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Learning how exactly to invest requires time and effort. Fortunately, mutual funds have simplified investing for a normal investor. Within the past few years the process of selecting mutual funds has been made easier. Target retirement funds are now available through major mutual fund families, and are provided by many 401(k) plans as well.
The target retirement fund advantage: one-stop shopping, virtually no investment knowledge or experience necessary. Just buy and hold, pay your fees/expenses and maybe sales charges. Professional money managers handle all the investment decisions depending on the retirement year you pick. Just select the target fund closest to the year of your planned, or past, retirement. Example: target retirement 2030 fund would be appropriate in the event you plan to retire within two or three years of the year 2030.
Once invested you never need to make another investment decision or worry about the way to invest. While you approach retirement and become more conservative, so does your investment portfolio.
Target retirement funds can be mutual funds that simply invest in other stock funds, bond funds, and money market funds of the exact same mutual fund company. Target funds dated far in to the future, like target 2040 or 2050, will be heavily invested in stock funds for quite some time to come. If you invest in a target 2020 fund today, your money will be invested primarily in stock funds and bond funds, mostly stock funds the very first few years.
If you're already retired and don't know-how to invest, you could consider putting your nest egg into the safest of these funds, the retirement income fund. These target funds invest about 80% of your money in safer income-producing investments like bond funds and money market funds to present you with income in retirement.
It does not get much easier. Plus, you can save thousands on mutual fund sales charges by buying one of these funds through a no-load mutual fund family rather than through an investment professional.
Target funds are the easy way to invest in a professionally managed retirement portfolio targeted to your station in life. The idea behind these investments: young adults need growth and will accept higher risk, middle-aged investors will accept moderate risk for higher-than-average returns, asset manager and older folks will accept some risk to earn a greater amount of income in retirement.
The problem is: if you don't understand investment basics or how exactly to invest based upon your personal risk tolerance, you might select a target fund that's not really appropriate for you. Quite simply, the same shoe will not fit all investors of a given category. Some young people are conservative, and many retired folks are uncomfortable taking even a small risk with their retirement nest egg.
Just as in some other mutual fund, you need to understand the nature of the investments held in a target retirement fund portfolio. Virtually any of these funds can lose money, as well as in 2008 the vast majority of them did. Why? Since these funds have market risk, and 2008 was a horrible year for the currency markets. Let's take a more in-depth look-at the risk involved.
If you plan to retire in 2040 and invest in a target retirement 2040 fund, 90% or even more of your assets will be invested in stocks. If the stock market drops 40% as it did recently, expect that you will lose almost 40% of your investment value. A 2050 target fund could be 95% invested in stocks.
In the event you plan to retire in 10 or 20 years, beware that a 2020 target retirement fund will be about 60% invested in stocks and also a 2030 fund about 80%. In case you are uneasy with this risk, consider putting all or several of your retirement assets in to a safer target fund. For instance, a 2010 fund bought today would only be about 25% invested in stock funds.