Lifestyle Funds for the Inert

Most people are devotees of some hobby outside of work -- for me, it's movies. For others, it's Oscar Wilde, or numismatics. Maybe ornithology. I don't know of anyone whose non-professional passion is asset allocation. No one I know enjoys a lost weekend watching an asset-allocation marathon. They don't huddle inside a coffee house and discuss efficient frontiers and debate whether we have witnessed the death of the equity-risk premium. It's just not that much fun.

Therein lies the problem: Most people, out of fear, confusion or inertia, manage to avoid asset allocation their entire lives. Studies have shown that the average investor allocates 401(k) assets once -- or defers to whatever classes his or her employer provides as as a default -- and never adjusts or rebalances the portfolio again.

"Most investors don't do anything because they have too many choices, and they don't always understand them," said Richard Thaler, behavioral finance professor at the University of Chicago.

What's an inert, asset allocation-averse investor to do? Good news: The fund industry, in its wisdom, offers "lifestyle" funds. While they vary, these funds essentially act as one-step lifetime asset allocators -- setting up a basket of stock, bond and cash mutual funds to meet your needs, according to one's age and risk tolerance. We'll discuss how to use them and name a few that might be best for you.

Let me be clear: These funds aren't the optimal choice-diversified portfolio. In the coming week, I'll devote a few columns to more sophisticated and successful strategies. But this is the easiest asset-allocation deal out there, and I guarantee it offers exponentially greater returns than inertia.