how a life cycle fund works
life cycle funds are designed to be used by investors with specific goals that require capital at set times these funds are generally used for retirement investing however investors can use them whenever they need capital at a specific time in the future each life cycle fund defines its time horizon by naming the fund with a target date an example will help to explain how a life cycle fund works suppose that you invest in a life cycle fund with a target retirement date of 2050 in 2020 at first the fund will be aggressive in 2020 the fund might hold 80 stocks and 20 bonds each year there will be more bonds and fewer stocks in the fund by 2035 you should be halfway to the retirement date the fund would be 60 stocks and 40 bonds in 2035 finally the fund would reach 40 stocks and 60 bonds by the target retirement date of 2050 benefits of life cycle fundsfor investors with a targeted need for capital at a specific date life cycle funds offer the advantage of convenience life cycle fund investors can easily put their investing activities on autopilot with just one fund the fixed asset allocations of life cycle funds promise to give investors the right balanced portfolio for them each year for investors who seek to take a very passive approach to retirement a life cycle fund may be appropriate most life cycle funds also have the advantage of a preset glide path a preset path offers investors greater transparency which gives them more confidence in the fund a life cycle fund s glide path provides for steadily decreasing risk over time by shifting asset allocations toward low risk investments investors can also expect a life cycle fund to be managed through the target retirement date criticisms of life cycle fundssome critics of life cycle funds say that their age based approach is flawed in particular the age of the bull market may be more important than the age of the investor legendary investor benjamin graham suggested adjusting investments in stocks and bonds based on market valuations rather than your age building on graham s work nobel prize winning economist robert shiller advocated using the p e 10 ratio as a measure of stock market valuation life cycle funds are based on the idea that young investors can handle more risk but this is not always true younger workers usually have less money saved and they almost always have less experience as a result younger workers are exceptionally vulnerable to unemployment during recessions a young investor who takes on high levels of risk might be forced to sell stocks at the worst possible time investors might also prefer a more active approach those investors should seek a financial advisor or use other types of funds to meet their investment goals real world example of a life cycle fundthe vanguard target retirement 2065 trusts are one example of life cycle funds in july 2017 vanguard launched its life cycle offering for 2065 the vanguard target retirement 2065 trusts 1 the fund offers an example of how life cycle funds transition their allocations for risk management the vanguard target retirement 2065 asset allocation remains fixed for the first 20 years with approximately 90 in equities and 10 in bonds for the next 25 years leading to the target date the allocation gradually moves more toward bonds at the target date the asset allocation is approximately 50 in equities 40 in bonds and 10 in short term tips the allocation to bonds and short term tips gradually continues to increase in the seven years following the target date after that the allocation is fixed at approximately 30 stocks 50 bonds and 20 short term tips 