Retirement requires rethinking your investment portfolio's risk level. Target-date funds can help minimize risk as you approach retirement.
Portfolio diversification and balancing asset allocation can help minimize risk in your investment portfolio and retirement savings accounts.
Even though you once worked hard to choose the best stocks, bonds, or mutual funds for your retirement savings account, there comes a time when it may be prudent to sell them. This is because life is dynamic, and your investment portfolio should also be dynamic and flexible to adapt to your shifting life. I always stress that there isn’t one perfect portfolio allocation model for all people at all times. When I meet with clients, we review their current situation and goals, and see if their current holdings are appropriate.
As you approach retirement, your asset allocation should gradually change from being more aggressive to more conservative. Some investors choose target-date funds to automatically make these adjustments for them. A target-date fund manager adjusts holdings in order to tweak the risk structure to meet certain target dates. Target-date funds consist of a mix of stocks and bonds and become more conservative as the “target” date approaches. Investors typically invest in these funds with due dates geared to meet their retirement, though sometimes target dates may coincide with other large-ticket items such as wedding bills or house down-payments.
Before you invest in a target-date fund, make sure that the target-date fund’s levels of financial risk jive with your own. Just because the target-date fund’s due date is the same as your retirement, this doesn’t mean it is necessarily right for you. Look carefully at the holdings of the fund and make sure you are comfortable with the level of risk exposure. There are no absolute standards on how target-date funds are structured, which means that if you must choose between two funds with similar target dates, you may find that they have significantly different levels of investment risk. Once you have to do that level of analysis, you may want to just set up a portfolio with a customized asset allocation that fits you most appropriately.
Additionally, in order to maintain diversification within your portfolio investment, consider whether the assets in which the fund invests are substantially different from any other holdings you may own. Make sure the assets held by target-date funds don’t duplicate other holdings you have in your portoflio. It is important to maintain a diversified asset allocation, since diversification is a good tool to minimize risk.
While target-date funds may work well for some investors, there are many serious concerns about using them which you should discuss with your financial advisor. In any case, though, all investors should set a target date to review their portfolio and make sure the risk management strategies that they once chose remain the most effective way of handling their assets.
To learn more about retirement planning, read Hidden Financial Strategies for Planning a Happy Retirement.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.