Monday, September 16, 2013

Target-Date Funds: Investing, On Autopilot

Time is the most valuable thing you have.
Read this if: 

1) You want to invest but you're not sure what to invest in. 
2) You want to invest but you want something that is relatively safe. 
3) You want to invest but you want to just sort of set it up and never think about that money again. 

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Since I've started doing this personal finance stuff, I have not made it a priority to invest in individual stocks. The money that I am investing is going towards a specific purpose and stocks are just a bit too risky for me to consider them. Instead, I found an alternative that lets me take advantage of stocks without having to pick them out for myself: target date funds (also known as lifecycle funds).


Background

Before I get into what target date funds are, I just want to remind you guys that mutual funds are made of multiple stocks, and bond funds arae made of multiple bonds. When you buy shares of a mutual fund, you are essentially investing in every company that fund has stock in. 

What are target-date funds and how do they work? 

I have a target-date fund with Vanguard called "Target Retirement 2055." That means I don't intend on selling my shares of this fund until the year 2055. The goal of this fund is to maximize returns from now until 2055 without taking unnecessary risks with your money - this is done by investing in a mix of things, including stocks and bonds. Over time, the fund will move money from riskier assets to less risky assets. 

Right now, my mix is something like 80% stocks and 20% bonds. As we get closer to 2055, the fund will allocate funds to a mix more like 20% stocks and 80% bonds. 

As you get older, your risk tolerance should go down because you're going to need that money sooner, and/or you'll have less time to recover from mistakes. But while you're young, you can afford to take more risks because you have more time to recover. Target-date funds take this into consideration as they manage your money for you. 

Why are they popular?

Target-date funds just help you create the right mix of stocks and bonds, and changes it over the years so that you don't have to. The simplicity is what makes them so attractive, especially to people who don't want to have to think too much about what they invest in. 

Why doesn't everyone just use them?

There is a lot of debate about the true effectiveness of investing on "autopilot." On the one hand, it's really convenient and effective for people who don't know what they're doing (or don't want to manually rebalance their investments). On the other, it gives people less control over their money because someone else is essentially managing their money for them.

Bottom Line 


If you have money that you can invest for a long time (meaning you don't need to use it any time soon), I'd recommend a target date fund. 

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Plan of Action: 

1) If you want to get started with investing, a target-date fund is a great choice. Think about what your goals are, and consider investing in one! 

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Would you consider investing a target-date fund? Let me know in the comments. 

As always, contact me with questions or suggestions! You can either comment directly on the post or send me an email to moneymattersjoan@gmail.com. 

Photo credit: Î’ethan via photopin cc

1 comment:

  1. I'm also invested in the Vanguard Target Retirement 2055 fund. It's gone up so much in the past year though, do you think it would be wiser to buy more now or to wait a little while and see if the price goes down? Are there any other Vanguard funds that you like?

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