Selecting a Target-Date Investment? Check the Approach

Check Your Target-Date Fund Approach - Part 1

Part 1 Selecting a Target-Date Investment

Investors often look to target-date investments for retirement—and for good reason. They offer a convenient way to invest, professional money management and a well-balanced mix of investments intended to help lessen the impact of market volatility.

Those are great benefits for any long-term goal, but not all target-date funds (TDF) are created the same. Investment managers use various approaches to investment design and strategy execution.

In part one of this two-part series, we examine how target-date investments work, and different approaches managers take in their portfolios. Knowing these can help you make better decisions about which target-date investment might best meets your needs.

Understand What You’re Buying

Target-date funds break down the complicated task of selecting several different investments by letting you choose one portfolio based on when you want to start using the money. They are named by year, so you choose one closest to your goal date. For example, if you plan to retire near the year 2040, you could select a 2040 target-date portfolio. The closer you get to the target date, the more conservative the investment approach will become.

Can it be that simple? Yes and no. Start with the date, but other factors are important, too:

  1. Management: When you choose a target-date fund, you’re choosing an investment manager and the accompanying portfolio management style, which can vary widely.
  2. Asset mixture: Many target-date investments are “funds-of-funds”. In other words, they consist of one portfolio with several underlying funds designed to react differently when market conditions change. The asset mixture can potentially help you ride out market volatility, but it cannot ensure a profit or protect you against loss.

 Analyze the Approach

Professional money managers handle the day-to-day details of selecting the underlying funds, overseeing and rebalancing them as needed. View it as a long-term relationship. That’s even more reason to understand the manager’s approach.

It may be easy to choose a date for your goal, but you need to do a little homework when selecting a manager. To understand how your money will be handled, look at the investment manager’s approach. What is the content mix within the target-date fund? How quickly does the mix of stocks, bonds and money markets shift over time? Does the mix change after the target date, or does it remain the same? Understanding these things will help you understand the risks, especially one of the biggest concerns for retirement investors: longevity risk, which is the potential of outliving your money.

Evaluate Risk

By nature, most target-date portfolios are designed to decrease in market risk as the target date approaches. Market risk relates to how much stock is in the portfolio, versus bonds and money markets, at any point in time. The further from the target date, the more stocks will be in the portfolio. Closer to the target date, fewer stocks will be in the portfolio.

The further from the target date, the more stocks in the TDF. The closer to the target date, the fewer stocks in the TDF.
This illustration has been prepared for education purposes only. It is not intended to represent any particular investment product.

However, target-date funds differ by how much and when the portfolio becomes more conservative. The course a fund takes as it approaches its target date is called its “glide path.”

In part two of our series on selecting a target-date investment, you’ll find out more about glide paths, the shapes they take and what this could mean for investing for retirement or any other long-term goal.

Learn More About How Target-Date Funds Work

For educational use only. This information is not intended to serve as investment advice.

The target date of a target-date fund is the approximate year when investors plan to retire or start withdrawing their money. The principal value of the investment is not guaranteed at any time, including at the target date.

Each target-date fund seeks the highest total return consistent with its asset mix. Over time, the asset mix and weightings are adjusted to be more conservative. In general, as the target year approaches, the portfolio’s allocation becomes more conservative by decreasing the allocation to stocks and increasing the allocation to bonds and money market instruments.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.