I’ve been using a target date fund for 12 years, and it’s been fine, but now I feel like I might’ve missed out on about $100k in growth. What do you think?
My 401k has $250k right now. Comparing my target date fund to the Dow or S&P over the same time, the returns seem lower. I get that these funds are designed for stability as retirement gets closer, but is that worth the trade-off?
I’m 38 for those asking how far I am from retirement.
Target date funds are a good option if you want something simple and don’t want to actively manage your investments. They include some bonds to reduce the impact of market downturns and get more conservative as retirement approaches.
@Frances
Yeah, and the hands-off approach is nice. The fund managers rebalance everything for you. If your target date is far out, the returns might seem behind because these funds also include international stocks, which haven’t performed as well recently. That could change, though.
@Frances
The downside is the higher fees compared to index funds.
Peyton said:
@Frances
The downside is the higher fees compared to index funds.
True, but some funds aren’t too bad. For example, FFOLX charges 0.08%, and doing it yourself would be 0.02%. So it’s just a few extra dollars per $10k for them to handle rebalancing. But other funds, like FFFGX, charge way more because they’re actively managed, which seems unnecessary.
@Frances
Most long-term target funds are still heavily invested in stocks, around 90-95%.
Fane said:
@Frances
Most long-term target funds are still heavily invested in stocks, around 90-95%.
I heard bots often recommend target funds…
Fane said:
@Frances
Most long-term target funds are still heavily invested in stocks, around 90-95%.
I heard bots often recommend target funds…
Yeah, you can sometimes tell. But it depends on the situation.
People say target funds are too conservative for younger investors, but I disagree. It’s not just about bonds. International stocks in these funds have lagged behind US stocks recently, but that might flip. Vanguard TDFs, for example, start with 90% stocks and 10% bonds, then adjust as you get closer to retirement. The difference in returns between 90/10 and 100/0 is small, but the added stability can prevent panic-selling during a downturn. For me, the main benefit is reducing the chance of making bad decisions, not just chasing the highest returns.
@Sage
Thanks, that’s a really helpful way to think about it.
@Sage
I’ve got a Vanguard 2065 TDF in my 403b and was wondering if I should change it, but this makes me feel more confident about staying the course. Thanks!
Jamie said:
@Sage
I’ve got a Vanguard 2065 TDF in my 403b and was wondering if I should change it, but this makes me feel more confident about staying the course. Thanks!
Glad it helped reassure you!
Nobody knows the future. If someone did, they wouldn’t be on this forum. Keep in mind, you’ve been dollar-cost averaging into the TDF. Comparing its returns to a total stock market index fund (which assumes you invested a lump sum upfront) isn’t really fair.
@Oak
If I could see the future, I’d name myself ‘Cassandra2024’ and watch everyone ignore me.
@Oak
Fair point. I meant comparing percentage growth between the two, not my personal return.
Rory said:
@Oak
Fair point. I meant comparing percentage growth between the two, not my personal return.
Target funds aim to balance risk and growth over time. They won’t match the S&P 500, but that’s not their goal. It’s about aligning risk with your retirement timeline.
Rory said:
@Oak
Fair point. I meant comparing percentage growth between the two, not my personal return.
Exactly. Plus, dollar-cost averaging smooths out your returns over time.
Some of you might not remember, but between 2000 and 2009, the S&P 500 barely moved. A diversified portfolio with international stocks and bonds would’ve done better. TDFs spread out risk, so they might underperform when US stocks are booming but help protect you during downturns. If you’re 20-30 years from retirement and okay with volatility, an all-stock index fund could be better. But as you get closer, a TDF can provide stability when you need it most.
I split my 401k 50/50 between a 2055 TDF and an S&P 500 fund.