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Like many investors, you may rely on mutual funds and investment professionals to put your money to work for you. And, investing in a mix of stocks and bonds within a single mutual fund can help keep your investments diversified.
The two most popular types of these all-in-one mutual funds are target date funds and target risk funds. Though their investment philosophies differ, both are designed to help you realize your investment goals in a more convenient way.
Target date funds offer a straightforward way to diversify your investments. You simply select a mutual fund based on the year you plan to retire, and the fund automatically adjusts over time to stay in line with your investment goals.
You don’t need to rebalance or select any underlying funds—the single target date fund does that for you. The mix of assets within your account gradually shifts from an aggressive to a more conservative risk profile as the target date approaches.
This single investment approach is appealing, but there are a few things to keep in mind, when saving for retirement.
In other words, you need to consider the level of risk the fund takes to help meet its objectives. Each fund has a unique formula to determine the right mix of stocks and bonds for (1) each target date, (2) the number of years until the target date, and (3) the relative level of risk being assumed.
The fund’s investment mix typically becomes less risky as the target date nears, but you need to be sure you’re comfortable with volatility throughout its life. Selecting the right target date fund is made more difficult if your risk tolerance changes as retirement nears.
In other words, you need to fully understand the strategy behind the fund’s approach before making an investment into it.
Target date funds are a good solution for some investors but aren’t always as “hands-off” as they may appear. And they may be too aggressive or conservative for your individual risk tolerance.
Target risk funds build a mix of stocks and bonds that align to a particular risk level:
Generally, younger investors will put their money into more aggressive target risk funds and focus on growing their assets. Older investors tend to use more conservative allocations to protect their assets as retirement grows closer.
Here’s a closer look at what these funds offer.
For example, if you’re an older investor with the majority of your assets sitting in bond funds in a 401(k), a small allocation to an aggressive target risk fund in an IRA might be the right choice for you. A target date fund doesn’t offer the same flexibility—the closer the target date, the more conservative the investment mix.
No matter what your planned retirement age is, you can get the right investment mix with a target risk fund based on your risk profile. You can also update it as your investing needs evolve. Keep in mind, you will be responsible for adjusting your investments as your risk tolerance changes.
Target date funds | Target risk funds |
Aligns with a stated retirement or target goal date. | Aligns with an investment risk level: conservative, moderate, aggressive. |
May be significant variations in risk levels between funds with same target date. | Risk level specific to the fund and does not change. |
Requires understand the “glide path” for shifting investments as the target date nears. | The investor would rebalance as risk tolerance or needs change. |
Investment manager adjusts investments over time with the fund to align with need for less risk as the target date approaches. | The investor would move assets between funds with different risks levels as your risk tolerance changes. |
At Thrivent Mutual Funds, we offer a wide range of target risk funds in our Asset Allocation and Income Plus Funds. Our team of seasoned investment professionals brings deep knowledge and thorough proprietary research to actively manage each fund.
When you choose to invest with Thrivent Mutual Funds, you’ll benefit from the expertise of our investment professionals and the convenience and choices we provide to make investing easier.
The concepts presented are intended for educational purposes only. This information should not be considered investment advice or a recommendation of any particular security, strategy, or product.