Target Date Funds (TDF) are one of the best inventions in the investment industry. These funds allow individual investors a one-stop purchase to invest in stocks, bonds, and cash across the US, International, large companies, small companies, and bonds. But even better, the rebalancing occurs automatically and is set to take on less risk as you approach retirement!

The big downside to only using a TDF is that they are set up for the average investor. Are you average? They do not take into account your risk tolerance, particular job or industry or the economic cycle. They also assume a particular retirement date to put you into a default allocation.

While there are drawbacks to TDF, if you can save and invest consistently into one, you are going to be great shape.

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Transcript

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The batter and it's okay, you do it. You do it too. No one ever bothered to explain what the heck you been on this show? I'd say I just roughly counting. I'd say we've brought up the idea of target date funds. Easily five or six times. And I don't think we've ever done a show specifically about target date funds, which is weird because this is like a major way that people invest. 


You tell your clients about them, you get your clients into them all the time. So today's show everything you ever wanted to know in a really nice, tight, concise format about target date funds, Mike Morton, what the heck? are target date 


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And that. Is ostensibly when you plan to retire. Now we could have a whole conversation around retirement because again, many of my clients it's, that seems so far in the future. I'm not? 


sure I want to retire. I just want to be financially free, but I still want to be involved and do stuff. So the whole notion of retirement is definitely changing as well, but the census targeted. 


It says:

You buy it in a single fund. And that fund is managed for you over time as you're approaching retirement in what they think is the best way for you to be most successful with your retirement portfolio, as you approach and go into that retirement date. 


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Target date funds. 


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So you might encounter target date funds in all kinds of contexts. 


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He started with Vanguard and Jack Bogle and he said, Hey, why don't we just allow investors to just invest in the entire. Just for one, by one thing and you own the entire market and no one's got to manage it. Just like tugs along buys, buys the entire market. That was great. Great for the individual investor. 


And we've talked a lot about returns and how they've been really good just from these passive index funds. Target date funds are a similar idea. It's a one-stop shop, set it and forget it. But this time, instead of just owning the entire stock market, Because that's a hundred percent in investing in companies. 


years away. So target date:ears away, I'm in target date:

You don't want to be as aggressive. So the default in these target date funds will be more like a 60% stocks, 40% bonds. Okay. So Now we know that underneath the target date fund, if it's 40 years away, 90% stock, if we're five years away, it's only 60% stock. So everything in between is going to be a great day. 


Between those two from going from 90% down to 85% to 80%, all the way down to 60, by the time you retire. And that is, you'll see a term called your glide path. And that is what happens within the target date fund is that you'll slowly glide every five years, slowly go from that 90% equities down to that 60% into the stock market. 


By the time you retire. 


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Refer within a target date fund to the fact that it is on a glide path that there's this adjustment over time. How much churn are we talking about inside the target date fund? How much active management are we talking about? Is that something that investors should be concerned about or is it very little. 


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So no one has to really manage that just as companies come and go each year, you make a little tweaks to it. Same thing with the target date fund, it's predetermined with the algorithms, of the glide path. You can go online and see what that's going to be, for the different years. 


. So it's inside the Vanguard:[:

And the president of the company would come on and he very earnestly looked at the cameras. And by the way, I'm not just the president, I'm also a client. And then you'd get like a before and after photo of he looked like telly Savalas and then he looked like, full head of hair. 


Actually happened to be in a target date funds for both my five to nines for my kids, for my for their college savings. Cause I'd like them to be able to go to college someday. Currently I couldn't pay for that. And also for our own retirement for me and my wife and I have to attest that super. 


You can fire it and forget it. And I love just hearing right now the reassurance that, Nope, you're, it's like an index fund. You're not paying lots of fees. You're not, having people trying to time the market for you. It's just something that's calibrated to give the right amount of risk for where you are. 


Vis-a-vis 


your target date? 


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want to burst your bubble. I 


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They are an average. So we've talked about this in the past. So they are built for the average investor and Matt, you don't look like an average investor to me. You look like a very unique butterfly, individual investor. 


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and no one is because you have your own unique life with its own challenges, your own family, retirement, maybe at 65 or 55 or. 


You might want to change careers and paths, your income might be very unstable. It might go fluctuate up and down, more tied to the economy. It might not be tied to the economy at all. Everybody is so unique in their needs. So whenever I talk with clients, it's trying to really understand where we are and where you're headed and then build, align the resources portfolio being one of them. 


To accomplish those goals. So if you walked in and you're just like, yes, I am going to work at this average job until I'm 65 and then retire with the same expenses. Then the target date fund could. Pretty decent for you. The other problem with them is it that the glide path is preset predetermined, and it's not bad, but it might not be optimal for your life. 


And another words, another way of thinking about that is there's big economic cycles, big business cycles, your career, where are you in your career? That being heavily exposed to the market might be a really good idea for you. You might not want to be at that. Hey, I think I'm want to retire. Five or eight years, I might not want to be at only 60% equities. 


I might want to be higher than that. On the other hand, you might want to be lower than that. Hey, I'm really conservative. I've won the game. I don't need to invest that much anymore. We could be ultra conservative. So really understanding where you are means you can do a much better job tweaking your portfolio. 


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Optimal for you that gives you the amount of risk, volatility, and return that fits your life circumstance. You're saying that there are more particularized approaches that you can take some of the tweaks, we'll get to that in a second. We'll get to some of the tweaks you can apply. I actually, I was going to ask you a question about the advantage and the disadvantage of. 


Target date funds versus a slightly more curated experience. And I was going to word it my way, but it turns out you have a client who asked that exact question, and this is a great way for us to introduce something new that we want to do on this show starting now, which is to really open up avenues for listeners to ask questions of you. 


They can ask questions of me too, but if they want good, useful information for the financial future, they should ask my 


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financialplanningpod@gmail.com. 


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So with 


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it here on the podcast, your question, or I will definitely respond to you. So I respond to , all the questions that come in. So feel free to leave a comment or a question at either of those places. And we'll definitely get back to you. 


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You had a client who asked you about the possibility of designing a five or six. ETFs to invest in versus some kind of an aggressive target date funds. So what are the advantages? First of all, just remind people what ETFs are. And second of all, what are the advantages and disadvantages of those two different options? 


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Why wouldn't I just get the target date fund, and I really like it. And to go back to your point, Matt, if you are saving and then investing your savings, you're already winning. Congratulations. You are doing a tremendous job. You deserve a pat on the back and you will be great. All right. So this has taken it to another level where you really want to get interested in trying to be more particular for your situation or optimize for what you're trying to work on. So why would you have a basket of stocks? So I told you that the target date fund has underneath it, this same basket, five or six different things. If you go to the Vanguard 20, 40 target date fund right there on the page, it'll show you, we own, 22% of this And 15% of this and the, this is 22% of the Vanguard total. 


You a total U S index, 15% of the Vanguard international index. So they own underneath there in certain percentages, these same low cost, passive index ones. My recommendation for people that want to take it, up a level is that you can do that yourself. You could own those things yourself, and this gives you advantages one again, you can look every year at how your life is unfolding and decide to keep the same percentages rebalance to the same percent. 


Tweak it, depending on where you are and not just rely on. For the average investor that says, oh, you know your one year closer to retirement, let's take you down by, by 1%, from your stock allocation, that might not be a good time to do that might not be the right time for you to do that. 


So that puts a little bit more in your hands. Now I want to be careful. I don't want to overwhelm you and put too much in your hands and S and then you get nervous and oh, I gotta do I have to do something now, most of the time, you don't have to do anything. That's the benefit as well. So I believe personally that you will outperform. 


A target date fund. If you want to put in that little bit of extra effort and you will also feel really good about your future, but it's not for everybody. And if you're just doing the target date fund, it's a one shop set and forget it. And you're doing really well. 


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You could choose a different date. If you want to assume more volatility, a little bit better return or a little bit more safety. So bottom line. It's just a great tool to use for. 


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That makes sense for you. 


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Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at financialplanningpod@gmail.com. Until next time thanks for tuning in

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