Allocation Funds:  Investing Made Simple

Suzanna De Baca -- Expert Business Source, 7/7/2008 7:02:00 AM

Dear Suzanna:

My 401(k) at work has Target Date Funds, where I can just choose my retirement date and supposedly get appropriate investments. What are these and are they a good choice?

- Wanting to Retire in 2020

Dear 2020:

If you find selecting mutual funds for your 401(k) difficult or if you don’t have the time interest, or expertise to diversify or rebalance your portfolio, a Target Date Fund might be appropriate for you.  Also called Allocation Funds, these funds combine various other funds in one package that shifts holdings over time as you near retirement or the date you need the funds. 

For example, if you choose a Target Date 2020 Fund, that means that you have 12 years until your projected retirement. While you may still want some growth in your investment portfolio now, as you near retirement it will probably make sense to be more conservative. A Target Date Fund will gradually realign your investment mix with your risk tolerance, likely moving from a greater allocation to equities (stocks) to a greater allocation in fixed income (bonds). These funds can also be appropriate for other events with a set date, such as saving for a child’s college education.

One of the big advantages of Target Date Funds is that the investment company does the work for you in one handy fund.  While you should continue to monitor your investments, you don’t have to actively switch funds around yourself.

There are also Target Risk Funds, which provide you with a set blend of investments according to your risk tolerance.  For example, you may have a choice of conservative, moderate, or aggressive combinations of investments.

These increasingly popular funds can be the right choice for many consumers.  Talk to your Human Resources professional or investment advisor to make sure that this makes sense for you and your overall financial goals.

Suzanna de Baca is president of Private Capital Solutions Group. Securities offered through Broker Dealer Financial Services Corp. Member FINRA & SIPC. Investment Advisor Representative of Investment Advisors Corp., A Registered Investment Advisor. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.