We all know that investing is a great way to build a future, but even if you have a well-crafted plan, there might be market drops that affect you negatively. Target-Date Mutual Funds might be the key to avoiding that.
If you want to build your wealth to retire with a juicy fund that will allow you to live your golden year to the fullest, then you need to start investing. The longer you keep your money in the market, the higher your returns will be. If you invest $10,000, then in 10 years you will —on average— get a 9% return per year. So it’ simple math: more years, more returns.
This sounds pretty sweet, but of course, the market is somewhat unpredictable and imagine what the situation would be if just as you get closer to your retirement age, the market drops and you lose part of your money. It sounds terrible, but it can happen. In 2008, stocks fell more than 38%, and, in the past, it lost 47% of its value in a single year.
The best way to minimize your risk is by diversifying your portfolio as you get closer to your retirement age, and that is exactly what a Target-Date mutual fund is for.
A target-date mutual fund is exclusively designed for retirement savings. As your target retirement age approaches, the best option to minimize your risk is rebalancing your portfolio. A good way to do so is by shifting a certain amount of money from stocks to bonds, but as doing this manually can be a bit tricky, the target-date mutual fund will do it for you.
How do they do it? By managing your asset allocation.
Asset allocation is an expression used to define the way your portfolio is shaped: what percentage of your capital is destined to a certain type of bond, stock, or even cash.
Target-date funds are like index funds: they buy and hold shares in an entire index of stocks and aim to replicate its performance.
Investing in a target-date fund is easy: all you need to do is chose a fund and make an initial investment.
Even if it implies giving some control over your funds to a company, this way of thinking about your future will allow you to stay rather on the safe side in the long-run.