Advantages and Disadvantages of Target Date Funds
Target date funds (TDF) are also known as target retirement funds or annuities. While the same feature is found in many 529s, when we talk about TDFS, we’re usually talking about funds designed for retirement. They usually include a year in the fund’s name, and are chosen based on the logic of comparing that year to your retirement date. They have several characteristics:
- Financial structure fund
- Well managed
- It is separated
- Automatic retribution
- He became a little more aggressive over time
As with any type of investment, there are PROS and CONS to day trading. In the best funds, profits often outweigh cash, but there may be other reasons why, like me, you may not want to use them as your retirement investment solution.
Benefits of Target Date Funds
Let’s start with the objectives regarding TDFs.
#1 simple and easy to use
A structured fund means you only have to choose one investment. The Target day bag is a one stop shop. Fixed, complex investments can be very easy, and target date funds, like their cousins, annuities, are a good example. One of the smartest investors I know, Mike Piper, uses a single fund solution for his retirement investing. Don’t break the reign of simplicity. You simply select the date you want to retake and match it with the Fund. That’s all. While many will argue that a TDF may not be the best investment portfolio available, no one will argue that it is not an investment opportunity that, if properly funded, may allow you to reach your retirement goals.
# 2 divided
Perhaps the most important goal in investing is diversity. In short, you don’t want to put all your eggs in one basket. Predicting the future is very difficult, and a diversified portfolio allows you to perform well in a variety of future economic conditions. TDF automatically provides you with a Diversified Investment Portfolio / Asset Allocation. Not only is it divided between asset classes by including US stocks, international stocks from all over the world, and additional asset bonds), but sometimes it is not added to the items), but it is more diversified within those asset classes by holding thousands of individual securities.
# 3 Behavioral Control
In many ways, the investor is more important than the investment. The biggest risk to your retirement portfolio is yourself and unreported behavior. A target date fund minimizes this risk as much as possible. Since it is a diversified portfolio, it reduces the volatility of the overall portfolio and makes it easier to stay on course in the depth of the market. Since the Fund selects all asset classes, selects every single security, and controls asset allocation, and controls the glide path, all that remains to control is the most important thing of all – the final level (ie, how much you put where you put each year). A target date fund focuses the investor on what is most important and takes care of everything else. It eliminates manager risk, stock-specific risk, and market timing risk – all traps many investors fall into.
# 4 reduces work
One of the best parts of a Target day bag is that it lightens your load. I know a cardiologist who spends an hour every day researching stocks. It’s a bit of a hobby for him to enjoy, but that’s still 365 hours a year, the equivalent of two months of full-time work. No one using TDF should do that. A professional manager chooses investments, automatically returns the account, and gradually reduces the risk of investment with a set glide method.
Given all those great benefits, it’s easy to see the appeal of a target day fund.
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However, there are several date funds, and it is a good idea to understand them before choosing this investment strategy.
# 1 Loss of control
The main advantages of TDFs are offset by their main problem – they are not regulated. Sometimes it’s good to be out of control, but that doesn’t mean you’re out of control. You can’t choose the investment. You cannot choose the distribution of assets. You cannot choose the glide mode. A trained manager is all that.
However, you can work around this. Instead of choosing your money on your retirement date, you can just look under the hood and choose it through asset allocation. Even if you want to retire in 2045, you can still use a smaller asset allocation and choose a 2035 thousand fund instead.
You can also add a fund to a retirement fund. Chris Pedeersen and Paul Merriman are proponents of the “Big Fund” approach, which is the basic approach of the Target Detirement Fund and the Small Value Fund. This provides a small amount of tilt that many investors want in their portfolio to try to take advantage of the long-term data that suggests that small and valuable stocks are investigating the market for a long time due to behavioral problems due to behavior and / or risk.
# 2 Risk Tolerance is Intolerance
A professional TDF manager decides how much risk they think you should be taking when you take some time off before retirement. That may be more aggressive than you wish to be or more aggressive than you wish to be. For example, most of these funds start with about 90% shares and stay there for many years. That’s pretty good – it’s more aggressive than most investors can tolerate. A professional manager can manage your asset allocation for you, but you still have to live with the consequences of those choices. If you can’t sleep at night or can’t reach your goals because of low returns, you’ll have a hard time staying there.
# 3 bad money
Not all targeted retirement funds are created equal. The best ones have very low costs, and they are built with the funds of the indicators of deviations. The worst part is that it is expensive and filled with fully managed funds where the Mutual Fund company has trouble selling itself. It is not so difficult to use the best funds (Vanguard, TSP, Fidelity Freedom Index, Schwab target funds), but you have to pay a little attention. Note that both trust and schwab have non-in-fund-based and fund-based TDFS.
# 4 most expensive
Investing in a TDF is more expensive than “rolling your own” investments. For some target date bags, the extra cost is obvious; They actually charge an additional fee for the fund on top of the value of the funds. Neither the TSP nor the TSP does so with its funds; you simply pay a weighted average cost of lower funds. However, Vanguard uses premium investor share Fund classes instead of Admiral Admiral Admiral Share classes. This results in an expense ratio that is a few basis points higher (perhaps a full 0.08%) than it would be if you were planning the same portfolio of Admiral Share Class Funds using the same Admiral Share Class Funds. TSP L funds do not do this, and the fund’s financial structure is provided to participants for free.
# 5 Lack of availability
Many doctors have multiple investment accounts. It is not uncommon for a physician to have a 403(b), a 401(a), a 457(b), a spouse’s 401(k), a Roth ROTH IRAS, and a taxable account. It is rare that the same TDF is found in all those accounts. If you are going to have to manage your portfolio in one account, you might as well do it in all accounts or there is little point in using a target address fund at all.
# 6 cargo area goods
Doing the property right has the potential to add another 0.5% per year or on returns. This usually means placing some assets in tax-sheltered accounts while other assets are placed in taxable accounts. It can also mean things like using municipal bonds when investing in bonds in a taxable account. However, none of the TDFSs use municipal bonds. If you place all asset classes in every account, then, at least one of those asset classes is held in the wrong place, eliminating the profit in the right place of the asset. In short, you give up less return for convenience.
#7 The Chase The Chase
While professionals tend to be a little better at avoiding the rush of performance than salespeople, they still do it. The asset allocation of Target Date Funds changes from time to time in unpredictable ways. That could mean increasing the stock-to-bond ratio or increasing the current stock-to-stock ratio, either or not. If you are not controlled, you are not controlled, and that has its pluses and minuses.
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Who are the targets of the day bags?
Who is the ideal target date fund buyer? Several factors make it possible that this should be your investment strategy:
- If you have one investment account. For example, if you are a resident investing in a Roth IRA, this is a good solution.
- If you have the same TDF available in all accounts. The fewer accounts you have, the more likely it is to be true.
- If you accept a slightly lower cost extension and a slightly higher tax performance.
- If you really appreciate the behavioral benefits of TDFS.
WHAT DO YOU THINK? Do you use TDFs? Why or why not? Which one do you use?
[This updated post was originally published in 2020.]
