs.
"They're not good for somebody who wants a tailor-made portfolio," said Langdon Healy, a mutual fund analyst with Morningstar Inc. in Chicago.
Still, for those who want to take the guesswork out of their investing and want diversification, lifestyle funds can be an attractive option. "They're probably very good for people who don't have the discipline to buy low and sell high," said Kathryn Barland, a senior research analyst with Lipper Inc. in Denver.
If you're thinking about lifestyle investing, here are some considerations:
To get the full benefit out of a lifestyle fund, choose only one for all or most of your investment dollars. "The idea is to make one of them the core of your portfolio," Healy said.
A Hewitt Associates study two years ago found that the majority of investors defeated the purpose of lifestyle investing by spreading dollars among several lifestyle and other funds. As a result, workers in their 20s through their 60s ended up with a similar portfolio, rather than one geared toward their age or risk tolerance, the benefits consulting firm found.
Also, by investing in several lifestyle funds in the same series, you can end up with a lot of overlap because the funds tend to invest in the same investments though in different degrees, Healy said.
Look at fees. Often a lifestyle fund is a "fund of funds," meaning it invests in other mutual funds. In some cases, investors will only pay the management fees charged by the funds within the lifestyle fund. But some lifestyle funds tack on an additional management fee.
"In some cases that could be justified, if there is a manager overseeing ... that fund of funds on a daily basis and managing it," Healy said. "For a fund of funds that is not really actively being managed to assess an extra layer of fees is expensive."
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