Target-date Funds: Good? Bad? or Just Easy?

We all wish investing in the markets was easier than it is. Our lives are complicated enough. Deciding which investments to makeover our lifetimes, with our priorities changing, and the markets changing makes for a real challenge. So what about “Target-date” investments?

So, what is a “target-date” investment? Essentially, they are mutual funds or exchange-traded funds (ETF’s) that are actively managed to grow your money in a way that is optimized based on when you will need the money. Generally, the “target date” lines up with your retirement date, but it might also coincide with a college tuition need or any other future major expense.

As an example, let’s say you envision retiring around the year 2040, 19 years from now. You would find a 2040 or 2045 Target Date fund (many investment companies offer this directly or you can get through most 401K’s). Between now and 2040, the fund’s investment team will manage the portfolio of stocks, bonds/fixed income, and cash. They attempt to trade-off risk with growth. In other words, the longer time frame they have, the more risk (stocks) will be built into the portfolio of investment items. Said differently, the closer to the target date, the less risk will be built into the investments. More fixed income and cash will be held closer to the target date. Essentially, target-date investments charge a fee to attempt to manage risk for you depending on the number of years you have to invest. You, supposedly, don’t have to worry about it until you need the money. Sounds easy.

Target-date funds are easy for the investor. Over the years, you don’t have to worry about manually changing the investment mix such that you are decreasing risk the closer to your need date approaches.

That said, there are trade-offs.

1. Target-date funds are expensive. That management does cost you money in the form of returns versus non-target-date funds.

2. If you forget about the target-date fund and let it ride past your target date, your returns will not track the overall market.

3. The target-date funds don’t adapt with your life changes. If your income and priorities change, you will want to change your investments.

4. Generally, these funds are a very conservative investment. They offer a smoother ride in volatile times, but they may disappoint you when the market has its good years.

I am here for you to discuss target-date investments if you are interested. That said, I manage many client’s investments that consider returns, long-term goals, and short-term life changes. That’s what I do! Please let me know how I can help!