From Here to Financial Happiness

Day Sixty Five One‐Stop Shopping

Yesterday, we discussed combining three index funds to create a globally diversified portfolio. For today, I promised a second approach – and this one is even simpler. Instead of combining three index funds, you might purchase a single target‐date retirement fund.

A target‐date fund provides a broadly diversified portfolio in a single fund, with each fund geared toward a particular retirement date. For instance, a fund targeting 2045 would have a mix of stocks and bonds that would be appropriate for someone turning age 65 in 2045 or thereabouts.

The big advantage of target‐date funds is their simplicity. Indeed, they have become a mainstay of many 401(k) plans and may even be the default investment option. But there are drawbacks. While most target‐date funds don't charge any expenses themselves, they typically invest in other funds offered by the sponsoring fund company – and these funds can be costly and will almost always be actively managed.

Three exceptions: Charles Schwab, Fidelity Investments and Vanguard Group all have a series of target‐date retirement funds that invest in each company's own index funds. That means the funds have low annual expenses, 0.08% a year for the Schwab funds, 0.15% for Fidelity's offerings and 0.13% to 0.15% for the Vanguard funds. Keep in mind that, while the stock index portion of these funds shouldn't generate big tax bills, you will owe income taxes each year on the interest kicked off by the bonds – assuming ...