Target-date funds (also called lifecycle funds) are mutual funds that change over time based on your estimated date of retirement. As you age, a computer algorithm automatically adjusts the types of funds in your investment as you approach retirement.
For example, a target-date fund for the year 2045 would initially include more aggressive (and riskier) stocks but over time would buy more conservative (less risky) stocks. A 2020 target-date fund would be in protection mode, offering low-risk stocks or bonds to guarding the wealth you’ve accumulated. Sounds like an easy way to invest. But I don’t like target-date funds, and here are three reasons why.
Reason #1—Retirement Isn’t a Date
This approach to investing is built on the false notion that retirement is a date somewhere down the road, out in the future. That’s the wrong way to think about retirement. Remember, retirement is not an age; it’s a financial number. It’s the amount of money you’ll need to live the retirement you’ve dreamed about. And if you can buckle down, make sacrifices, and work harder, you can hit that financial number sooner than some computer model tells you. The computer doesn’t take your passion and intensity into account.
Reason #2—Computers Don’t Know You
Using a computer to invest for you is like using the Internet to diagnose a medical problem. WebMD can give you a list of possible ailments, but to actually fix the problem, you’d want to talk with a real doctor. In the same way, a computer can create cookie-cutter investment strategies, but it can’t tailor a plan based on your specific situation. Investment advisors know your goals, risk tolerance, dreams, desires and struggles. They know exactly what you’re trying to do, so they can always give you better advice than a computer.
With a target-date fund, you set a date when you think you want to retire, invest your money every month, and go on your merry little way. You won’t give your investments a second thought. And that’s a bad idea. You need to know where your money is going. You need to understand what you’re investing in and why. Remember, you are responsible for your retirement dream. If you can’t retire when you want and how you want, you can’t blame a computer. You sit in the driver’s seat. There’s no autopilot on the road to retirement.
If you’ve invested in target-date funds, you don’t have to live with that mistake. You can change your investments. Talk to an investment advisor today. Explain your financial situation and your retirement goals. Then together you can map out the right path to achieving those goals. You should use your computer to track your investment plan, but never use them to determine your plan.