Choosing the right investments for your retirement can seem overwhelming. The choices feel like they are endless. Then you see it: the fund with your retirement year right in the name of it. Could this be the remedy to your dilemma? Ahead of jumping in to this miracle investment, let us take a look at the benefits and drawbacks of this fund.
What is a Target Date Fund
A target date fund takes care of the asset allocations for your investments for you, so that you do not need to be concerned about how much you have in equities versus in bonds. This amount adjusts over the years to change the risk levels as you approach retirement.
This allocation is made by investing in other funds to get the appropriate mix of investments. So the retirement fund itself may be invested in 5 stocks funds and 2 bonds funds, or some other mix to create the right amount of risk.
The Advantages of a Target Date Fund
Worry Free ? The extent of your learning is simply to do a quick math problem to see what year you are going to retire. No need to learn all those funny investing terms.
Saves time ? obviously if you only need to select your year, then you don?t have to spend as much time working on your investments.
Disadvantages of a Target Date Fund
Risk preference may be different than you would select ? The fund may end up taking on much more risk than you would consider taking with your money (or possibly less risk).
Still New ? Target Date funds were created in 1993. This might seem like a long time, yet 19 years in investing for a product of this style that is supposed to get you from youth to retirement it is not a very long time. Once it hits 40 or 50 years it will be easier to see if they live up to their intended purpose.
Expenses may be High ? Fees will destroy your return. With a target date fund there are two fees. The fee for the actual fund, plus the fees for all the underlying investment funds. So even if you think you are getting a .5 percent fee you may be paying 1.5 percent if the underlying investments charge 1 percent.
Only as Good as the Company Managing the Fund ? Because these are funds of funds, a company typically will use funds within their own line up. If the company is not good at investing international or in bonds and only excels at stocks you could end up worse off. The overall quality of the company is very important to the quality of the fund you are investing in.
It is decision time ? are you going to take that target date fund in your portfolio? Remember that whatever you decide the most important thing to remember is to be investing!
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Source: http://www.investorhk.com/are-target-date-funds-good-for-you
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