It was recently brought to my attention that not everyone likes to spend countless hours pouring over their 401(k)’s and IRA’s looking for the absolute best investments. Shocking! I know!
I learned of this strange type of person just last week when I received an email from a friend asking for some advice on his 401(k). He sent me a list of the funds his 401(k) plan offered and asked me what he should invest in, with the caveat that he didn’t want to have to pay attention to it. He has zero interest in doing anything but contributing money out of his paycheck and getting on with his life.
At first I was taken aback. Someone who doesn’t want to spend a lot of time managing their 401(k)?! I guess I had read about people like this before, but like a supermodel or rock star, never thought I’d actually meet one.
Once the shock subsided I got down to work, looking over the list of funds he had provided me. I started to scribble down a mix of the typical index funds I would recommend, when I remembered his catch…he didn’t want to pay attention to his investments.
Luckily, “lazy” investors have hope. The target date fund (also referred to as a lifecycle fund). Just about every 401(k) plan offers them, and they’re perfect for someone who has no interest in managing their 401(k) plan beyond contributing money from each paycheck because they’re basically an entire portfolio in a box.
How target date funds work is pretty simple. You invest in the offering that most closely matches your probable year of retirement and the fund automatically adjusts its mix of stocks, bonds etc… as the years pass.
For example: my friend will be investing in the “Target Date 2045 Fund” in his 401(k). This fund is geared toward someone with just over 30 years left until they plan to retire. Right now the fund will skew towards a more aggressive asset allocation. It will be heavy in stock holdings in order to try to maximize the growth of your contributed dollars. Over time, as you near retirement, the fund will automatically shift its holdings to become more conservative. By the time 2045 rolls around the fund will be weighted very heavily towards fixed income investments in order to focus more on preserving the capital you have built up over the years.
You can see exactly how the fund adjusts its holdings in the graph above. Basically it does everything that someone who is actively managing their investments should do as time passes on.
Now, Target Date Funds aren’t perfect. In fact I wouldn’t recommend them to most people who have even a slight interest in learning about their investments and keeping track of things on their own. The reason being is that I don’t think a “one size fits all” approach is the way to go with investing. You and I may be the same age, but we may have a very different tolerance for risk which should be reflected in what we choose to invest in. Target Date Funds simply don’t allow you the flexibility or control to tailor things to your own needs.
So while Target Date funds may not be the best option for your retirement savings. They are hands down the easiest way to invest. And for a lot of people, including my friend who inspired this post. That’s what matters more than anything else. My guess is that if you’re a regular reader of my posts you probably want a little more than a one size fits all approach to your investments. But if you want to spend your time worrying about other things, and simplicity is what you’re really after. Look into a Target Date fund, it just might be the investment you were looking for.
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