When it comes to investing, it can be really complex, which makes for very little surprise that we are pitched “set it and forget it” investing solutions. This dash for simplicity can inevitably lead investors to target-date funds (aka “lifecycle funds”). Target-date funds are popular with investors because they’re an easy answer to the complicated challenge of investing for retirement. While many investors want a hands-off solution to investing for their retirement — seriously, who doesn’t? — remaining hands-off isn’t always the best solution. Whether an investor isn’t sure about how to allocate their assets, or aren’t aware of other online services that make it easier for them, they should be aware of some of the critical limitations target-date funds suffer from.
There are five major setbacks target-date funds encounter, and investors should be aware of the reasons why target-date funds sometimes fail to deliver. One reason, is that one size doesn’t fit all. Target-date funds group investors together using broad homogeneous characteristics like age, which can be bad when it comes to higher risk portfolios and risk tolerance — you’ll be treated the same as someone who is able to invest more money.
Asset allocation is one of the greatest influencers on your return than any other factor, but if you have other accounts, it will be harder to maintain asset allocation. What’s even more despairing, is that target-date funds operate according to inflexible “glide paths” (formulas that adjust your asset allocation over time) that cannot be changed for any reason.
See the other three reasons below in this infographic created by Jemstep, and learn why target-date funds may not be right path for you and your investments.