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Investors who take a look under the hood of their target-date fund might be in for a surprise. Some of the funds that share the same target-date may have significantly different asset allocations and risk levels. In most cases, minor differences in how the funds are invested aren’t a big deal but some funds can stretch the boundary of what’s risk-appropriate for a given target date.
In this article, you’ll learn to identify aggressive target-date funds (TDFs) by knowing the investor-specific criteria and asset allocation strategies used by TDF issuers to create these funds.
The glide path refers to how a target date fund’s asset allocation changes over time. TDFs generally start out heavily invested in equities when the target date is years away and becomes progressively more invested in fixed income and cash as the target date nears.
You can read how target-date funds work to familiarize yourself with this class of mutual funds.
Providers take a number of factors into play when determining a fund’s glide path.
Check out our Retirement Fund section to know the different types of pre-packaged target-date funds.
Outside of the demographics of the shareholder base and the desire to try to achieve above average returns, there are macroeconomic factors as well that may lead a TDF provider to lean more heavily on equities.
Know the pros and cons of target-date funds.
Personal circumstances and preferences should play an important part in the decision-making process. Among other factors, investors need to determine if they are comfortable taking on more risk before going with an aggressive target-date fund.
Check the questions that you should ask your target-date fund provider.
It’s always important to know what you’re investing in. TDFs may appear conservative on the surface based on their target date but many are often more conservative or aggressive than expected. There may be reasonable factors at play helping to explain why a TDF may be investing more aggressively, but make sure the fund is consistent with your goals and risk tolerance before investing.
Be sure to follow our Target-Date Funds section to make the right investment decision.
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Portfolio Management
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