6 steps to selecting a target-date fund

Step #3: Investigate the investment approach

The primary question here is index vs. actively managed? Some TDFs comprise actively managed funds, which seek to outperform similar funds or a market benchmark. To do so, managers use research, market forecasts, and their own judgment and experience to buy and sell securities. Other TDFs are composed of index funds. An index is a group of securities that represents a market or a portion of a market. An index fund seeks to track the returns of a market, such as the broad U.S. stock market, or market segment, such as short-term bonds. Over time, indexing has performed favorably relative to active strategies, largely as a result of lower costs. Some active managers have outperformed peers and benchmarks over various time periods, but evidence suggests that the likelihood of outperforming with consistency is extremely difficult over time because of the higher costs associated with active management. Note, too, that many TDFs adhere to a static asset allocation strategy, which means the underlying portfolio remains the same (except for the glide-path changes). Some funds, however, are more tactical, changing the portfolio as market conditions change.

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