Financial Q&A: Is a target-date fund right for you?

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Q: What do you think about 401(k) target retirement funds? I'm 24 years old and invest in a 2050 fund.

E.S., via e-mail

A: Target-date funds allow an investor to buy into a well-diversified portfolio with an asset-allocation strategy that adjusts over a desired amount of time before you expect to retire.

According to Jeffrey Broadhurst, a registered financial adviser in Lansdale, Pa., these mutual funds can be terrific for different types of investors.

Target-date funds, he says, are especially good for:

•Novices. In particular, those who haven't yet learned how to construct a risk-appropriate, globally diversified, tax-efficient portfolio of low-cost funds, he says.

•The not-so-wealthy. If the minimum initial investment for a single fund is $3,000, you would need $30,000 to properly diversify across 10 asset classes (small-cap, mid-cap, large-cap, international, etc.). But with a target-date fund, that $3,000 will be spread over a variety of underlying funds and thus will be well diversified.

•Passive investors. We hesitate to use the word "lazy" here, but if you're not inclined to fuss a lot with your investments, this type of fund allows you to set it and forget it. As you age, your allocation automatically adjusts to a more conservative mix (heavier on bonds, lighter on stocks, for instance). Such an investor need not lift a finger to accomplish this task.

On the downside, however, Mr. Broadhurst points out that target-date funds can be too conservative. For example, he looked at one target date fund for 2050, and it contains more than 10 percent bonds. For someone such as yourself, with 42 years left to retirement, he doesn't think you need any bonds at the moment.

Also, target funds are "funds of funds," so Broadhurst warns that their expense structure can be higher than that of a standard mutual fund.

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