One of the questions that we are frequently asked is whether or not target date funds are a sound investment strategy. To us, target date funds provide a sense of comfort when it’s not universally understood how they work. To understand if they are the right strategy for you we must first know how they work.

Each target date fund has a glide path associated with how the portfolio changes over time from being more aggressive to being more conservative. It is also important to know that each mutual fund company has their own methodology for their glide path. As a result, you must research the fund companies to understand what their glide path is to determine if you are comfortable with the timing of their investment changes. While they all have similar names, there is no standardization for the portfolios.

A problem that we recognize is that a younger investor purchasing a target date fund may be significantly more aggressive in their portfolio than they realize. When the stock market volatility increases, they may sell the position and lose confidence in the long term investment process. By using a risk based approach, the investment process allows the investor to set a level of volatility in their portfolio they feel is most appropriate. Additionally, for many investors reaching retirement, the allocation of the portfolio may be too conservative given the needs for retirement.

To us, utilizing a risk and needs based planning approach, a balance between the necessary level of risk and potential reward to create better retirement outcomes is important. To learn more about your investing and how we can help you with your strategy, contact our team today!

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