This Investment Is Almost As Popular As the Smartphone
Doing the right thing isn’t always easy in the personal investing space. The desire to beat the market is strong, after all.
But it seems when investing in their company 401(k)s, U.S. savers have seen the light. Retirement investment management firm Vanguard has found that 72% of the 4.6 million people participating in company-sponsored plans overseen by Vanguard invest in target date funds. That percentage has tripled over the past decade.
These target date funds relieve the individual investor of asset allocation decisions; instead, they automatically adjust each person’s equity exposure based on their age. If you’re a 35-year-old investor, then you’ll almost certainly have a higher percentage of stocks in your portfolio than a 65-year-old who’s close to retirement, for example, although it varies based on your own risk tolerance.
The most important thing about these features: They help investors avoid that urge to time the market, which far more often than not hurts their returns over time.
The use of target date funds, by Vanguard’s analysis, has tripled over the past decade. The company estimates that the number of participants who allow their allocations to be professionally managed, either through a target date fund, a balanced fund or an account advisory service, will grow to 75% by 2021, up from 17% in 2007.
These numbers “signal a shift in responsibility for investment decision-making away from the participant and back to employer-selected investment and advice programs,” wrote Martha King, managing director of the institutional investor group at Vanguard.
As an investment product, the target-date fund stands alone in terms of growth. You’d have to look towards U.S. smartphone adoption, which sits at 77% today according to Pew, to find a close mirror to the surge target date funds have seen.
Yet these numbers don’t show the whole picture. Despite the growth in these funds, many investors still choose actively managed ones over index-driven options, which change equity allocation based on a market index. Financial services consultancy Sway Research found that index-focused target date account for only 37% of all target date fund assets. That leaves 63% of assets in actively managed funds and hybrid options that offer a mix of active and passive management.
Over the long term, it’s best to also have exposure to index funds, since they’ve been shown to outperform actively managed accounts, in part because their costs are so much lower. In fact, 92.2% of actively managed funds underperformed their large-cap benchmark over the past 15 years, according to S&P Global.
If you’re choosing an actively managed target date fund, you’ll also want to have some portion of your savings in an index fund as well. But Vanguard found that two-thirds of its participants invest in only one target date fund.
The oldest rule of thumb for personal investors is to not have all their retirement eggs in one basket. That’s one thing that hasn’t changed.