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What is a target-date fund?

Target-date funds, or lifecycle funds, are designed to be long-term investments for individuals with particular retirement dates in mind.

The funds are typically named for the date you plan to retire, for instance ‘Retirement Fund 2030.’ They are mostly mutual funds that offer diversification through a mix of stocks, bonds and cash investments.

“I love this investment option, it's so simple,” says Sethi. “It automatically includes diversified investments — stocks, bonds, et cetera … and over time, it will automatically become more conservative, which is typically what we want for older investors.”

Over time, as you progress towards your planned retirement, most target date funds will adjust their blend of investments to be more conservative. For instance, they may switch out stock investments for a mix weighted more toward bonds, which are generally considered to be less risky.

“You're not sitting here looking at P/E (price-to-earnings) ratios, you just have your one investment and you’re set automatically every single month,” Sethi adds.

There are a few different ways to invest in a target-date fund. You can invest through a brokerage account or buy directly from a fund provider like Vanguard or Fidelity. It is also a common preset investment choice in 401(k) plans.

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The benefits of boring investing

Target-date funds aren’t exactly sexy. But that’s why Sethi — who advocates for “simple and really boring” investing — is such a fan.

“You want entertainment? Go watch my Netflix show or get a dog,” he says. “Investing is like watching paint dry. You set it up and then you set up an automatic transfer that comes right out of your checking account every month and then you get on with your life.”

Sethi warns against investing to “get rich quick” — even if that has earned him the label of “old index investor” and “luddite” among his critics.

He claims people investing in “quack schemes” like whole life insurance — which he says is “not an investment” — indexed universal life insurance (ULI), maximum premium indexing (MPI) are missing the point of “low cost, simple, long-term investing.”

“They're taking all their money and handing it over someone who's extracting fat fees — and I just don't stand for it,” he says.

Sethi is not against having some fun with your money — for instance, putting 5% of your cash into alternative investments — but only if you “have a diversified portfolio” of assets so that you don’t risk blowing your retirement savings in one fell swoop.

All your eggs in one basket

Is it really wise to pump as much money as possible into a target-date fund, as Sethi suggests?

To answer that question you have to fully understand your personal financial situation, your investments objectives, your tolerance for risk and your overall goals for retirement. If you’re not sure how to figure that out, consider working with a financial adviser who can help you map out a path you’re comfortable with.

It’s important to remember that all investments come with risk — some more so than others.

Target date funds do not guarantee that you’ll have sufficient retirement income and there’s always the possibility that you could lose money.

You could also end up paying relatively high expense ratio fees, with the most expensive funds charging an annual fee of well above 1%, according to Forbes Advisor. Just remember, every dollar you pay in expenses is a dollar less for your retirement fund.

The funds may also be too conservative for your needs. Sethi admits in a blog post that “you could conceivably squeeze out slightly better returns by building a custom portfolio based on your exact needs” but he also says you need “unlimited resources — more time, more money and more discipline” in order to achieve that.

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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

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