Target date funds are a popular choice for most investors when it comes to their 401k because it is largely hands-off. Referred to as a “fund of funds”, a target date fund may be a good choice in some instances… but not always. Is a target date fund the best approach for your 401k? We’ve listed some of the pros and cons of this approach when it comes to your retirement goals and assessment of your risk preferences.
Target date funds are easy
As mentioned above, a target date fund is pretty easy to manage simply because, well, most investors don’t have to micromanage their portfolios. It’s very much a “set it and forget it” strategy.
Conceptually, it works: Based on an investor’s target date of retirement, one mutual fund can be managed for life, with asset allocation adjusting over time.
Drawbacks of target date funds
But having your 401k on autopilot can also be a detriment. You’re less likely to pay attention to what’s happening inside your portfolio, and you could be paying higher fees in the long run… which means less money overall comes back to you.
You also need to consider what your personal risk tolerance is. Market volatility can certainly affect your investment portfolio at any time, but without a good grasp on what your investments are doing, you may be taking more (or less) risk than you’d like.
How to figure out if target date funds are the best approach for your 401k?
If you have any questions about how target date funds might affect your investment portfolio, it’s best to contact your financial advisor to discuss options. After assessing your retirement goals and risk preferences, you will be able to discern whether a target date fund is the best approach for you.
Contact Chatterton and Associates today so that we can help you manage your evolving personal and financial needs.
The Team at Chatterton & Associates