NEW YORK (TheStreet) -- Target-date funds have been growing in popularity. That's a good thing for the average investor, according to James Lauder, CEO of Global Index Advisors, sub-adviser to Wells Fargo (WFC) - Get Report Advantage Funds.
He told TheStreet TV's Gregg Greenberg that by using target-date funds, firms encourage investors to save more money for retirement and to stop trying to be professional investors.
Target-date funds are supposed to make investing easier, since the investor can simply chose the approximate date of their retirement and invest in the fund accordingly. The fund managers and advisers handle the rest of the legwork.
What about risk tolerance? Some investors want more risk, while others prefer to play it safe. "We're a bit more conservative as we get closer to retirement," he said. "We don't want to see people have large setbacks."
However, if investors decide they do want to take on additional risk, they can always chose a target-date fund for a later year. The closer the fund is to the target retirement date, the more conservative it tends to be.
Of course, these funds aren't solely invested in equities. For instance, Wells Fargo's funds have exposure to a basket of stocks with direct exposure to commodities, such as gold miners. In the short term, these companies may have a high correlation to the broader market, he said, but over the long term, they tend to be more highly correlated to the underlying commodity.
This strategy works better for the investor, he said, rather than direct exposure to the commodity contracts. The fund also invests in fixed income as a way to reduce its correlation to equities.
Lauder says that fixed income and cash tend to be better investments for the funds, rather than liquid alternative assets, since investors tend to be more familiar with them.
-- Written by Bret Kenwell