The broadening appeal of target date funds
Target date funds (TDFs) were first created in the 1990s and have proved to be hugely successful in the US, with more than $700bn (£457bn) invested in them at the end of 2014 according to research from Morningstar. We are now starting to see this trend take hold on this side of the Atlantic.
The target date
TDFs are diversified multi-asset funds where savers are required to decide only the amount they wish to invest and the “target date” when they expect to begin making withdrawals for a future goal.
Risk, return and time
Deciphering how much risk/return potential to have in a portfolio is a key decision for any investment strategy. Cash is a safe asset in the short run but a risky asset in the long-term because of inflation. Bonds and equities have a higher return potential, but that comes with a higher level of short-term investment risk because of volatility. Over the long-term, their ability to beat inflation means they are an essential ingredient to an investment portfolio.
A diversified portfolio across assets types and geographies
The investment portfolio represents a changing mix of all the major asset classes – UK and global equities, emerging markets, property, UK and global corporate bonds, and government bond allocations, which together represent thousands of underlying securities. Conveniently as these are all held within a single fund, it’s easy to keep an eye on performance of the portfolio as a whole.
Making it easier
TDFs remove a lot of the stress of designing, managing and sticking to a diversified investment strategy to achieve a goal in the future. If the date of the goal changes, savers can switch to a different TDF, and like any other multi-asset fund, savers can top-up, or take out money at any time without penalty.
Avoiding common mistakes
By having a professionally managed portfolio over time, savers using TDFs are less prone to ‘behavioural biases’ that can damage long-term returns. Examples of these behavioural pitfalls that most savers can suffer include:
–chasing winning stocks or funds whose performance may subsequently decline,
–chasing star managers who are rarely able to maintain their record,.
TDFs provide savers with the opportunity to invest their money in a diversified multi-asset fund that is managed over time to help meet their needs and goals, without many of the worries that traditionally accompany more complicated investment decisions – their benefits as an easier approach to professional investing for the first timer are undeniable.
Read the full version of this article here: http://www.ftadviser.com/2015/06/10/investments/the-broadening-appeal-of-target-date-funds-aH5uKf38VdKidfYk2nZBdO/article-1.html