In recent years, a “set it and forget it” approach to long-term investing has become increasingly popular. One of the ways this trend manifests itself is through “target date” retirement funds.
Target date funds are designed to automatically adjust as you get closer to retirement age. Your asset allocation is shifted from an emphasis on stocks to an emphasis on bonds as you approach your target date. It’s all supposed to happen seamlessly so that you don’t have to worry about it. Just keep investing, and your portfolio will take care of itself.
But should you rely on target funds for your retirement?
Problems with Returns
One of the issues with target date funds is that you might not be able to plan for huge market events. Some target date funds still haven’t fully recovered from the stock market crash of a few years ago. What happens when a stock crash happens just before your target fund starts moving your assets into bonds? You could end up “locking in” those stock losses as you end up in more conservative investments, which won’t offer you the chance to recover the losses.
In order to deal with this issue, you might need to switch to a fund with a target date that’s further out, or you might need to look for other ways to recoup some of the losses. The problem with relying on an automatic formula is that you so often see automatic responses — no matter what’s going on in the world outside.
Don’t Get Lazy
Another issue is that target date funds, and other automatic type plans, tend to encourage a certain amount of laziness on the part of investors. While you don’t want to get involved in too much active trading (the fees can start to add up and cut into your returns), you also don’t want to just forget about your investments.
Sometimes, it’s a good idea to check in on your asset allocation, and consider selling mutual funds, or other investments, that aren’t helping you reach your retirement goals. Obsession’s not good, but neither is ignorance.
Target date funds tend to get you thinking that it’s all “taken care of,” when it might not be.
Before you decide to invest in a target date fund, figure out what type of management it undergoes. Additionally, be prepared to check up on the fund. You want to see how things progress throughout your milestones. That way, if you need to make adjustments (like picking a longer target date), or if you decide that you’d be better served by doing something else with your money, you can make the move before it’s too late.
It’s important to pay attention to what’s happening with your portfolio. A target date fund may help take some of the pressure off, but it doesn’t relieve you of the responsibility of doing your own research.
Do you have a target date retirement fund?
- E*Trade IRA - Official Site