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Home>Target-date funds can be the right choice if you're this kind of investor

Target-date funds can be the right choice if you're this kind of investor

Target-date funds can be the right choice if you're this kind of investor

09/29/2017

By Anora M. Gaudiano, MarketWatch , Ryan Vlastelica

When it comes to investment products, the ones that get the least attention turn out to have the best investor returns, according to Morningstar.

Enter target-date funds, which have grown to nearly $900 billion under management by the end of 2016 since first launching less than 25 years ago.

A target-date fund, also known as a life-cycle fund, is a mutual fund with a mix of assets -- typically stocks and bonds -- structured to become less risky as investors approach retirement age. Returns are never guaranteed, but depend on how markets perform.

For example, a target-date fund for 2050 will have a much higher allocation to equities than a fund with 2020 date.

Because of behavioral mistakes, such as buying funds at market tops while chasing returns and abandoning them during downturns -- commonly known as buying high and selling low -- investors tend to underperform their investments or have a negative return gap.

Read: Why advisers say tactical allocation funds usually aren't worth the fees (http://www.marketwatch.com/story/why-advisers-say-tactical-allocation-funds-usually-arent-worth-the-fees-2017-03-23)

But Morningstar's Annual Mind the Gap study found that such self-defeating behavior generally hasn't been seen within target-date funds. In fact, investors who use target-date funds as their sole investment do even better than the funds themselves. The investor return gap in this case is positive.

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