Is a Target Date Fund a good investment? (Article)


Is a Target Date Fund a good investment?

If you have any kind of investment account, you also probably have the option to invest in a target date fund. Target date funds are offered in nearly all employer sponsored plans and are available from a plethora of vendors for IRAs and brokerages. Today we will explore what a target date fund is and talk about who might, or might not, want to invest in one.

First, what is a target date fund? A target date fund is a diversified mix of investments that is designed to optimize risk and return for a certain time frame.  For a longer time frame the mix of investments is more aggressive and as the fund approaches and in some cases passes through the pre-determined date it gradually reduces risk by adjusting the mix of investments in the portfolio.

Now for the important question: are target date funds any good? Sure they are! They offer a low price, diversified portfolio in one convenient wrapper. Are they right for everyone? No.

Target date funds make a lot of sense for younger people, people with smaller balances or people that want to take a hands-off approach to investing. Investing in a target date fund can also mitigate the analysis paralysis some people get when choosing investments. They do not just have to be used for retirement either. Target date funds make a great option for education savings, just pick the date close to when college starts.

On the other hand, target date funds may not be good for older, more aggressive investors. Not everyone wants to start dialing back risk in their mid-40s. Investors with large balances may not want their entire balance to be conservative or might want to expand their portfolio into other asset classes. Additionally, some investors may have several different accounts with different tax treatment and want to allocate assets to them according to that.

The fact is, target date funds are fantastic, low cost, diversified investments. For many people they make a lot of sense and can help them lower fees, especially when they are just starting out.

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