It's been a few weeks since I've been on Fox 59, so it was great to be back last week! And even better, I was able to answer one of the most common questions I get which is, "are target-date funds right for me?" Click the link below to watch me explain target-date funds and their use to Ray Cortopassi.
Investing can get messy and people often have questions about what they should invest in, what mix of investments they should have, and how to determine their risk tolerance, among many other questions. There are so many factors to consider and so much information necessary to make the right decisions that people often feel lost. This is where a target-date fund comes in. A target-date fund is assigned a year, such as Target 2025 or Target 2040, which means it is the optimal mix of investments for someone retiring in the specific year it's named for. A target-date fund is a pre-packaged, set-it-and-forget-it, way to invest.
"I’ve always thought of our investment allocations as cake recipes. Add the right amount of stock, the right amount of bonds, and the right amount of cash, and you will have a money-cake cooked to your liking. Target-date funds are prepackaged cakes. The ingredients are all right there, the cake is baked, and you can’t adjust the recipe. Strangely, people mess this part up. If you have a target-date fund in your portfolio, along with other funds, then you are basically pouring flour and/or sugar on the top of a pre-baked cake that you just emptied into a mixing bowl from a plastic wrapper. Yeah, that’s not going to taste good. When you combine a target-date fund with other investments within your account, you may create untended consequences. Target-date funds were designed to be the only investment in your account."(courtesy of the Indy Star)
But as great as all of that sounds, I do want to make sure you know a target-fund is actually third in line of the best ways to invest. Here are the three best ways for you to invest, in order:
#1 - Invest with a professional advisor. This is the best way to get a personal plan managed by a professional.
#2 - Educate yourself. Surprisingly, your second best option is doing your own research and managing your investments. It requires not only a lot of self-educating, but it also requires some honesty. Honesty with yourself, that is. You need to look yourself in the mirror and ask yourself if you are confident enough in your knowledge to manage your own investments. If so, this can be a great route to take.
#3 - A target-date fund is perfect for you if you don't have an advisor and you can admit your knowledge is lacking in the investment department. You'll probably find the fees are a little higher on these types of funds, but it's a small price to pay to be able to invest with peace of mind.
So there you have it. Target-date funds are perfect for a certain situation. What other investing question do you want to throw at me?