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Many of us invest for one reason: to build a big enough nest egg for retirement. Good old-fashioned picking is the preferred route for many investors but can be a bit daunting for the novice investor. This reader's question addresses another type of that can provide you with a solid retirement strategy.
This week's questionbe answered by InvestingAnswers analyst David Sterman:
A. Paul, you're talking about "target-date" funds, and the short answer is, yes, they are a solid vehicle. Before we look at your various options with these funds, let's see how they work.
These funds acquire a set of assets and place them into athat is aimed at investors of a specific age. Funds that are aimed at people close to retirement up on low-risk such as and Treasury Bills, along with that sport stable and solid yields.
For investors who don't plan to retire for several decades, there are target-date funds that own a riskier but perhaps higher-returning set of assets. This follows the longstanding investing maxim that the greater the number of years until retirement, the more aggressive an investor should be. These funds steadily adjust their mix of holdings as the years pass, focusing on more conservative investments as the end date of the portfolio draws closer.
[InvestingAnswers Feature: Are Target-Date Funds Right for You?]
Though these funds have been around for two decades, they've recently soared in popularity, thanks to the Pension Protection Act (PPA) of 2006. That act allowed employers to automatically enroll their employees into 401(k) plans, and target-date funds became an acceptable, especially for novice investors. Before the PPA, less than $200 billion was invested in these funds. That figure has quickly soared to nearly $500 billion.
In response to this popularity, financial services providers are now investment options. Fidelity, Vanguard and T. Rowe Price have the widest range of offerings, though other firms also now sponsor target-date funds. It's probably best to stick with the Big Three, as smaller firms are always at risk of shuttering a that has too few assets under management.a wider range of
[InvestingAnswers Feature: Find the Best Target-Date ] for Retirement
Keyfamilies for you to consider include:
- Fidelity's "Freedom funds," each of which has a date attached to them. For example, the Freedom 2030 expense ratio, and analysis by financial data firm Morningstar found that "long-term performance has been merely decent." is suitable for investors in mid-careers, while the Freedom 2055 is ideal for investors who have only recently joined the workforce. These funds carry a 0.89% annual
- T. Rowe Price Retirement Target-Date Funds sport a more reasonable 0.7% annual expense ratio, yet have delivered solid returns compared to the peer group. That's partially attributable to a more aggressive investing approach, which has paid off while the markets have rebounded in recent years, though "there's more driving performance than just the strategic asset allocation," Morningstar suggests. The -rating firm thinks T. Rowe Price's managers have proven to be especially adept pickers, which could continue to lead to relative outperformance for these funds.
- The Vanguard Target Retirement Target-Date Funds get high marks for a fairly conservative approach. "The high-quality bias of the rally, but they held up better than most during 2008's financial crisis," according to Morningstar's analysts. Perhaps the strongest endorsement for these funds: a very low 0.18% annual expense ratio. Over the course of many years, the smaller bite from expenses means more stays in your -- and not in the firm's coffers. and portfolios caused these funds to lag their competitors during 2009's speculative-driven
The rightfor you depends on your risk tolerance. Even among target-date funds with similar dates you'll find a vastly different mix of assets. That's why you should compare and contrast the holdings of funds offered by the leading 401(k) providers such as Fidelity, Vanguard, T. Rowe Price and others.
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