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Build Your Own Portfolio Or Choose A Target Date Fund?

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1Which One Do You Choose?

That answer depends a lot on what your skills are. You don’t have to be a financial genius to allocate stocks, bonds and cash. But part of that, means understanding risk, and your time horizon for your investments, including when you’ll need your money. Rather than a custom built portfolio like I’m describing here, there are mutual fund investments—called target funds—that invest your money accordingly with a certain year in mind when you’ll retire or need the cash. As you get closer to the time you’ll need the money, the fund starts shifting investments to become more conservative

2Getting Immediate Access

A target date fund immediately give you access to a portfolio that is balanced and diversified. Pick the fund with the target date—say Year 2020—and you get a automatically built portfolio complete with stocks, bonds, inflation hedge real estate, even more. And as you get closer to Year 2020, the portfolio naturally shifts to becoming more conservative. Sorta like an autopilot kinda thing. Yes, it’s quick and easy. And it does come with some drawbacks: Yes, it appeals to the masses, but there’s not a lot of true personalization to your goals, and financial ambitions.

3Target Date Funds Are Very Popular With Investors

Just pick the year you think you’ll begin to need the cash, invest in a portfolio with a maturity closest to that date, and the underlying investments are selected on your behalf. Or you can build your own portfolio. Or there’s a third option: Turn over the management of your money to an independent, fee-based advisor who builds and monitors your investments. That may cost more money, of course. So you really have three options: A Target Date Fund, build your own portfolio, or hire someone to manage your money for you. A target date fund is not really personalized or individualized; whereas a private money manager is. Now you know.

4What’s Right For You?

With Target Date Funds, the percentage of investments in stocks or Bonds can vary a lot, Especially with people who are the same age. For example, if you’re 50 and you’re investing in a 10 year target date fund—or a fund that invests for the year 2020 (6 years from now)—you might find yourself with a completely different mix of investments than another 50 year old. It’s because target-date funds don’t lend themselves to individualized solutions. You’re in the same boat as all the other investors. And that might be good in some situations. In other instances however, you’re probably best with a personalized portfolio.

5If You’re Investing Long-Term, You Have A Few Choices

Get a money manager and have them help you manage your portfolio. Do it yourself. Or invest in a target date fund. For example, a 10-year fund will own certain investments that are designed to generate a reasonable rate of return over that 10-year period. That’s why they call it a target date fund. And as you approach that date, for example for retirement, the fund will automatically start re-allocating, or shifting, investments to make the fund become more balanced and conservative. So the fund’s investment mix becomes more conservative as you get closer to that retirement date, and that’s a good thing.

I've been an investment strategist and adviser for over 35 years, leading with a mission of unbiased advice to educate and protect listeners on my weekly radio show on NPR affiliates nationwide. I have been named a “Top 100 Wealth Advisor” by Worth Magazine and “Top Advisor” by Reuters.