Target Date Funds Let You Invest and Forget

What are they? Target date mutual funds are a type of investment that bases asset allocation on the target end date of the fund. Their greatest and strongest benefit is that they provide instant and ongoing asset allocation. They are made up of a wide variety of large-, mid-, and small-cap funds, as well as international, and bond mutual funds from the same fund family.

When Eric was picking mutual funds for his 401(k), he could have chosen only three or four mutual funds and not been exceptionally diversified. Instead, he picked, American Century LIVESTRONG 2025(ARWIX Quote), which holds American Century Equity Growth, American Century Large Company Value, American Century Intl Growth, American Century Inflation-Adjusted Bond and American Century Emerging Markets, just to name a few. Without this choice, he would not have been invested in an inflation-adjusted bond or felt comfortable with the risk of an emerging markets mutual fund. But given that we are potentially entering a high inflationary period and he is young enough to handle a little bit of risk, these were both great choices, especially in our down market.

Every year, the fund's manager readjusts the percentages in the mutual fund categories so the fund adheres to the original asset allocation, also called a fund mix. The fund mix also changes to make the fund more conservative as you get closer to the target date of return, and that is also part of the original plan. If you did nothing, it would end up completely overweighed in one area and become too aggressive as you got closer to your target date. You can buy target date funds yourself from a mutual fund company, and they are also found on many 401(k) plans. There are more than 250 of them with over $150 billion in assets.