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Why Would an Experienced Investor Buy a Target-Date Fund?

A reader writes in, asking:

“I saw the recent article on Squared Away about target funds appealing to inexperienced investors. [Mike’s note: see here.] I gather that you use a target date fund yourself, despite being an experienced investor. Could you elaborate on why experienced investors might want to use a target date fund?”

Target-date funds, like anything else, are not a good fit for everybody. But personally I’m of the opinion that they’re a sophisticated tool, offering fantastic value for their cost (at low-cost fund families anyway). And I’ve heard from many experienced investors, citing a variety of reasons why they choose to use target-date funds.

I’ve heard from people who use target-date funds primarily for the time savings. They found that it took quite a while to rebalance a portfolio of several different asset classes across many different accounts, and they like not having to deal with that.

I’ve heard from people who use target-date funds because they consider themselves to be math-averse (or finance-averse) and they found the process of rebalancing to be stressful.

I’ve heard from people who use target-date funds to simplify the portfolio for the sake of their spouse (e.g., in case their spouse outlives them).

I’ve heard from people who use target-date funds to simplify their portfolio to protect (to some extent) against cognitive decline.

I’ve heard from people who use target-date funds to make it easier to “stay the course” in market downturns. That is, with a target-date fund, they only see the overall portfolio decline, which is always less than the decline in the worst asset class. So there’s no longer the temptation to bail out of the worst-performing fund(s).

As for me personally, I use a LifeStrategy fund (which is very similar to a target-date fund) in order to avoid a common behavioral finance error: tinkering.

You see, even in the “passive/index investing” camp, there are many differences of opinion about how to build a portfolio. For example, there is no consensus regarding how much of your bond allocation should be invested in corporate bonds. Ditto for high-yield bonds, international bonds, mortgage-backed bonds, TIPS, and so on. And there are similar differences of opinion regarding the stock portion of the portfolio as well.

So what’s an investor to do?

Really, the only thing to be done is simply pick one option and stick with it, even if you’re not 100% sure that it’s the correct option (and, to be clear, you won’t be sure). For some people, “sticking with it” is easy to do. For other people, it’s not so easy.

For me, what I found was that, when I went to rebalance our portfolio (which was approximately every month when I made new retirement account contributions), I would often be tempted to make one small change or another based on whatever I had read recently. Now, with an all-in-one fund, that temptation is gone. I simply log in, contribute as much money as I want to contribute, and that’s all there is to it.

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