Don’t Quit Your Day Job is primarily a site for musing about the most efficient way of going about things. We don’t generally waste our time with saving pennies, frugality, or lifestyle constriction – most of our readers are on a solid path of spending less than they earn, saving, and investing. That said, we haven’t been that accommodating to one particular crowd we want to be more welcoming to, a demographic we have previously taken to calling ‘low information investors‘.
You see, even though the writers on this site would make great examples of ‘Type A’ in the dictionary, that doesn’t mean that you necessarily should watch your investments as closely as they do. There are plenty of reasons for you to want to distance yourself from the intricacies of your investment mix, with one of the best being simple comparative advantage – you can outsource your investments and concentrate your limited time on another aspect of your life – your career, perhaps, or maybe your underwater basket-weaving hobby. “But…”, you might might ask, “how can I be more hands off, while still making sure to invest?”.
Target Date Funds
Enter Target Date Funds – a relatively new concept (early 90s) that should have existed far earlier. You see, there are a ton of ‘passive, hands off‘ type portfolios in the literature hat share two disadvantages – the first being the requirement to re-balance when levels get out of whack, and the second being that you have to choose which style is right for you. Small barriers, perhaps, but it’s probably no news to this site’s readers that extra choices in a 401(k) counter-intuitively reduce employee participation (PDF). Analysis paralysis – it’s a thing!
That’s where the Target Date Fund comes into play. You make exactly one decision – to pick a target date fund – and the rest is on autopilot. What do I mean? Well, Target Date Funds come with a year in their title – 2035, for example – which is supposed to coincide with the investor’s date of retirement. Basically, you pick a date when you are between 60 and 70, invest your money with that fund, and let someone else take care of the rest. The fund will automatically adjust your asset allocation – fixed income, cash, equities – to be appropriate to your timeframe.
Worried you might later shift your horizon? No worries there – just move your funds to a different year’s option. That’s the point – you put your funds on autopilot in order to let a professional shift money according to when you’ll need it.
An Example Fund
There are many good mutual fund companies, among them Vanguard, T. Rowe Price, and Fidelity. Odds are you have options from one of those firms in your 401(k), and you can seek them out with your IRAs and brokerage accounts if you are so inclined. As you might know, the most common advice given about allocations is to start with stocks and riskier investments when you are younger and slowly shift your allocation into bonds and fixed income as you age. Let’s say you’re 28, and are eying the Target Date 2050 Fund from Vanguard. Here’s how Vanguard divides the funds:
- Approximately 90% invested in equities
- Approximately 10% in bonds
Compare that to the Target Date 2020 (for people roughly in their mid to upper 50s) which breaks down as:
- Approximately 65% in equities
- Approximately 35% in bonds
And, of course, as that date approaches (and passes!), the allocation will shift.
If you’re going to go hands off with your investments, or perhaps if you are just overwhelmed by the number of choices to invest in – don’t let analysis paralysis turn you off investing. Just find an appropriate Target Date Fund and revisit your decision if things change or if you start to learn more and want to take control.