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.