If you’re too busy to do laundry or cook dinner, you probably don’t have loads of time to invest either.
Many people in your shoes are putting their investments on “auto pilot” in target date funds. You sign up, put your money in the fund and basically forget about it until you retire.
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It’s called “target date” because you select one fund to put your money into that best matches the approximate year you want to retire. So if you’re 25 today, you probably want to go into 2055 fund (which works out to retiring around 65).
It’s essentially a one-stop shop for investing because target date funds gradually adjust the amount of stocks and bonds in your portfolio. They become more conservative as you near retirement. So when you’re 25, the target date fund typically has you more heavily invested in stocks. By the time you retire, your portfolio is heavy on the bonds.
New, inexperienced investors are more likely to enter into target-date funds than anyone else, according to a study by University of Missouri professor Michael Guillemette.
target date funds
Related: How to Invest $1,000
A popular choice: “[Target-date funds are] simply a way for an investor to let someone else drive the car,” says Brad McMillan, chief investment officer at Commonwealth Financial Network. Average investors “are probably going to come out better with a target-date fund…than they’re going to do by themselves.”
In theory, they are simple. But they aren’t bullet proof. Like any investment, you want to do a little homework, especially on fees. The managers of target date funds can use an array of investing options to make up the portfolio. Some of those investments cost more than others.
It’s not entirely “one size fits all.” But increasingly, target date funds are finding appeal with young investors.
Born in 1994, target date funds have ballooned in recent years. People had over $700 billion invested in target date funds at the end of last year, according to Morningstar. That’s about double the amount from 2011.
A key law change in 2006 has allowed employers to automatically enroll employees who do not want to actively manage their 401(k) money into target date funds. That has also spurred the big surge in target date investing.
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