When Being Passive Pays: Study Looks at Target-Date Fund Returns

When Being Passive Pays: Study Looks at Target-Date Fund Returns

Consider this your permission to be passive.

Turns out, people who invest in hands-off target-date funds tend to see better returns than those who actively manage their portfolios, new research from Morningstar finds.

Refresher: A target-date fund is a mutual fund that automatically shifts its combination of stocks, bonds and cash based on a specific time frame.

For example, a younger investor might start with a more aggressive allocation, with a large percentage of their portfolio in stocks. But as an investor gets closer to their planned retirement age, the target-fund would automatically rebalance into less risky allocations.


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In other words, target-date funds may be a good option for investors who are either inexperienced or uninterested in meddling with their portfolio personally.

And now, Morningstar finds that the hands-off approach might be favorable for another reason: asset-weighted returns for target-date funds over the past 10 years averaged 6.1%, more than 1 percentage point higher than the category's 5% gain. In contrast, returns for most broad investment categories had negative investor-return gaps.

While the study shows that for many investors, choosing a target-date fund might be a more successful route to reaching retirement goals, that’s not necessarily because the funds are better, Morningstar officials say.

Rather, it's more likely due to the habits of target-fund investors. That is, they tend to invest regularly and consistently—and leave their funds alone to grow.

In contrast, more active investors are likely to move their money around based on market ups and downs.

“We know that hands-on investors tend to have worse performance because they’re moving at the wrong time—which isn't surprising because even fund managers have a hard time trying to deliver superior returns," Janet Yang, Morningstar’s director of multi-asset class manager research, told MarketWatch.

To learn more about the hands-off strategy, read up on whether target-date funds might be a good fit for you.

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.


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