Mutual funds: Set it and forget it
NEW YORK – Many investors pride themselves on making regular contributions to their retirement savings plans, but once they set up those accounts, they’re likely to spend more time weighing what movie to see or where to go on vacation than managing their assets.
While some might find the notion of such neglect anathema, many investors avoid financial checkups because they feel overwhelmed or find the process mind-numbing. These procrastinators might consider target-date funds, a growing breed of mutual fund that promises the reward of a home-cooked meal with the ease of a TV dinner.
Target-date funds, which are referred to by a variety of names, including target maturity date funds, are becoming more popular because they allow investors to put money into a fund and get back to planning that vacation almost without a second thought. The funds shift investments to become more conservative as their maturity dates near.
“Theoretically, you could set the clock and forget about it,” said Tom Roseen, an analyst with Lipper Inc., which tracks funds.
Granted, it’s always wise for investors to keep tabs on their investments and, even among the lowest-maintenance funds such as these, not all are alike. But their appeal is clear.
“The main thing about all of the target-date funds is that they’re simple. They all package some sophisticated asset allocation into a nice easy-to-use package,” said Bob Boyda, senior vice president at John Hancock Financial Services.
Most target date funds are what are known as a fund of funds – those that invest in other mutual funds to boost diversity beyond what would generally be capable from a single fund. To get started, investors simply pick a year in which they expect to retire and then watch over time as the funds move toward more conservative investments, for example, by shifting from stocks to bonds.
One major difference among target-date funds involves how the funds’ investments are weighted on the target date. Some investors expect, essentially, to be handed a check for the amount of their dutifully invested retirement savings. Other funds are run with the assumption that someone about to retire will still need some holdings in stocks, for example, and would run out of money if they were only invested in bonds, whose returns tend to be lower. It is important to understand which philosophy a fund subscribes to.
Greg Carlson, an analyst at fund-tracker Morningstar Inc., notes target-date funds vary in how conservatively they might be invested all along. Investors should be aware of how much of a fund is put into stocks and how much is funneled into bonds. He said the investments themselves should be broadly diversified and the funds should have low expense ratios.
“Costs are very important because they’re meant to be held for a very long time,” he said of target-date funds.
He believes 1 percent is a good benchmark. Expenses beyond that are likely to eat too much into returns, he said.