1	SOCIALS Photos from the PODER Magazine Forecast 2007 held at the International Monetary Fund headquarters in Washington. read more...
2	ASK JULIE Financial columnist Julie Stav breaks down the differences between index funds and life cycle mutual funds. read more...

THE RIGHT FUND

Dear Julie: I have heard that index funds are a good way to invest in the stock market. But, what is the difference between an index fund and a life cycle fund, and which one should I opt for?

Let’s begin with the definition of a mutual fund in general. A mutual fund is a type of investment where you can buy shares in a company that pools monies from many investors and buys and sells stocks, bonds, or just about any other type of securities with this money. There are many companies that do this and they are called “families” of funds. Oppenheimer, Franklin, State Farm, Vanguard and Fidelity are examples of mutual fund families. Each one of these companies has one or more accounts in their family, each with a different investment goal, also known as the fund category. These categories can range from very aggressive to very conservative. These funds are called “managed funds” because the administrator “manages” the money invested in it.
Index funds are also part of a family, but instead of being actively managed by the fund advisor according to the fund category, they simply buy all the companies that comprise an index and just sit and wait; if the index goes up, so does the fund; if it goes down, well, you get the message. One of the most popular Index Funds is one that invests in the companies that make up the S&P 500 Index. These funds are totally invested in the market during good and bad times.
A life cycle fund, on the other hand, is actively managed according to the date of the fund. For example, a life cycle fund with a target date of 2013 invests more aggressively at the beginning and then reduces its aggressive holdings as it approaches its destination—the year 2013.
As you can see, the difference between these two types of funds is mainly that the first one, the index fund, maintains the same speed, while the life cycle fund speeds up or slows down according to how far it’s going.
Now for your ultimate question: which one is better for you? Well, if you happen to need the money you have invested in an index fund when the market is up, you will probably come out looking pretty good, but if you sell your shares during a bear market, you will suffer the decrease in share price and end up with less money. So, if you can time your withdrawal to coincide with a bull market, an index fund is probably going to give you better returns since it kept its speed at full throttle during your investment journey.
However (and you knew this one was coming, didn’t you?): If you are investing for a specific goal like your children’s college education, your retirement, or any other purpose with a deadline that would require you to withdraw money from your fund at a specific time, a life cycle fund may prove less risky, since this type of investment reduces its exposure to stocks over time buy buying bonds or using money market accounts as it approaches its destination. In a life cycle fund, you sacrifice the possibility of making a higher return in later years by protecting your gains with more conservative investments.
So, do you go for the most you can get along the way and take your chances, or are you willing to give up some gains to decrease your risk? Your call!