Keep It Simple Stupid
In my previous post about asset allocation I talked about how important it is to have a diverse mix of investments that match your risk tolerance and time horizon. I also explained that it is necessary to shift this mix of investments into less risky assets as you get closer to retirement. For those of you who don’t have the time or desire to actively manage your portfolio’s asset allocation, target retirement funds may be right for you.
Target retirement funds are mutual funds that hold a set allocation of stocks, bonds and cash based upon the fund-holder’s expected retirement date. As time goes by, the allocation of investments becomes more conservative by decreasing it’s exposure to stocks and increasing it’s exposure to fixed income investments. For example, in my IRA I hold Vanguard’s Target Retirement 2050 Fund. Currently this fund has the following asset allocation…
- U.S. Stocks – 72%
- International Stocks – 18%
- U.S. Bonds – 10%
This aggressive asset allocation will gradually get more conservative as I get closer to retirement. By the time I’m 60 and a few years away from calling it quits the fund’s holdings will look like this…
- U.S. Stocks – 48%
- International Stocks – 12%
- U.S. Bonds – 40%
By gradually become more conservative target retirement funds offer a simple way for investors to ensure they have a proper asset allocation based on their age/time horizon. All the investor has to do is decide when they want to retire and then pick the fund that’s closest to that date.
Target retirement funds are also a great way to start investing because they allow you to have a diversified portfolio of stocks and bonds all in one fund. Not only is this convenient, but it also helps young investors who may not have enough money to open multiple funds. (Many funds require that investors have at least $3,000 to open a new account) One final benefit of these funds is that they tend to have low fees and expensive ratios. Keeping fees and expenses to a minimum is vital to investors hoping to achieve maximum returns.
To learn more about target retirement funds you can visit any of the major mutual fund companies’ websites. Personally I’m a fan of Vanguard’s funds, but Fidelity and T. Row Price also have some nice options as well.
