ETF of the Week: Target Date Mutual Funds and ETFs

The whole idea is that target date mutual funds and ETFs make it easy for the investor. It just involves picking the date that is thought to be a retiring date in the future, which tends to be rolling every five-year period. The fund company would then allocate a stock and bond mix within that ETF or mutual fund that would decrease equity holdings and increased fixed income holdings over time.

With that in mind, one has to consider how it would work going forward. Looking at these target date funds, about 60% is allocated in bonds, while 40% is allocated in US and international stocks. When retiring at 65, for example, having another 20-25 years would mean questioning whether you want the lion’s share of the portfolio in bonds. The answer is no.

Still, with longer life expectancy, putting plenty of money away means one can count on good results with these target ETFs and mutual funds, as it comes with being diversified and taking more risk. Ultimately, this leads to more growth and having a better retirement, which puts everyone in a better spot than they were 50 years ago, by comparison.

Lydon adds, “Social security just isn’t going to cut it for people, so you’ve got to save, and what you do have in retirement, you’ve got to grow and not put it in low yielding. This is especially the case with inflationary unprotected areas like the bond market.”

Lydon feels it’s all about investors understanding what they own by looking at what is happening in the markets and how people should be responding. If the plan is to retire in the next 5 years, and the 401k has an allocation largely positioned toward a target date fund in 2025 or 2030, it’s important to look inside. Being in bonds will not be great, as it can lead to depreciation in the portfolio.

“The solution is understanding what you own, understanding what rising rates can do to a bond portfolio, and thinking about if, rather than setting the time for your target date, set the time for your target date that you think you’re going to die,” Lydon notes with a laugh.

Yes, it can seem morbid, but if it’s 2025 and the plan is to retire, thinking that 2045 is a reasonable expectation to live to, allocate more toward 2045, as it means having more stocks and more growth. And keep in mind that when the money managers set these up, they always sound right at the time and have done well. However, there’s no apology if the market starts to see rising interest rates in the future.

This article originally appeared on ETFTrends.com