The Beginner’s Guide to Investing

When is it a bad idea to invest in target-date funds?


Target-date funds — actively managed funds with a pre-determined asset allocation that automatically shifts as an investor ages — are an easy option for the hands-off investor, and their popularity increases every year, according to a new report. But while they have many attractive features, experts advise investors to consider all of their options.

Over half of all plan participants are invested in a single target-date fund, according to Vanguard's How America Saves 2019 report, and 77% of all participants use at least one. Naturally, the percentage varies by age: A 2018 report from Fidelity found that 68% of millennials have 100% of their assets invested in a target date fund.

Vanguard anticipates that that percentage will continue to increase in the years to come. Nine in 10 plan sponsors offered a target-date fund by the end of 2018, per Vanguard's report, compared to one-third of companies a decade ago. Their rising popularity is in part due to the fact they're the default investment option for many employer retirement plans, notes Vanguard.

"Target-date funds are great for younger investors just getting started," Ryan Marshall, a New Jersey-based certified financial planner, tells CNBC Make It. "They offer broad diversification and an easy entry point for selecting investment options."

Target-date funds allow investors to use a "set it and forget it" approach that's best for younger, less sophisticated investors, especially those who only have money in tax-advantaged accounts, like a 401(k) or IRA.

But they're not ideal for everyone.

Understand the fund's "glide path"

As you get older, the most important thing to understand is your fund's "glide path."

This refers to how the fund's asset allocation — a mix of stocks, bonds and cash, for example — changes over time as you get closer to the "target date" year in the fund's name. As you near retirement, your fund "glides" from being growth-oriented to being more conservative.

If the asset allocation of your chosen year isn't in line with your personal risk tolerance, than you can invest in your own mix of funds, or pick a different target-date year. You need to reassess when you're nearing retirement, Ashley Folkes, an Arizona-based CFP, tells CNBC Make It. Be especially cautious of investing too heavily in conservative assets.

"We aren't planning for one year in retirement, but 25-30," years, says Folkes. Target-date funds "may take too much risk off the table, and you need those risk assets to outpace inflation and taxes."

This simple equation will tell you if you're saving enough for retirement
This simple equation will tell you if you're saving enough for retirement

Marshall adds that retirement, unlike target-date funds, is not one-size-fits-all.

"You are lumping individuals with a few hundred thousand dollars with people that may have closer to a million dollars," says Marshall. "Investors need to invest based on their long term and short term goals and not what Vanguard is saying someone retiring in 2030 or 2040 should be."

And if you have money in a brokerage account, it makes sense to consider all of your other options.

Roger Ma, a New York-based CFP, tells CNBC Make It that it comes down to whether investors prefer efficiency, or total cost and performance, or simplicity.

"The most efficient portfolio will be more complex and take more time to manage on an ongoing basis," says Ma. "On the other hand, the simplest portfolio, like a single target-date fund, will be easy to manage on an ongoing basis, but may cost more."

Don't miss: How much money Americans have in their 401(k)s at every age

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The definitive guide to retirement savings plans
The definitive guide to retirement savings plans