With more and more individuals beginning to realize the need to start investing for their retirements at an earlier age, the need for financial vehicles that allow for more passive, long-term investing increases. One of the options for those looking for this type of investment opportunity are target-date funds. Target-date funds are mutual funds that are in a hybrid category that automatically reset their asset mix of stocks, bonds, and cash equivalents in its portfolio according to a selected time frame that is particular to an individual investor.
For instance, a 25 year old looking to retire around 2055 would invest in a 2055 fund, which would have a longer time horizon and be heavily weighted toward stocks, with a relatively small weight towards bonds and cash-equivalents. On the other hand, an older individual who is planning to retire sooner in 2030, would invest in a 2030 target-date fund that has a shorter time horizon, and that would be weighted more heavily towards bonds and cash equivalents, and less on stocks. This weight would make the fund less volatile, and it would be made up of assets that would allow for the older investor to begin making withdrawals when they plan to in 2030. One does not have to invest in a target-date fund with the exact year of their planned retirement. For example, for the older individual planning to retire in 2030 could invest in a 2040 fund if they were looking for a slightly riskier investment.
As one could probably guess, these target-date funds are popular with investors who have 401(k) plans, because instead of having to invest in a number of investments, they invest in one single fund that is designed for their specific goals. The manager’s that head these target-date funds rebalance the asset allocation each quarter or year to keep the fund on track to meet the goals of the investors involved in it.
Though putting money into a fund that starts off more stock-allocated and a bit riskier and evolves into a more fixed-income-allocated and less risky portfolio seems like an easy and solid option, one must keep in mind these funds do not guarantee returns or completely take care of one’s retirement. Target-funds hold great potential for investors looking at a long-term investment, but they have pros and cons that are associated with them.
Simplification is an attribute associated with target-date funds, but it can be seen as both a pro and a con. In regards to being a pro, target-date funds bring a level of portfolio management and complexity to individual investors that wouldn’t typically be possible for them to achieve. On the other hand, many target-date funds can sometimes be treated as a one-size-fits-all type of investment, though in reality individual investment situations vary greatly.
Another advantage of target-date funds is the fact that they take the rebalancing of a portfolio out of the hands of the individual investor and is managed by a professional. In most cases, individual long-term investors are not going to rebalance their portfolio after every quarter or even year, but in the case of target-funds, the managers are usually reallocating assets after certain periods of times in order to keep the fund on track to meet its goals. On the other side of things though, sometimes target-funds aren’t reallocated by managers frequently enough or they are allocated poorly at the wrong times. In some cases where this occurs, investors are hurt by the fund selling low and buying high, or by the fund being allocated too heavily in stocks during volatile times or being too allocated in fixed-income securities during a market rebound.
Bottom Line
Target-date funds can be a simple, viable long-term investment for those considering how to save for retirement and where to put their capital. With any investment, due diligence is needed to determine whether or not individual target-funds are right for an individual or not. Different target-funds fit different individuals’ needs, but overall these funds should be considered as a great option for those looking to place their money in a professionally managed, long-term, and frequently adjusted portfolio based on future retirement goals.
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What are Target-Date Funds and How Can They Help You Reach Your Retirement Goals?
With more and more individuals beginning to realize the need to start investing for their retirements at an earlier age, the need for financial vehicles that allow for more passive, long-term investing increases. One of the options for those looking for this type of investment opportunity are target-date funds. Target-date funds are mutual funds that are in a hybrid category that automatically reset their asset mix of stocks, bonds, and cash equivalents in its portfolio according to a selected time frame that is particular to an individual investor.
For instance, a 25 year old looking to retire around 2055 would invest in a 2055 fund, which would have a longer time horizon and be heavily weighted toward stocks, with a relatively small weight towards bonds and cash-equivalents. On the other hand, an older individual who is planning to retire sooner in 2030, would invest in a 2030 target-date fund that has a shorter time horizon, and that would be weighted more heavily towards bonds and cash equivalents, and less on stocks. This weight would make the fund less volatile, and it would be made up of assets that would allow for the older investor to begin making withdrawals when they plan to in 2030. One does not have to invest in a target-date fund with the exact year of their planned retirement. For example, for the older individual planning to retire in 2030 could invest in a 2040 fund if they were looking for a slightly riskier investment.
As one could probably guess, these target-date funds are popular with investors who have 401(k) plans, because instead of having to invest in a number of investments, they invest in one single fund that is designed for their specific goals. The manager’s that head these target-date funds rebalance the asset allocation each quarter or year to keep the fund on track to meet the goals of the investors involved in it.
Though putting money into a fund that starts off more stock-allocated and a bit riskier and evolves into a more fixed-income-allocated and less risky portfolio seems like an easy and solid option, one must keep in mind these funds do not guarantee returns or completely take care of one’s retirement. Target-funds hold great potential for investors looking at a long-term investment, but they have pros and cons that are associated with them.
Simplification is an attribute associated with target-date funds, but it can be seen as both a pro and a con. In regards to being a pro, target-date funds bring a level of portfolio management and complexity to individual investors that wouldn’t typically be possible for them to achieve. On the other hand, many target-date funds can sometimes be treated as a one-size-fits-all type of investment, though in reality individual investment situations vary greatly.
Another advantage of target-date funds is the fact that they take the rebalancing of a portfolio out of the hands of the individual investor and is managed by a professional. In most cases, individual long-term investors are not going to rebalance their portfolio after every quarter or even year, but in the case of target-funds, the managers are usually reallocating assets after certain periods of times in order to keep the fund on track to meet its goals. On the other side of things though, sometimes target-funds aren’t reallocated by managers frequently enough or they are allocated poorly at the wrong times. In some cases where this occurs, investors are hurt by the fund selling low and buying high, or by the fund being allocated too heavily in stocks during volatile times or being too allocated in fixed-income securities during a market rebound.
Bottom Line
Target-date funds can be a simple, viable long-term investment for those considering how to save for retirement and where to put their capital. With any investment, due diligence is needed to determine whether or not individual target-funds are right for an individual or not. Different target-funds fit different individuals’ needs, but overall these funds should be considered as a great option for those looking to place their money in a professionally managed, long-term, and frequently adjusted portfolio based on future retirement goals.
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