If You Don’t Go All-in With Your Trust Fund, You Are Probably Losing Money.
Set date funds, also known as lifecycle funds, look like an easy way to save and forget for retirement . They do all the work for you to diversify and reallocate your funds. But if you invest outside of your trust fund, you can shoot yourself in the foot.
A new study by investment advisory firm Financial Engines found that most people using date-dated funds do not fully invest in them. They buy additional mutual funds or stocks. Some of the reasons cited are further diversification, more aggressive investment, and more control.
But dated funds are designed with a specific diversification strategy in mind, and if you take on other investments, you might overestimate or underestimate your investments in certain sectors, geographic regions, and so on.
Date funds may be more risky than you think on their own, but they are even more risky if you combine them with other investments. According to Financial Engines CFO Christopher Jones, people who partially invest in fixed-date funds earn an income that is 2% less per year than those who only use fixed-date funds.
If you want or need to combine target date funds with other investments, try launching all of your assets with Morningstar’s Instant X-Ray to ensure you are investing in line with your goals.
Planned mutual funds “are not so simple” – Chief Financial Officer of Financial Engines | The street