Target date funds vs s p 500 index fund?
The Bottom Line
A target-date fund is generally a "fund of funds," meaning that the investor is paying an extra layer of fees. Those additional fees could make the fund's actual return compare unfavorably to other options for a retirement portfolio, such as an S&P 500 Index Fund.
The Bottom Line
A target-date fund is generally a "fund of funds," meaning that the investor is paying an extra layer of fees. Those additional fees could make the fund's actual return compare unfavorably to other options for a retirement portfolio, such as an S&P 500 Index Fund.
If you can find a target-date fund with a low expense ratio and consistently invest money in it month after month, it'll do a pretty good job of getting you to retirement. Once you've reached retirement, though, most target-date funds don't do as good of a job at conserving your assets.
It can't beat the market
But if you're willing to put in a bit more time, effort, and research, investing in individual stocks could help you earn far more over time. An S&P 500 index fund can be a fantastic choice for many investors, but it won't be the right fit for every portfolio.
Rowe Price U.S. Equity Research fund (ticker: PRCOX) is in this exclusive club, having bested—along with a team of about 30 research analysts—the S&P 500 index for the past five years on an annualized basis. U.S. Equity Research is a Morningstar five-star gold-medal fund.
Key Takeaways. Index funds offer more choices and lower costs, while a target-date fund is an easy way to invest for retirement without worrying about asset allocations. Index funds include passively-managed exchange-traded funds (ETFs) and mutual funds that track specific indexes.
Target-date funds are usually rather complex instruments, internally speaking, while index funds are transparent and static. Target-date funds come with a complete range of fee structures, while index funds typically charge little or nothing due to their passive management.
However, fund managers differ in how they allocate money between those asset classes. That means funds — even those with the same target year — may have stock and bond holdings that aren't well aligned with an investor's financial plan. In other words, they might be too risky or too conservative.
Funds may get too conservative too quickly
As you approach your target date, target-date funds move more of your money from stocks to bonds. However, this approach lowers your overall potential return, creating a drag on performance in exchange for relative safety.
They provide an element of inexpensive, quite reasonable investment advice for people who might not otherwise be able to afford it and might otherwise be making kooky choices. And most important of all, they have delivered positive outcomes for investors who own them.
Why doesn't everyone just invest in S&P 500?
It might actually lead to unwanted losses. Investors that only invest in the S&P 500 leave themselves exposed to numerous pitfalls: Investing only in the S&P 500 does not provide the broad diversification that minimizes risk. Economic downturns and bear markets can still deliver large losses.
In 1980, had you invested a mere $1,000 in what went on to become the top-performing stock of S&P 500 (^GSPC 0.53%), then you would be sitting on a cool $1.2 million today. That equates to a total return of 120,936%. The stock? None other than Gap (GPS 2.85%).
However, the S&P 500 isn't the only index you should own in your portfolio, and it probably isn't even the best index to own for your US stock exposure. As usual, the best bet that most investors can make is to invest in a globally diversified portfolio of low-cost funds in the world's best companies.
$10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
The main drawback to the S&P 500 is that the index gives higher weights to companies with more market capitalization. The stock prices for Apple and Microsoft have a much greater influence on the index than a company with a lower market cap.
From 2010 through 2021, anywhere from 55 percent to 87 percent of actively managed funds that invest in S&P 500 stocks couldn't beat that benchmark in any given year. Compared with that, the results for 2022 were cause for celebration: About 51 percent of large-cap stock funds failed to beat the S&P 500.
Target-date funds provide a simple way to save for retirement. They offer exposure to a variety of markets, active and passive management, and a selection of asset allocation. Despite their simplicity, investors who use target-date funds need to stay on top of asset allocation, fees, and investment risk.
Target-date funds greatly simplify the process of keeping on top of your retirement investments. The biggest advantage of target date funds is that they handle the challenging task of optimizing your asset allocation and rebalancing your investment holdings.
The quartiles of funds that generated an average yield of 3.4% and 2.7% devoted an average of 16.6% and 15.1% of their fixed-income portfolios to high-yield bonds. The quartiles of funds that yielded an average of 2.4% and 1.9% held just 5.6% and 3.9% of their bond sleeves in high-yield bonds.
Diversification is an important factor, and you'll want to balance having too much in one type of asset. For example, many experts recommend having an allocation to large stocks such as those in an S&P 500 index fund as well as an allocation to medium- and small-cap stocks.
What is one advantage of choosing a target-date fund as your primary?
Target date funds make investing for retirement more convenient by automatically changing your investment mix or asset allocation over time.
A target-date fund's portfolio mix of assets and degree of risk become more conservative as it approaches its objective target date. Higher-risk portfolio investments typically include domestic and global equities.
If you invest in target-date funds, that should be the only investment in your 401(k). Don't make the mistake that so many 401(k) holders make and try to use them to complement other funds. They aren't designed for that. If you're going to do it, go all the way.
Automatic rebalancing: Target date funds are automatically rebalanced periodically to maintain their target asset allocation, so that swings in the markets do not throw a participant's allocation off course. Research shows that systematic rebalancing tends to improve a portfolio's long-term performance.
First, the net returns of a balanced fund are likely to be higher than those of a target date fund. Over long periods, the gross returns of balanced funds are expected to be roughly the same as those of target date funds.
