As a financial advisor, the invention of the target date mutual fund ranks right up there with the invention of the mutual fund and the invention of the index fund. In other words, a game-changer for long-term investors. But what is it and why is it important? We’ll take a closer look at target date funds in this two-part series.
A target date fund is a class of mutual funds or ETFs that periodically rebalances asset class weights to optimize risk and returns for a predetermined time frame. The asset allocation of a target date fund is typically designed to gradually shift to a more conservative profile so as to minimize risk when the target date approaches. The appeal of target date funds is that they offer investors the convenience of putting their investing activities on autopilot in one vehicle. In plain English, it takes passive investing to a whole new level, and makes long-term investing much simpler for the average person.
We’ll cover the specifics in part 2, but much like how mutual funds allow for automatic diversification, target date funds allow for automatic rebalancing of your portfolio’s asset allocation. Are you invested in an extremely stock-heavy portfolio at the age of 28? Good. What about at the age of 65? Not good. Without using a target date fund, the necessary rebalancing over your career is your responsibility. Sell some stocks and buy some bonds. A little at a time. For decades. It’s not the easiest process for most investors. Target date funds do it for you. Set it and forget it.
Target date funds are offered in most retirement plans these days, and for a good reason, given their appeal to most investors. We’re going to pause for now, but, much like a target date fund, we’ll regroup and rebalance ourselves before part 2.
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