SUPPOSE YOU HAVE settled on a basic mix of 60% stocks and 40% bonds. This 60-40 mix is often referred to as a balanced portfolio. How should you go about building your desired investment mix? You can find mutual funds that offer this combination in a single fund, thus giving you one-stop investment shopping. For instance, you could buy a traditional balanced fund, though you might find the stock portion is invested largely or entirely in U.S. shares, with no foreign exposure.
Alternatively, you could purchase a target-date retirement fund that has a 60-40 mix. Target-date funds often have better diversified portfolios than traditional balanced funds, including investing more abroad. The funds typically achieve this mix by investing in other funds from the same fund family. Target-date funds become more conservative as they approach their target date. The funds, which are found in many 401(k) plans, are geared to folks retiring in the year specified in the fund’s name or within a few years of that date.
Financial advisors and other experts often criticize target-date funds as cookie-cutter solutions that aren’t customized to reflect each individual’s particular financial needs. But this criticism is self-serving: Target-date funds are a threat to financial advisors, because they provide investors with diversified portfolios—without the need to hire a financial advisor.
Most of the major fund companies now offer target-date funds, including Fidelity Investments, T. Rowe Price Group and Vanguard Group. Target-date funds—and also balanced funds—might be appealing if you’re looking for simplicity. They are also a good choice if you find investing nerve-racking, because all you see is a single share price, which will move relatively sedately compared to the shares of more narrowly focused funds. In addition, you’re relieved of the need to rebalance, because the funds do it for you.
One downside: Most balanced and target-date funds are actively managed, and hence have higher costs and run the risk of badly lagging behind the market. Prefer low-cost market-tracking index funds? Check out the target-date index funds offered by Fidelity Investments, Charles Schwab and Vanguard Group, as well as Vanguard’s balanced index fund.
Fidelity and Schwab offer two sets of target-date funds, one built around actively managed funds and a separate group that use index funds. The latter are far cheaper. Fidelity Freedom Index funds levy 0.15%, Schwab’s target-date index funds charge 0.08% a year and Vanguard’s offerings have expenses of 0.13% to 0.15%—far less than most other target-date funds.
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