Target's Investment Strategy: A Deep Dive Into Their Style

Target-date funds are a popular choice for investors saving for retirement. They are designed to be the only investment vehicle that an investor uses to save for retirement. They are also referred to as life-cycle funds or age-based funds. The target year is identified in the name of the fund, and the fund automatically rebalances your portfolio with the right mix of stocks, bonds and money market accounts as you age. While target-date funds are a convenient option for many, they do have their disadvantages, such as limited investment choices and the potential to be too conservative near the retirement date.

Target-date funds are a set it and forget it option

Target-date funds are a "set it and forget it" retirement savings option. They are designed to be the only investment vehicle that an investor uses to save for retirement. They are also referred to as life-cycle funds or age-based funds. The concept is simple: pick a fund, put as much as you can into the fund, and then forget about it until you reach retirement age.

Target-date funds are a common investment option for 401(k) accounts. They are a default plan for many employer-backed retirement plans. They are designed to age with you by automatically rebalancing your portfolio from growth investments toward more conservative ones as retirement nears. They remove two headaches for investors: deciding on a mix of assets and rebalancing those investments over time.

The target year is identified in the name of the fund. For example, if you plan to retire in or near 2045, you would pick a fund with 2045 in its name. The fund automatically rebalances your portfolio with the right mix of stocks, bonds, and money market accounts as you age. While you set and forget, the fund updates your asset allocation through the years.

Target-date funds are a popular choice among investors for retirement savings. In 2023, 64% of retirement contributions were invested in target-date funds, up from 59% in 2022, according to Vanguard. However, they are not a perfect solution for everyone. They may be too conservative near the retirement date, and investors are not actively involved in investment choices.

Funds automatically rebalance your portfolio

Target-date funds are designed to simplify retirement savings by automatically rebalancing your portfolio from growth investments towards more conservative ones as your retirement age approaches. These funds are often referred to as "set it and forget it" investment options, as they remove the need for investors to actively decide on asset allocation and rebalancing over time.

Here's how they work: when you're early in your working life, target-date funds are typically focused on growth. This means a larger portion of your portfolio is allocated to stocks, which tend to provide higher returns but come with greater risk. As you get closer to retirement, the fund gradually shifts towards more conservative investments, such as bonds and money market accounts, which are considered safer but yield smaller returns.

The "target date" in the fund's name corresponds to your planned retirement year. For example, if you're 40 years old and plan to retire at 65, you would choose a fund named with the year nearest to your retirement date. The fund will automatically adjust your asset allocation as you age, ensuring a more conservative mix as retirement nears.

One important distinction to make is between "to" funds and "through" funds. "To" funds freeze your asset allocation in the year you plan to retire, while "through" funds continue the glide path for 10 years or more past retirement before freezing. "Through" funds recognise that retirement isn't the end goal but rather that you may have 20 or more years of living expenses to consider post-retirement.

While target-date funds offer simplicity and convenience, it's important to remember that not all funds are created equal. They can vary in terms of investment style, fees, and underlying fund offerings. It's crucial to evaluate the costs and investment strategies of different funds before making a decision. Additionally, while target-date funds handle rebalancing automatically, experts advise reviewing your fund's performance annually to ensure it aligns with your financial goals.

Target-date funds are a common default choice for 401(k) plans

Target-date funds are designed to be the only investment vehicle that an investor uses to save for retirement. They are also referred to as life-cycle funds or age-based funds. The concept is simple: pick a fund, put as much as you can into the fund, then forget about it until you reach retirement age.

Target-date funds are a popular choice among investors saving for retirement. In 2023, 64% of retirement contributions were invested in target-date funds, up from 59% in 2022, according to Vanguard. They have become a default option for many employer-sponsored 401(k) plans. The Pension Protection Act of 2006 helped employers develop retirement plans and set up automatic enrollment, making target-date funds an easy option for retirement plans with their low fees and diversified portfolios.

Target-date funds are designed to age with you by automatically rebalancing your portfolio from growth investments toward more conservative ones as retirement nears. Early in your working life, a target-date fund is generally set for growth by having a much larger slice of your portfolio in stocks rather than fixed-income investments. As your retirement year approaches, the fund gradually shifts toward more bonds, money market accounts, and other lower-risk investments.

There are two types of target-date funds from which you can choose: target date and target risk. A target-date fund operates under an asset allocation formula that assumes you will retire in a certain year and adjusts its asset allocation model as it gets closer to that year. The target year is identified in the name of the fund. So, for instance, if you plan to retire in or near 2045, you would pick a fund with 2045 in its name.

Target-date funds are a popular choice for retirement savings

The target year is identified in the name of the fund, so if you plan to retire in or near 2045, you would choose a fund with 2045 in its name. These funds are designed to age with you, automatically rebalancing your portfolio from growth investments toward more conservative ones as retirement nears. Early in your working life, a target-date fund is generally set for growth, with a larger slice of your portfolio in stocks rather than fixed-income investments. As your retirement year approaches, the fund gradually shifts toward more bonds, money market accounts, and other lower-risk investments.

Target-date funds are a "set it and forget it" option, removing the headaches of deciding on a mix of assets and rebalancing those investments over time. They are a common default choice for employer-backed retirement plans such as 401(k) accounts, and they have become increasingly popular. In 2023, 64% of retirement contributions were invested in target-date funds, up from 59% in 2022, according to Vanguard.

While target-date funds offer a simple solution for retirement savings, investors still need to consider fees, asset allocation, and potential risks. Not all funds are created equal, and it's important to evaluate the costs and underlying investments of these funds. Additionally, investors need to be aware of how other retirement investments could impact their overall asset allocation. Despite these considerations, target-date funds remain a popular choice for those seeking a hands-off approach to retirement savings.

Target-date funds have pros and cons

Target-date funds are a popular choice for investors, especially for retirement savings. They are designed to be the only investment vehicle that an investor uses to save for retirement. They are also referred to as life-cycle funds or age-based funds.

Pros

• Simplicity: Target-date funds are simple to understand and invest in. You pick a fund, put as much as you can into it, and forget about it until you reach retirement age. The fund automatically rebalances and reallocates assets as you get closer to retirement, typically shifting the majority of assets from riskier investments to more conservative investments.
• Diversification: Target-date funds offer exposure to a variety of markets, active and passive management, and a selection of asset allocation options.
• Set it and forget it: Target-date funds are a "set it and forget it" investment option. After setting your contribution and selecting the funds, the asset mix in the funds automatically adjusts, slowly becoming more conservative as you get older.
• Lower fund fees: As target-date funds have become more popular, their fees have decreased significantly. Their asset-weighted average expense ratio was 0.32% at the end of 2022, according to Morningstar.

Cons

• Fund expenses: Target-date funds have expense ratios, and it's important to compare these before selecting one. Some target-date funds carry higher fees than the index funds within them.
• No guaranteed earnings: Target-date funds are investments, and all investments carry the risk of losing value. For example, the Vanguard Target Retirement 2025 Fund (VTTVX) fell more than 15% in 2022, despite being close to its target date.
• May become too conservative too quickly: As you approach your target date, target-date funds move more of your money from stocks to bonds, lowering your overall potential return. This could severely impact your potential retirement income, especially if you have a longer retirement ahead of you.

Frequently asked questions