According to the SEC survey dated April 11th 2013, target date mutual funds have become increasingly popular over the last several years, with assets totaling over a half a trillion dollars. Roughly 70 % of U.S. Employers offer Target Date Funds as the default investment option for their company sponsored defined contribution plans.
But before you jump in, here are a few things you should know about Target Date Funds.
Target Date Fund Myth #1. Your money is guaranteed.
Based on the Securities and Exchange Commission, they found that 64% of investors polled, believed that their Target Date Fund was guaranteed. Thats unbelievable, and its just not true!
Target Date Funds are intended to match the investors portfolio risk level to the amount of time until they withdraw the funds. Gradually moving from riskier investments towards more conservative investments as the target date gets closer. The funds do not mature and they are not guaranteed.
From the SEC Survey…
For example, in 2008, investors who invested in funds with a 2010 target date found themselves facing average losses of 30%, just two years before their presumed retirement date. Some of these investors faced losses as high as 41%.
Target Date Fund Myth #2. All Target Date Funds are alike.
I knew there would be some discrepancy from one Target Date Fund to another, but even I had no idea, until I started to look into the data.
According to the 2014 Morningstar Target Date Series Research Paper, For the 2015 target date funds, the percent invested in stocks ranged from 25% to as high as 78%.
That is a huge difference! Remember, 2015 target date funds were essentially for people planning to retire within the next year.
Before you invest in any Target Date Fund, make sure you know whats in it.
Target Date Fund Myth #3. “Just Set It and Forget it”
Some fund providers touted Target Date Funds as a “set it and forget it” investment option. They may believe these funds are primarily attractive to less sophisticated investors who lack financial experience.
Some marketing material on these funds advertise the automatic rebalancing feature suggesting that investors don’t even need to monitor their investments.
As with any investment, do your homework. There is no magic formula with Target Date Funds. Your money is still at risk, just as it is with any other investment.
With Target Date Funds it may be difficult to see exactly whats happening inside the fund. You are relying 100% on the fund company to make all of the decisions. I recommend people take a more proactive approach to managing their investments.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Investing in target date retirement funds are subject to risk of their underlying funds.
The investment risks of each fund will change over time as its asset allocation changes.
They are subject to the volatility of the financial markets, including equity and fixed income investments.
The principal value of a target fund is not guaranteed at anytime including the target date.
The target date is the approximate date when investors plan to start withdrawing their money
Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus and, if available, the summary prospectus contain this and other important information about the investment company. You can obtain a prospectus and summary prospectus from your financial representative. Read carefully before investing
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