Editor's pick: Originally published Dec. 20.
Retiring in 2040? Put your money here. Set to ride off into the sunset in 2045? Place your funds here and don't worry about a thing. Starting your golden years in 2050? Well, here's a place for your money.
By now, you've surely seen these types of adds for target-date funds, investment vehicles that make allocation decisions based on how old you are now and when you're likely to retire. Yet, if you're only a few years out of college and new to the world of investing, despite their ease of use, they may not be the best place for new investors.
"These set-it-and-forget-it funds, there's a lot of damage done to portfolios," said Kimberly Foss, CFP, best-selling author and President/CEO of Roseville, Calif.-based Empyrion Wealth Management. "When you dive deeper into these funds, it's costly and can reduce your return on investment and that's hurtful for someone in their 20s."
When looking at these funds in a 401(k) or similar retirement plan, investors aren't actually buying an investment or a single asset, but rather a whole bunch of assets.
"What these really are is funds of funds," Foss added. "Their expense ratios are high and allocations to stocks and fixed income might not be appropriate as you get older."
A general rule of thumb for investing is people in their 20s can start off being invested in 90% stocks and 10% fixed income. For every decade closer towards retirement, that ratio gets shifted by 10%. People in their 30s could have a ratio of 80% stocks and 20% bonds, people in their 40s could have a ratio of 70/30 and so forth.
Certain target-date funds, no matter who the provider is, don't change their allocations or their focus depending on age, Foss noted, something that can be detrimental, especially to fixed income, as interest rates begin to rise.
"As interest rates rise, these funds will look at a number of broad benchmarks for bonds and that can do substantial damage in a rising rate environment."
Instead, Foss, who helps run $200 million in assets under management at Empyrion, recommends having a financial advisor, even if your net worth isn't in the millions.
On Empyrion's website, as well as many others, there are certain do-it-yourself tools for asset allocations depending upon your age. Even though many websites have slightly different allocation percentages depending upon age, most of them are within a few percentage points of each other. Still, it's important for people not to get intimated, Foss said. "You still need to do your homework or it'll be hard to recover."
Even though there have been countless studies and stories written about the lack of Millennials (defined as those between 18 and 34) investing, Foss believes the old approach just doesn't work anymore.
"It's not just about assets under management anymore -- it's about taking someone's goals and creating a wealth plan, integrating their savings, 401(k)s or 529 plans and helping them with direction or goals. That builds trust and a relationship for a lifetime."
One area where millennials are increasingly looking to shake-up the investing world is fees, as discussed in this Charles Schwab commercial.
Foss said she charges "less than 24 basis points for her firm's services," allowing investors to get access to mutual funds, cheaper. Instead of buying retail class shares, which often have higher fees and expenses associated with them, she buys institutional class shares.
When asked where she was putting money to work, Foss declined to give specific stock picks, but noted that large-cap U.S. and real estate funds looked attractive.
Still, Millennials are often deep-rooted in their faiths and it's been difficult to grab their attention, no matter the approach. Despite some of traditional banks and financial advisors best efforts in targeting this group -- which views everything differently, from home ownership to marriage to owning a car -- they've come up short in acquiring them as clients.
Appealing to their love of technology and ease of use, though could come in handy down the line, though.
Companies that have focused on technology, specifically mobile, might be the way millennials invest in the future, Foss said. That's where robo-advisors, companies which invest automatically depending on age, risk profile and a variety of other factors, come in. "My daughter uses Acorns, and Betterment has a good allocation and keeps its fees relatively low," Foss said.
Acorns and Betterment have attracted millions of dollars in investment. Acorns recently raised a $30 million Series D round, led by PayPal (PYPL) while Betterment raised $100 million in a Series E funding round.
But at the end of the day, while a robo-advisor is a "great alternative," it still comes down to fundamentals that any age group has to understand and adhere to, Foss cautioned. "You've got to be careful and do your homework. No matter what happens, there is no substitute for doing your own homework," she said.