Q. I am a young investor who just started out investing. Should I buy a target-date fund or broadly diversified index funds?
A. For a young investor, given long investment horizon, it's advised to start with a broadly diversified stock index funds, there is no need to allocate any money to bond funds, because a) your initial investments tend to be small amount, you can afford losing them big; b) by observing the stock index funds' ups and downs for a few years, you will have a better idea about the market cycles and if you can adapt to it.
A target-date fund is diversified, but it carries higher expense than the stock index funds, and it also has unnecessary bond components in it which is unnecessary for young investors. Overtime, target-date funds will add more fixed income components, but for people who will receive social security income, a target-date fund will be overly conservative.
A. For a young investor, given long investment horizon, it's advised to start with a broadly diversified stock index funds, there is no need to allocate any money to bond funds, because a) your initial investments tend to be small amount, you can afford losing them big; b) by observing the stock index funds' ups and downs for a few years, you will have a better idea about the market cycles and if you can adapt to it.
A target-date fund is diversified, but it carries higher expense than the stock index funds, and it also has unnecessary bond components in it which is unnecessary for young investors. Overtime, target-date funds will add more fixed income components, but for people who will receive social security income, a target-date fund will be overly conservative.
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