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Daniel Cross Nov 03, 2015
The other issue many people have with investing for retirement is understanding how asset allocation works. On the surface, it seems simple: you invest more in riskier high-growth assets, such as stocks, because you’re younger and have more time to recover from down markets. As you get closer to retirement, you slowly shift your focus away from stocks to more conservative investments like bonds.
Of course, understanding how each asset should be split and when to change them can require a bit of legwork and know-how. If you aren’t an investment professional, this process may be intimidating. The financial industry came up with a solution to this problem with target-date mutual funds – a single investment that holds other mutual funds and automatically changes stock/bond allocation according to the target date selected on the fund. It’s designed as a “set it and forget it” investment, but if you invest in one, you might not be getting all the benefits you think you are.
Fees also can be an issue in these types of all-in-one investments. Mutual funds already have an expense ratio, or fee, built in for management of the fund. A target-date fund could hold a collection of mutual funds, each with different fees that you can’t control – not to mention the fee associated with the target-date fund itself. In an already conservative fund, these fees can hurt overall returns. If you earn 6% on your investments but the fees add up to 1%, you’re only taking home 5%.
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