Mixing with target-date investments (or when to have more than one) (2024)

FAQs

Should you have multiple target-date funds? ›

If you invest in target-date funds, that should be the only investment in your 401(k). Don't make the mistake that so many 401(k) holders make and try to use them to complement other funds. They aren't designed for that.

We can divide asset allocation models into three broad groups: Income Portfolio: 70% to 100% in bonds. Balanced Portfolio: 40% to 60% in stocks. Growth Portfolio: 70% to 100% in stocks.

As you approach your target date, target-date funds move more of your money from stocks to bonds. However, this approach lowers your overall potential return, creating a drag on performance in exchange for relative safety.

Investors may want to pay close attention to the expected equity exposure at the target date, and what happens after the target date, to make sure they are generally comfortable with the approach. Comparing a glide path with the average also provides insight into how relatively aggressive or conservative it may be.

That means funds — even those with the same target year — may have stock and bond holdings that aren't well aligned with an investor's financial plan. In other words, they might be too risky or too conservative.

“Everyone's situation is different,” Lovison said, “but these funds might be suitable for the first $200,000-$300,000 of savings before shifting to a more personalized portfolio. Ultimately, choosing between a target-date fund and other investment options should align with your long-term goals and risk tolerance.”

Your ideal asset allocation is the mix of investments, from most aggressive to safest, that will earn the total return over time that you need. The mix includes stocks, bonds, and cash or money market securities. The percentage of your portfolio you devote to each depends on your time frame and your tolerance for risk.

Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses.

*Vanguard Target Retirement Funds average expense ratio: 0.08%. Industry average expense ratio for comparable target-date funds: 0.48%.

The Bottom Line

A target-date fund is generally a "fund of funds," meaning that the investor is paying an extra layer of fees. Those additional fees could make the fund's actual return compare unfavorably to other options for a retirement portfolio, such as an S&P 500 Index Fund. Securities & Exchange Commission.

What is better than a target-date fund? ›

Index funds offer more choices and lower costs, while a target-date fund is an easy way to invest for retirement without worrying about asset allocations. Index funds include passively-managed exchange-traded funds (ETFs) and mutual funds that track specific indexes.

Target-date funds can take much of the guesswork out of retirement planning. But fund holdings are sometimes too conservative for younger investors. While passively managed target-date funds usually have reasonable pricing, actively managed ones can be expensive.

To invest in a target-date fund, investors typically choose the fund with the name closest to the date they plan to retire. An investor who is age 30 and wishes to retire at age 65 might choose a target-date fund with a date close to 35 years in the future.

You're cost-conscious about fees: If you prefer low-cost investments and want to minimize expenses, index funds typically have lower expense ratios than actively managed funds, including most target-date funds, though fees for these funds have been dropping over time, too. 5.

End results (which factor in the fees) matter more, however, as that's what determines participant outcomes. To weigh both cost and potential return, plot target date funds' expense ratios against their annualized returns — so you can incorporate both value and cost into the selection process.

Sure, these investments are designed to be standalone comprising a broadly diversified portfolio in just one investment. But that doesn't mean target-date investments and other funds can't happily exist side by side in the same portfolio. In fact, many do.

To invest in a target-date fund, investors typically choose the fund with the name closest to the date they plan to retire. An investor who is age 30 and wishes to retire at age 65 might choose a target-date fund with a date close to 35 years in the future.

Index funds typically offer lower costs, broad market exposure, and simplicity, while target-date funds are a hands-off, all-in-one investment vehicle. Factors to consider when choosing between target-date and index funds include your investment goals, risk tolerance, and time horizon.

Automatic rebalancing: Target date funds are automatically rebalanced periodically to maintain their target asset allocation, so that swings in the markets do not throw a participant's allocation off course.