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What is a target date-fund? How do I invest in one?


A target-date fund is a vehicle that helps people to meet one of the main goals of retirement planning. It’s widely thought that investing in a portfolio divided between stocks and bonds is the best way to produce long-term wealth. It’s also widely thought that the proportion held in each type of asset should vary with the investor’s age. Stocks tend to produce much bigger gains than bonds over the long haul, but with more volatility, meaning that the possibility of short-term losses is also greater for stocks. Investors are encouraged, therefore, to keep more of their portfolios in stocks when they’re younger, and have more time to recover from bad runs in the market, and gradually shift into bonds as they get closer to retirement.

Target-date funds were invented to permit investors to accomplish that shift in allocation in a systematic way as the years roll on. Each fund assumes that the owner plans to retire at a specific time – the target date – and then adjusts the holdings accordingly as the date approaches. With 27 years to go, a 2040 target-date fund might have 90 percent of its assets or more in stocks. The mix might become 50/50 by 2035 and perhaps 20 percent stocks and 80 percent bonds by 2038. Similarly, you might find a 20/80 mix of stocks to bonds today in a fund with a 2015 target date.

Most large mutual-fund managers offer target-date funds, and there are plenty to choose from; the fund research firm Morningstar has 221 funds in its database just with target dates between 2036 and 2040. As with any investment, compare performance – historical returns and volatility – as well as such factors as total expenses, the strength of the management company and the length of time that the manager of the specific fund has been on the job, then pick the one or two that seem best.

-Conrad de Aenlle