January 26, 2007

target date funds

Finally back from Tampa. Of course, the return flight was delayed because of traffic into LaGuardia. When will I learn and fly into Newark?

Anyway, some great posts from others during my hiatus. This one about target date funds caught my eye. Particularly because one of my friends recently threw his rollover money into a Fidelity Freedom Fund.

For those who don't know, a target date fund is basically a mutual fund that invests within an asset allocation depending on when you retire. Depending on how far away you are from retirement, your asset allocation will be more or less aggressive (more if you're young and many, many years from retiring, and less if you're older and need to be more conservative with your money). These types of funds will automatically update their asset allocation as time passes, saving you the trouble of having to rebalance your portfolio.

Here's my (humble) opinion of target date, or life cycle, funds -- if you're someone who's all that interested in tracking, monitoring, assessing and rebalancing your investment portfolio, go for it. These types of funds make it easy for you to invest according to an allocation appropriate to your life stage and, as long as you're buying from a reputable company like Fidelity or Vanguard (I'm sure there are others too), then you can be pretty sure you're getting mostly efficent returns for your investment (in terms of expenses).

However, if you have even a little interest in taking more control over your investments, I say looking at index funds, ETFs and stocks of companies that you know well (examples include companies in your industry) would probably make for a better performing mix long term. That's partially why, even though I've considered target date funds, I don't think I'll ever choose to invest in one. To me, it just feels like I'm giving up too much control of my investments -- things that make other things easy might make them too easy at a cost. Again, just my opinion.

I also want to make sure readers know that the reason why I reference Fidelity so much is that because pretty much all of my accounts are set up there, so I'm most familiar with them. Obviously, I also like them (otherwise my accounts wouldn't be there =P), but I'm sure Vanguard and other top-quality companies are just as good.

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