I was recently quoted in Modern Medicine on the pros and cons of target date funds. A target date fund is a type of mutual fund, generally a retirement account, that offers you chance to leave asset allocation decisions to your fund company.
You choose the date at which you anticipate needing your money, also known as the “target date.” Based on this date, your fund company decides how aggressively to invest your retirement savings. The younger you are, the more aggressively your assets are invested. As you near retirement age, your assets are automatically allocated toward more conservative investments.
What are the drawbacks of this arrangement? The big drawback is loss of control over your investments, but this breaks down into two finer points, both based on the fact that the focus of the fund is your “target date.”
Target date funds do not take into account your personal level of risk tolerance; and
Target date funds may not adequately take into account market factors.
Rather than a target date fund, the wiser choice may be a customized portfolio that offers diversification based on your risk tolerance coupled with ongoing analysis of market conditions.