Invest Intelligence When It Realy Matters
Target-Date Funds: Another Dangerous Investment Epiphany
You may have heard of one of the newer (marketing) "innovations" developed by the mutual fund industry called target-date funds. They were launched a few years ago as a way to ensure investors they had developed a better way to manage investment risk after many saw their retirement accounts vaporize during the dotcom collapse.
The idea behind target-date funds is simple and seemingly useful. You select funds based on your target retirement year. Based on the year selected, these funds gradually invest in more conservative financial instruments as your retirement date approaches.
For instance, if you plan to retire in 2025, the current holdings of a typical fund might hold say 80% equities and 20% bonds. By 2020, the allocation might have gradually shifted to 40% equities and 60% bonds.
The rational for the reallocation to bonds is that equities are more volatile, so as your investment horizon (retirement date) draws near, you will want to have a less volatile portfolio so as to have a more predictable income stream.