Right on target

The term “asset allocation” refers to how a portfolio’s assets are distributed — for example, among stocks, bonds and cash. Conventional wisdom recommends that we investors shift our allocations over time, lowering our portfolio percentage dedicated to stocks and increasing our bond holdings.

That’s a lot to ask of individual investors, though — to monitor and change our asset allocation over time. Financial services companies, therefore, now offer “target-date” (or “life-cycle”) funds to make things easier.

These funds, which come from companies such as Vanguard, Fidelity, Charles Schwab and many others, each have a target retirement year typically reflected in their name. So a fund with the year 2060 in its name will invest its assets in a way that makes sense for those aiming to retire roughly 37 years from now — and will change its allocation over time accordingly.

Consider, for example, a 2060 fund and a 2030 fund from a major fund company. The 2060 fund has around 90 percent of its assets in U.S. and foreign stocks and much less in bonds. That’s reasonable, since stocks typically outperform bonds over long periods. The company’s 2030 fund, though, recently had an asset allocation close to 60 percent stocks and 40 percent bonds — because the retirement date is only a few years away.

You’ll often find these kinds of funds available in your company’s 401(k) plan, and you can invest in them on your own, too, through your brokerage or directly from a fund company.

Know, though, that they’re not perfect. The asset allocations for funds targeting the same year can vary significantly by fund company, and they may not be exactly what you prefer. If you aim to retire in, say, 2030, you can always invest in a 2035 fund in order to be a little more aggressive, or in a 2025 one to be more conservative. Remember to make sure the fees are reasonable, too. In general, the lower the fee, the better, as even relatively small fees can really eat into your gains over long periods.