All of my 401 K money is in a target date fund. I’ve haven’t talked about my this strategy for a couple of reasons. The choice illustrates my lack of sophistication when it comes to investing. Plus some writers have expressed negative opinions about this investment choice.
This type of fund may be the right choice for you so let’s talk about it together without embarrassment.
What is A Target Date Fund?
A target date fund may also be called a lifecycle or age-based fund. It is a mutual fund consisting of a mix of assets (stocks, bonds, etc.) that becomes more conservative over time based on the target date.
Typically the target date is included in the name. Investors selecting the Vanguard Target Retirement 2020 Fund most likely plan to retire during or close to the year 2020. The year may be adjusted based on tolerance for risk. I chose a fund later than I plan to retire because it was more aggressive.
Until target date funds were offered at my employer, I muddled my way through selecting funds and trying to keep them balanced based on my risk tolerance. I’m sure I lost a lot of potential earnings with this haphazard method.
Pros of a Target Date Fund
There are many reasons people like me choose this type of mutual fund. Target date funds are simple and that appeals to us. I don’t have to decide which funds from the list of options to pick let alone worry divid
Re-balancing is automatic and handled by the fund manager. No need to move funds around because the ratios are out of whack.ing my contribution among them.
Lastly, it’s hands off once you get started. Just pick the desired target fund and you don’t have to think about it. I don’t worry because an individual fund might be doing bad this week resulting in no stress.
Cons of a Target Date Fund
I alluded to one of the problem with lifecycle funds. They don’t take the risk tolerance of individual investors into account. The assumption is that all people planning to retire in 2030 (or whatever date) want the same allocations. The way around this problem is to select the fund with the desired balance instead of by date.
Another concern is the one size fits all approach. Everyone in the fund has the same stocks, bonds, etc. If you want an unique portfolio, this isn’t the right option for you.
Be selective in choosing the fund because some consist of funds from a single company (for example all Fidelity or all Vanguard). Diversification is important to ensure all your eggs aren’t in one basket.
When comparing my annual returns to some of my friends, I’m comfortable with my decision to invest in a target date fund. I usually beat or come close to their returns with a lot less stress. Maybe it’s also the choice for you. What’s your retirement fund investment strategy?