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Target-date funds: Remember what Mom said about your eggs and one basket

Target-date funds hew to good financial principles, but that doesn't mean they should be your only retirement investment.

According to Vanguard's annual benchmarking report, "How America

According to Vanguard's annual benchmarking report, "How America Saves," 51 percent of those surveyed rely on a single target-date fund for their retirement savings. Photo Credit: Getty Images

Your mother probably told you don’t put all your eggs in one basket.

But did you listen? Some folks aren’t.

According to Vanguard’s annual benchmarking report, "How America Saves," 51 percent of those surveyed rely on a single target-date fund for their retirement savings.

Target-date funds shift from stock-heavy investments to more conservative portfolios as they approach the "target date" on the fund, theoretically a date close to when the investor plans to retire. The general principle is that investors can take bigger risks, and likely earn bigger returns, when they are younger and need to become more cautious as they get older.

While the general concept of target-date funds is solid, mom had good reason to warn against putting all your eggs in that one basket. Here’s why.

More is better. “Academics agree, having multiple asset buckets to choose from in retirement allows for optimal long-term results. With one target-date fund, you're losing out on the flexibility to take advantage of the benefits and opportunities that different assets and accounts may provide,” says Michele Lee Fine, president of Cornerstone Wealth Advisors in Jericho.

Furthermore, with most target-date funds, you get only one investment manager, so you have the risk of a lack of diversification, points out Martin Levine, CFO of 4Thought Financial Group in Syosset.

One size doesn’t fit all. Imagine if you and your college classmates all invested in the same target-date retirement fund when graduating. Not everyone's paths have turned out the same. Some have guaranteed lifetime income pensions; others are maxing out their 401(k) contributions. “No single person is the same as the other. Yet many rely on the same single investment, representing their entire retirement savings, beholden to the results of this one single investment,” says Fine.

You can do better. “Inertia is the reason that most people end up in middle-of-the-road target-date funds," says Preston Forman, a certified financial planner with Seasons of Advice Wealth Management in Manhattan.

"These nothing-flashy funds are the default option if you don’t make a choice. While it can be better than the old default ‘stable value,’ a cash-like investment that rarely keeps up with inflation, there are almost always better options."

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