Investing is intimidating AF because not only is it riskier business than a pants-less Joel Goodsen sliding across the hardwood floor, but there are also just so many options of things to buy and invest in.

One of those options is the target date fund. This little guy with the big and technical-sounding name is sort of controversial among the Wall Street gurus.

I want to share with you the pros and cons of a target date fund so you can decide if it’s a good investment for you and your financial goals.

What is a Target Date Fund?

Target date funds, often referred to as lifecycle funds, hold a mix of stocks, bonds, and other investments. It’s basically a pre-packaged portfolio. Over time, the mix gradually shifts from a more aggressive to a more conservative mix of investments. In other words, the fund automatically rebalances as you near retirement.

The name "target date fund" comes from the fact that these funds have a specific target date, which is usually your expected —or targeted— retirement date. There is usually a number associated with the fund, like 2040 or 2045, and that number represents the year you plan to retire.

In the early years of your career, when retirement is still far off, you can be a little more aggressive in your investment approach because if there happens to be a lengthy market downturn, you have time to recover. You are in the wealth accumulation stage of your life. In this stage, you want to have a higher allocation of growth-oriented investments, like stocks.

However, when you get older and closer to retirement, you start reaching the wealth preservation stage of your life. You’re not worried as much about growing your portfolio as you are about keeping what you have. In this stage, you’ll probably want fewer stocks just to protect yourself from any potential big downturns in the market.

The cool thing about a target date fund is that as that target date draws nearer (aka that retirement date), the fund automatically reduces its allocation of stocks and increases its allocation to more conservative assets like bonds. 

This transition reduces your portfolio’s exposure to risk as you near retirement. 

Pros of Target Date Funds

✅ Good for young workers

When young people are in the wealth accumulation stage of their careers, a target date fund makes perfect sense. The fund ramps up risky investments in stocks during a time when there are a lot of working years left to continue investing and let the market work itself out (and remember, the market always works itself out).

This provides an ample return on investment by taking full advantage of compound interest!

✅ Super simple

A target date fund is pretty much the definition of “set it and forget it”. It’s honestly almost foolproof in that you can’t really tinker around with it too much. This helps save you from making unwise investments (don’t listen to your buddy Steve who insists a pink slip stock is your ticket to wealth).

The simplicity of the target date fund is really appealing for novice investors who just want to save for retirement and aren’t interested in learning the intricacies of buying and selling stocks (e.g., like 99.9% of us).

✅ Naturally rebalances

The key advantage of a target date fund is that it automatically rebalances, which saves you the hassle of monitoring and adjusting your portfolios as you age. It’s about as hands-off as you can get!

✅ Easy diversification

Target date funds are naturally diversified. What does this mean for you? Well, it keeps you from putting all of your eggs in one basket. Sure, Amazon may very well be taking over the world, but that doesn’t mean I should be investing every single dollar I have into that one company.

Target date funds are already diverse, so you don’t have to worry about having too much stock in any one thing.

Cons of Target Date Funds

🚫 Not all funds are created equal

There are multiple types of funds with different allocations for any given retirement year. Because of this, one target date fund may look entirely different than another even though the target date is the same year. You’ll need to understand your risk tolerance before choosing the right one for you.

🚫 Can be too conservative or too risky

Speaking of risk tolerance…with its “one size fits all” approach, it’s impossible for it to satisfy each individual’s risk tolerance and capacity.

Though they are designed to be a bit riskier when you’re younger and naturally rebalance as you near retirement, everyone’s risk tolerance is different. Some may find them too conservative when they want it to be more risky and vice versa.

🚫 High fees and expenses

There can be high fees associated with target date funds. Since each is a fund of funds, the portfolio you buy into consists of multiple underlying mutual funds, each of which has an expense ratio. Some of this is really paying for the ease of use, which of course is great, but may not make sense if those fees are eating into your investments. Make sure to always check the fees associated with each fund. A Target Date Index Fund is your best bet in having a great, diversified one that has low fees!

Wrapping Up

Target date funds are ideal for those seeking a hands-off, diversified investment strategy. Because they automatically adjust their asset allocation, you’re protected from risk at a time when you want to be conservative. This is a great fit for investors who want minimal involvement and don't have time or desire to actively manage their investments.

However, if you prefer more control over your investments or have unique financial goals, a more custom portfolio might be a better option.

Ultimately, you have to consider your personal financial situation and preferences.

💵 Are you close to retirement?

💵 Are you tolerant of risks?

💵 Have you invested in other funds?

💵 How much are you needing to earn to pay for retirement?

Ultimately, target date funds are a solid option for beginners and experts alike, younger and older and really everything in-between!

And also remember: you can always mix and match with other investments for a more comprehensive plan. IE A Target Date Index Fund + some other index funds to round it out!

Want to learn more about what investments are right for you?! Check out my free investing class!