Summary of video: What are Target Date Funds?
Three key benefits:
- Broad Diversification
- Self-Adjusts Asset Mix
- Auto-Rebalancing
Transcript of What are Target Date Funds?
Christine: Hello, and welcome to Target Date Now. I’m Christine Rogers-Raetsch. If you’re like a lot of other people, who approach saving for retirement with just a little hesitation or if you’re not quite sure exactly how to invest, there’s an investment option that you might want to know about. It’s called a target-date investment. Many planned participants see it as an alternative to what we might consider to be a traditional portfolio, but is it right for you?
Broad Diversification
Here at Vanguard, a target-date investment brings 3 key benefits to the table. The first is that it’s broadly diversified, both in its asset mix (stocks and bonds) and also in its investments. Each Vanguard target-date option invests in other Vanguard mutual funds. These funds range from bond funds to domestic and international stock funds. You can get all the diversification of a traditional portfolio that contains lots of individual funds in just one target date option.
Self-Adjusts Asset Mix
It also self adjusts its asset mix over time. This means that each Vanguard target-date options mix of stocks and bonds will become more conservative as its target-date approaches. You know there’s a general rule of thumb that says an investor could afford to be more aggressive the further he or she is from retirement, but as retirement approaches, it’s a good idea to consider reining in that aggression.
That is if you already have a portfolio that’s heavily invested in stocks, consider moving some of that stock allocation into something more conservative like bonds. How much? You can consider investing your age in bonds. If you’re 40, for example, consider an asset mix that has 40% of your savings in bonds.
Here’s the interesting part. The professionals who manage the investment will make these adjustments for you so you wouldn’t have to do it on your own. Something else you wouldn’t have to do on your own as an investor in a target-date option is rebalancing your portfolio. A target-date investment will take care of this for you as well.
Auto-Rebalancing
What is rebalancing? When you start off with an asset mix of something like 60% stocks and 40% bonds, over time and especially in turbulent markets, those allocations to stocks and bonds can shift a little bit or sometimes a lot. When you rebalance, you go back and adjust your asset allocation so that your current asset mix will match what you started with so you can see how the investment is designed to keep your assets invested appropriately.
I don’t want you to walk away thinking that a Vanguard target-date investment takes all the work away from you. You still have to assess your situation and decide if a target-date investment would be right. You have to determine if you’re okay with the costs associated with a target-date investment, and you have to continue to monitor the investment to make sure that the asset mix at any given time is in line with your personal goals, time horizon and your risk tolerance.
Like any other investment, a Vanguard target-date investment is not guaranteed at any time. However, if the convenience of a broadly diversified portfolio in a single fund appeals to you and you’d rather not handle the portfolio building and rebalancing duties on your own, you might want to consider investing a Vanguard target-date option.
Finally, if there’s a topic you’d like us to cover on Target Date Now or if there’s something that you’ve seen that you have a question about, just let us know at vanguard.com/targetdatenow. Meanwhile keep your retirement planning on target and join us next time on Target Date Now. Thanks for watching.
