Choosing the right investments for your retirement can seem overwhelming. The choices feel like they are endless. Then you see it: the fund with your retirement year right in the name of it. Could this be the remedy to your dilemma? Ahead of jumping in to this miracle investment, let us take a look at the benefits and drawbacks of this fund.
What Exactly is that Fancy Fund (Target Date Fund)
Target date funds take the work out of you doing all your own asset allocations. This means that you never need to agonize about how much you have in stocks versus how much you have in bonds. As you get closer to the end date your working years the portfolio will get more conservative.
This happens by the the fund investing in other funds, so it is a fund of funds. Therefore if your asset allocation is supposed to be 80% stocks plus 20% bonds, the fund will determine a stock fund or two and bond funds to create the right mix for your retirement year.
The Advantages of a Target Date Fund
Stress Free – You select the approximate year you want to retire and you are done! It is a set it and forget it approach to investing.
Saves time – pick it, set it, and forget it.
Negatives of a Target Date Fund
May not match your risk preference – They may end up taking on more risk than you would consider safe for your retirement money.
Not old enough- Target Date funds were created in 1993. While may seem like a long time, when you take into consideration that if you start saving for retirement when you first start working that you will have about forty years to save for retirement the target date funds are really not that old. It is hard to judge a product that has not taken gone through and entire investment cycle.
Expenses can be High -Fees harm your investments. There are two different fees that come into play with target date funds. The first is the expense ratio for the fund itself. The second is the expense ratio for the underlying funds. As a result, you could be paying more in costs than is good for your bottom line. I have seen some funds go as high as 2% and up, you just simply cannot win with this amount of fees.
Investment only as Good as Management Company – Most of these funds use funds from their own line up to create your portfolio. So if you use the Vanguard fund then it will contain Vanguard funds. So if your investment company is week then your investment will be weak.
It is decision time – are you going to take that target date fund in your portfolio? Remember that whatever you decide the most important thing to remember is to be investing!
Before you decide if target date funds are right for you get more details on investing for beginners at http://www.squidoo.com/investing-for-the-long-term
