Balanced funds invest in both stocks and bonds, typically allocating 50% to 70% in stocks.
Target date funds are ‘age-based’ funds consisting of a portfolio whose asset allocation mix becomes more conservative as the target date (usually retirement) approaches.
- Diversification — While balanced funds are typically allocated to U.S. large cap equity and corporate or government bonds, most target date funds offer much more diversification, typically incorporating U.S. small cap, international developed, and emerging market equities, along with a handful of additional fixed income asset classes.
- Professional expertise — A typical balanced fund utilizes a single team of professionals to make all buy/sell and allocation recommendations within the fund. Within a target date fund, however, the common approach is to have one specialized team manage the capital market assumptions and asset class allocation decisions. This team utilizes several other teams with more expertise within each asset class for security selection. With this approach, the number of professionals managing a fund is increased from a typical four-to-six person team for a balanced fund to a small army of professionals (20+) for a target date fund.
- Price tag — target date funds typically have a lower price tag. The average balanced fund charges 92 basis points, while the average target date fund charges only 39 basis points, meaning an investor can get a 50% fee break for a more robust portfolio.
- Time horizon — Arguably the greatest advantage for target date funds is the ability for investors to personalize their asset allocation based on their own time horizon. With a traditional balanced fund, the stated base allocations are fairly static, typically adjusting the equity allocation by only 5% to 10% up or down in any given year. Target date funds, on the other hand, incorporate a “glide path,” which decreases the fund’s allocation to riskier asset classes (most notably equity) over time. An investor with 40 to 50 years to retirement has an allocation to equities north of 90%, reflecting the investor’s long time horizon. As the investor approaches the target date, the allocation to equities decreases.
- Flexibility — Target date funds are also much more flexible than many realize. While the most traditional way to employ one of these funds is in reference to a retirement date, they can be purchased for any type of account and for a target date of any variety (e.g., planning for future education costs, investing for a down payment on a home). Additionally, if an investor has a small account and can only feasibly purchase one fund, a target date fund can be a great option.