For anyone searching for a simple, easy-to-understand investment strategy, target-date funds may be worth a look. A target-date fund is a mutual fund that invests with the assumption that investors will need to start withdrawing money from the fund at a specified time in the future. A professional fund manager monitors the fund and makes adjustments to the underlying investments as needed for the time frame.
A Focus on Long-Term Financial Goals
The primary feature of a target-date fund is that the fund adjusts its risk level over time. When the target date is still far away (2035, for example), target-date funds invest more of their total assets in higher-risk investments like stocks, with little or no exposure to more conservative investments. As the target date approaches, the fund gradually shifts its asset allocation away from stocks and other risky assets in favor of bonds and other conservative, income-producing investments.
Although target date funds are typically used for retirement saving, they can be suitable for any long-term goal that calls for periodic withdrawals beginning on the target date. For example, target date funds can help students and their families save for future college expenses. Ideally you would invest in a target date fund at least 10 years before your child’s expected college enrollment date. Doing so gives the target date fund time to move through its “glide path.”
Getting Into the Glide
Each target date fund has a unique glide path, which describes how the asset mix in the fund changes over time. Some have what are called “to” glide paths, which means the fund will reach its most conservative asset mix right when it arrives at (or gets “to”) the target date. At that time these funds will typically be invested primarily in investments like bonds and money market funds. There are also target date funds that follow a “through” glide path approach, which means they will continue to pursue some level of exposure to stocks and riskier investments beyond (or “through”) the target date. Target date funds that have a “to” glide path approach are generally more conservative than those with a “through” glide path.
Target-date funds can be a useful and easy way to invest for long-term goals. The automatic way in which target-date funds adjust their investment exposure throughout your lifetime can make investing a lot simpler.
It’s important to note that investing in target date funds, like any other investments, involves risk and may lose money.
Heartland Retirement Plan Services are offered through Dubuque Bank and Trust Company. The information provided herein is general in nature and is not intended to be nor should be construed as specific investment, legal or tax advice. The factual information has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Heartland Retirement Plan Services makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, it. Products offered through Heartland Retirement Plan Services are not FDIC insured, are not bank guaranteed and may lose value, unless otherwise noted.