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RetireMentors: Why target-date funds are the best retirement investment

9 reasons this simple choice can be a winner for most investors. Read More...

There’s not much that’s flashy or glamorous about a target-date retirement fund. It’s kind of boring, actually.

But in this case, boring is brilliant. Really.

I’m in the process of writing a new book to teach young investors how to maximize the probability that they’ll have more than enough money to live well in retirement. The heart of the book is made up of a dozen short chapters, each one detailing what I call a small step with a big payoff.

Every one of these steps has the potential to add $1 million to their eventual wealth.

Here’s what’s really amazing: If you invest in a target-date retirement fund, you’ll be taking most of these steps automatically, without any effort.

Warren Buffett said: “You only have to do a very few things right in your life as long as you don’t do too many things wrong.” In my view, a target-date fund is amply qualified to be among the “few things right” in the life of an investor.

Let me tell you nine reasons investors should learn to love these boring funds.

1. A single decision is all that’s needed. You don’t have to choose a manager, sort through asset classes or worry about how much risk you should take. Just figure out approximately what year you want to retire, and you’re on your way.

2. You don’t have to worry about how you should respond to whatever the stock market is doing. With the sense that someone else is taking care of that, there’s no reason to panic.

3. Other investors may need to rebalance their assets from time to time — and many of them will neglect this chore for long stretches. But you won’t. Your target-date fund takes care of that automatically.

4. One of the biggest attributes of target-date funds is the “glide path” that gradually reduces your exposure to equities and tempers your portfolio’s volatility with a gradually increasing stake in bonds. You don’t have to think about this; it will just happen.

5. You won’t need to chase investment fads or try to “time” the market. If something new comes along that is indisputably valuable, your target-date fund will probably get on board.

6. A target-date fund won’t lead you into risky territory. They tend to be quite conservative, sort of like a stuffy grandfather who wants you to stick to what’s tried and true. This means you don’t have to understand — or think — much about risk.

7. The best target-date funds offer lots of diversification by building their portfolios with low-cost index funds. This is beneficial for all sorts of reasons. Not the least of them: It makes it easy to accept that you own some asset classes (think international stocks) that you might not feel comfortable about doing on your own.

8. Target-date funds make it effortless and automatic for you to do several things you should do but that you may not feel like doing.

• For example, if you’re overly cautious, investing heavily in equities when you are young.

• For example, if you tend to be aggressive, transitioning to bonds as you get older.

• For example, if you’re nervous during market volatility, continuing to invest during bear markets.

9. Even the relatively few shortcomings of target-date funds are pretty easy to overcome. One of those shortcomings is an overreliance on large-cap stocks like those in the S&P 500 index SPX, +0.09%.

This deprives investors of the long-term growth they are likely to get from owning small-cap stocks and value stocks.

Here’s an answer: If you put 90% of your money in a target-date fund and the other 10% into a small-cap value fund, the historical returns suggest you can wind up with anywhere from 10% to 50% more money in retirement. The benefit of supplementing a target-date fund with a small-cap value fund, in fact, is one of the main points of my new book.

You can learn more at my website. There you will find links to articles, a podcast, and a 50-minute video.

Richard Buck contributed to this article.

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