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But target-date funds aren’t infallible, especially those that plan out five decades into the future. In this article, we’ll examine the structure of long-term target-date funds and how they might not always work for investors.
In case you are wondering whether mutual funds are right for you at all, you should read why mutual funds, in general, should be a part of your portfolio.
Know why custom target-date funds can be a better option than the traditional ones here.
So why might longer-term TDFs not necessarily work in all situations? Here are five reasons.
It’s safe to say that really long-term TDFs will be mostly, if not entirely, invested in stocks. Consider this. The 2065 fund will be geared toward people straight out of school, many of whom probably haven’t invested before and may be uncomfortable with market risks. For individuals, TDFs may offer an asset allocation and glide path that is inconsistent with their personal preferences. Further complicating matters is the fact that each investment provider offers their own glide path.
Check out our target-date fund section to remain up to date with the trends in this space.
Using the example above, what do you do if you aren’t comfortable with stock market risk? If you don’t want 90-100% of your money tied up in the stock market, you’re left looking elsewhere for an appropriate option. The same problem surfaces if you want to make any tactical adjustments to your portfolio. If you feel that a particular sector of the market is undervalued and you want to try to take advantage of it, TDFs aren’t going to be able to help. They’re locked into a glide path regardless of the economic environment.
That may slowly be changing, though, as some fund providers along with the Department of Labor are exploring the idea of layering annuities into TDFs to provide a guaranteed fixed income component.
Be sure to check how target-date funds including annuity-like options might be a better choice.
When we consider longer dated TDFs, young investors may have trouble with the notion of contributing to a product they don’t fully understand for even a short period of time, let alone a few decades.
TDFs are built to be all-in-one investments that should be held until the target date, but that’s not always what happens. Investors often get panicky and can be their own worst enemy when it comes to riding out the market’s highs and lows. Emotion-fueled buying and selling or attempting to time the market can severely diminish a portfolio’s returns over time. Investors unwilling to ‘set it and forget it’ may not experience the built-in portfolio management benefits that these funds offer.
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