Life Area: Financial
Topic: Millennial Investments
An Investment Gaining Popularity With My Millennial Followers
As I was researching for an upcoming blog post on the topic of Personal Finance, I came across some research I wanted to immediately pass-on to my Millennial followers: Like most investors, Millennials want convenient, simple ways to invest that will help them achieve their financial goals. Based on what these young professionals are doing with their company-sponsored and individual retirement plans, Millennials seem to be gravitating toward what many see as the perfect all-in-one investment vehicle to save for retirement: target-date funds.
Nearly two-thirds of professionals in their 20s who participate in 401(k) plans at work use target-date funds in their investment strategies, according to the latest available research from the Employee Benefit Research Institute. That compares to less than half for those in their 60s. With many employers offering target-date funds within their menu of investing options, the availability and simplicity of these funds makes them an obvious choice, and recent hires are gravitating toward them now more than ever.
What is a target-date fund?
One of the appeals of target-date funds is that they are easy to understand. The idea is that each fund targets individuals who intend to retire or otherwise get access to their money at a certain date in the future. In order to accommodate this time horizon, the investments that each target-date fund start out having an aggressive growth objective when the target date is far in the future. Over time, the fund then shifts to a more conservative approach, balancing growth and income needs gradually over time. By the time the target date is imminent, target-date funds have a greater emphasis on capital preservation than on future growth.
Let me mention, however, that these funds tend to be pretty broad and don’t make it possible for you to invest in certain stocks individually, especially your hand-picked social impact stocks.
Target-date funds have several advantages. Like many funds, they offer immediate diversification across a wide spectrum of investments even for those who don’t have much money to invest. What makes target-date funds stand apart from other investments, however, is the automatic way in which they adjust their investing exposure over time. Rather than making you recognize the need to adapt to changing circumstances as you grow older, the target-date fund itself makes adjustments internally, saving you the trouble of tracking their moves and letting you rely on the predefined investment strategy to work over the course of your lifetime.
These funds tend to be pretty broad and don’t make it possible for you to invest in certain stocks individually, especially your hand-picked social impact stocks.
Watch the Fees
As long as you or your employer is smart about choosing a fund provider that charges low fees, then a target-date fund is a good, simple way for anyone — Millennial or otherwise — to save for retirement. If your choice of target-date fund management fee is unreasonably expensive, however, then it’s worth looking for a cheaper alternative.
Like any investor, Millennials value convenience in their investments without unnecessary complexity. Target-date funds keep things simple, so it’s easy to see why they’ve become so popular among my Millennial clients.
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