Targeted Maturity Funds
Target retirement funds are also known as life-cycle or target maturity
funds. The rule is very simple to understand: As an investor approaches
retirement, these funds take less risk with stocks and put more money
into conservative bonds. In retirement, these funds put most of the
money in income-producing bonds.
U.S. fund companies like Fidelity Investments, T. Rowe Price Group, the
Vanguard Group and Charles Schwab & Co., among others, have launched
versions of the life-cycle strategy. Nowadays the earliest retirement funds
mature in 2010, with others offered in 5- or 10-year increments up to
2045. In general these funds have been well-received, even though most
of these are not much more than a year old and performance records are
short.
Not all life-cycle funds are alike. Some funds take more risk than others.
The trade-off is straightforward: Stocks can provide a larger retirement
nest-egg but are more volatile -- especially smaller-capitalization shares.
Bonds are relatively stable and safer but lack stocks' long-term punch.
Vanguard Target Retirement 2025 Fund (VTTVX), for example,
emphasizes on growth and income, whereas T. Rowe Price Retirement
2020 Fund (TRRBX) allocates almost 80% in stocks - a more aggressive
approach than the Vanguard fund's 60% allocation to stocks. Fidelity
Freedom 2025 Fund (FFTWX) invest 64% in domestic and 11% in
international equities.
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