TARGET DATE MUTUAL FUNDS

Target Date Funds (TDFs) are designed to be a maintenance-free solution to a person’s investment needs, basically to meet a specific need, such as Retirement–or College Education.  Generally, a portfolio should have a balance between stocks and bonds, and perhaps domestic and foreign securities.  Balance tends to reduce the volatility since the various components don’t necessarily all go UP and DOWN at the same time.

When a person is young, and has many more years to work, they normally should have a larger concentration of stock in their portfolio, as compared to bonds.  Then, as they progresses through their working years, they should gradually adjust their portfolio to become more conservative–shifting assets from stocks to bonds, on a gradual basis.  A Target Date portfolio does this transitioning automatically.

Younger workers can assume greater risks since they have more years to earn back any losses.  Older workers, on the other hand, do not have that capability.  Keep in mind that various mutual fund companies might balance the investment portfolio risks (i.e. the percentage of stocks-to-bonds) differently.  Also, some investors prefer to be a bit more aggressive and others more conservative.

Right now, there is a market risk inherent in Bonds.  (See “Bonds are Safe.  Right?”)   We currently have some of the lowest bond yields in a half a century.  As the Economy recovers, and the FED allows rates to rise, bond prices should drop.  Well, the problem inherent in Target Date Funds is that those with the highest percentage of bonds are those intended for people who are approaching their Target Date.

Lastly, the investor must keep Inflation in mind.  Back when Social Security started, the average life expectancy was in the 60s.  Nowadays, many people live well into their 80s.  So, if a person retires at age 66 (currently “Full Retirement Age” for Social Security), they could easily live another twenty years, or longer.  So, maintaining ones Standard of Living is imperative–meaning that, at least some Growth will always be necessary to any investment portfolio.

Refer to Carla Fried’s article “In-Target Date Funds, A Hodgepodge of Styles” from the NY Times for more information

SPEAK TO YOUR FINANCIAL ADVISOR TO DECIDE WHETHER TARGET DATE FUNDS ARE SUITABLE FOR YOU AND, WHICH COMPANIES’ FUNDS WOULD BE BEST FOR YOIUR NEEDS?  TARGET DATE FUNDS CAN ALSO BE USED IN CONJUNCTION WITH OTHER SECURITIES IN YOUR PORTFOLIO.

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