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Target retirement funds are mutual funds that are geared toward investors that have a specific target retirement date. The idea behind these funds is they change their asset allocation over time to meet the needs of the investor.
If your planned retirement date is far away (say 25 years) then the fund will have a more aggressive asset allocation with a higher proportion of stocks compared to bonds. If there is less time to retirement - then the fund will probably have more bonds than stocks.
The key difference between these funds and other mutual funds is that they will change their asset allocation over time to reflect the shortening of time to retirement. Other types of mutual funds either never change their stock/bond ratio or only do so according to market conditions.
Target retirement fund example
If you are planning to retire in the year 2035 then you might buy an ABC Target Retirement 2035 fund. Since that year is pretty far away, this fund will have significantly more stocks than bonds. Most funds of this type would probably have around 80% stocks and 20% bonds.
If your retirement is only a few years away - let’s say in the year 2015 then you might own an ABC Target Retirement 2015 fund. A rough estimate of the asset allocation might be 80% bonds and 20% stocks.
Pros of target retirement funds
- These funds are easy - they save you the work of continually monitoring and changing your asset allocation.
Cons of target retirement funds
- Potentially higher costs for the same reason as balanced funds.
- One size fits all doesn’t necessarily fit you.
- Effectiveness is reduced if you own other investments. If half your investment is a target retirement fund and the other half is in stocks - then you are defeating the whole point of owning one of these funds.
Photo by Jeff Harmon Photography
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A bull market is basically a stock market index that is trending upwards for a decent length of time. There is no exact definition for how much the market has to go up or how long the upward movement should last for a bull market to occur but usually when most investors are feeling “happy” about their stock investments, a bull market is in progress.
A bear market of course, is the opposite of the bull market - when the market is declining for a length of time or declines very quickly (ie a crash) then that is considered a bear market. One technical definition is that a bear market has occurred once the market drops 20% from the most recent high.
Investor sentiment
These terms are most often used in the context of investor sentiment and it is not really all that important for most investors to be concerned with the current market phase if they are invested for the long term. The business media in particular likes to use terms like “bulls”, “bears” since they need to make market moves and trends more exciting than they really are. An investor who like to be active with their investing and perhaps engage in market timing will be quite concerned with the market trend.
Photos by Family Bedding and My Elwood.
Welcome to ABCs of Investing! If you're new here, please read the "About" page to find out more about this site. If you would like to receive updates in your email then sign up here or you can subscribe to my RSS feed. Thanks for visiting!
Timing the market or market timing occurs when an investor or fund manager makes a decision to buy or sell an investment in anticipation of that investment going up or down in value. This can occur on a broad scale where a fund manager might alter the ratio of stocks to bonds in his fund or it can apply to a single investment such as an investor selling a stock because she thinks it will go down in value.
A very simple “timing the market” example
Bob holds a European mutual fund that he thinks will go down in price and sells it to put the money into an Asian mutual fund that he expects will perform better.
Should I try to time the stock market?
If you are going to try and time the market then make sure you do so for the right reasons. Panicking when the stock market crashes is not a good reason to sell. Greed is another tough opponent - if the market is doing really well and you want to buy in, then you are chasing returns which you might not get.
Decisions on buying and selling securities should only be done within the context of a defined investment strategy. There are many different methods for determining when to buy or sell investments but fear and greed should not be part of the equation.
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