TARGET-DATE INVESTMENT FUNDS: A PILOT FOR YOUR INVESTMENTS

Kelan Combe, Program Coordinator, Empowering Financial Wellness

For most people, investing can be a very daunting task. It can feel overwhelming to research different funds or investments, manage risk, and make sure your investments are diversified. However, there are investment options to help make this process simpler. One of these options is called a target-date fund.
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Before I go on to explain what a target-date fund is, I want to clarify that we at Utah Money Matters are not financial advisors, and nothing in this article is intended to be specific investment advice. We do not recommend or endorse any specific investment. Our goal for this article is intended to be informational only, and we recommend that you do your own research, and/or speak to a financial advisor before making personal investment decisions. 

A target-date fund is a type of mutual fund, or a collection of different investments and investment types, that is made to grow for a specified period of time, for example, for the next 30 years until retirement. The purpose of a target-date fund is to automatically adjust investments and risk over time so that the closer you get to your target-date, the less risk your investments have. Think of it like a pilot guiding a plane into a runway. The closer they get to the runway, the more level and slower they have to make the plane so that it doesn’t crash into the runway. A target-date fund does this by shifting from higher-risk, higher-return assets to lower-risk, lower-return assets such as bonds as the target-date nears.

Advantages of a Target-Date Fund

1. Simplification and Convenience: Target-date funds can be a simple way to invest, because you do not need to worry about choosing each investment yourself. Investors choose and adjust the assets for you based on the target-date of the fund.
2. Diversification and Rebalancing: These funds can help you minimize the risk of your investments by spreading them out across many different investments and investment types, such as stocks, bonds, and sometimes international funds. This spread reduces risk greatly compared to investing in a single asset.
3. Professionally Managed: Professional fund managers handle the investment decisions, which is helpful for those who don’t have the time, or expertise to manage their investment portfolios manually.

Disadvantages of a Target-Date Fund

1. One-Size-Fits-All: Personal finance is personal. What you need may be very different from what someone across the country needs. Risk tolerance, investment goals, or retirement plans vary from person to person, but with a target-date fund, everybody who invests in the fund gets the exact same thing. This may make it difficult to find one that perfectly matches what you are needing.
2. Fees: While target-date funds can offer more convenience, they can come with higher fees compared to other low-cost investment options due to them being actively managed. However, for some the cost of the convenience may be worth it.
3. Risk and Variability: Despite being designed to minimize risk as the target-date approaches, target-date funds are subject to market risk that can come from economic shifts. It is also important to remember that not all funds are created equal. Performance and risk can vary significantly between funds, even if they all have the same target-date. 

Target-date funds can be a valuable investment strategy for those looking for a convenient, hands-off approach to managing risk, but it is important to do the research to make sure you are comfortable with the risk and specific investments of the target-date funds you choose. For more information, check out this article from the Financial Industry Regulatory Authority (FINRA). You can also research specific target-date funds at https://tools.finra.org/fund_analyzer/ and https://finance.yahoo.com/.