Target Date Funds Pros And Cons

What Is A Target Date Fund? These mutual funds, known as life-cycle, age-based, and dynamic risk, are offered by investment companies like Vanguard and Fidelity.

Your investments will be managed according to a predetermined allocation that will reset over the years. The time frame would likely be shorter for college savings funds but based on a similar concept.

Typically, your assets will be heavily invested in more risky assets like stocks in your younger years. Your portfolio will then be rebalanced to a more conservative allocation in your later years leading up to your presumed retirement date.

Benefits of Target Date Funds

1. Simplicity

Choosing a target date fund takes the guesswork out of the investment process. The average investor may not have the knowledge or desire to actively do their own shifting of assets from an aggressive portfolio to a more conservative portfolio.

2. Diversification All investors should have diversification within their respective portfolios. You should never have concentrations in one particular stock or bond. Always maintain a diversified basket of assets composed of stocks, bonds, money market securities, and real estate. This helps to spread your investment risk among US and  international markets.

3. Asset Allocation It is important to allocate your assets into different baskets according to your risk tolerance, age and investment purpose. Different asset classes have different risks. Target funds do this automatically for you based on their predetermined glide path

Drawbacks of Target Date Funds

1. One Size Doesn’t Fit All The conventional wisdom is that younger individuals should invest more of their savings in riskier stocks. As they age, their asset allocation should transition to safer, more conservative assets, notably bonds and money market securities.

2. Greater Income Volatility If you are among those who have monthly swings in income, higher allocation in stocks may not necessarily be desirable for you even if you have a longer time frame to ride out downturns. Your goals may be different in terms of savings and investing.

3. Retirement Age May Be Going Up “Full retirement age” has moved up a few years as reflected in that our ability to collect 100% of our social security benefits. It has now been raised to at 67 years. Many educated older workers are also working well beyond 65 years. In any case, it is difficult for anyone in their 20s and 30s to contemplate their target date with accuracy.

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