Several advantages of target-date funds include: Low minimum investments, allowing for instant diversification among various asset classes (equities, bonds, etc.) Professionally managed portfolios, offering a hassle-free investment. Low maintenance, as the funds are designed as a one-size-fits-all solution.
For people who aren't going to follow investment markets, learn how to invest, and take a hands-on approach to their retirement, target-date funds are helpful. They're even a smart move for people who are inclined to frequently change their fund allocation inside their 401(k).
Advantages of Target-Date Funds
A target-date fund is a class of mutual funds or ETFs that periodically rebalances asset class weights to optimize risk and returns for predetermined time frame.
Target-date funds are designed to help manage investment risk. You pick a fund with a target year that is closest to the year you anticipate retiring, say a "2050 Fund." As you move toward your retirement "target date," the fund gradually reduces risk by changing the investments within the fund.
Rowe Price TROW -0.45% and BlackRock BLK 1.31% —the five largest target-date-fund companies, which command the majority of the market—don't charge double fees today, says Jason Kephart, a multiasset-manager research strategist at Morningstar.
Nothing special happens with a Target Retirement Fund when it reaches its target date. The fund doesn't stop investing, and you don't need to take your money out of the fund. The gradual move from stocks to bonds simply continues.
Target Date Funds violate Bellman's Principle of Optimality
Take two investors, both 45 years before retirement, starting out with $0 initial assets and contributing $1,000 each month to their retirement plan TDF.
The Best Target Date Funds For Retirement
In fact, you will most likely end up having to sell the entire fund and start again. Most Target Date Funds simply stop changing the allocation at the Target Date. So, if the model calls for 90% invested in bonds at the date, it will stay that way infinitely.
: the date set for an event or for the completion of a project, goal, or quota.
What is a target-date fund? A target-date fund is a diversified investment mix based on your age and the year you expect to retire. When you're younger, the exposure to equity will be much higher, perhaps 90%.
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