I have a sort of love/hate relationship with target date mutual funds. In case you’re not familiar with the term, these are funds that automatically track a target asset allocation that changes over time. They start out quite aggressive and become more conservative over time.
While these funds are incredibly convenient (that’s the love part), they’re not always appropriate… The allocations might not be right for your needs, the fund family may arbitrarily change the target allocations with little to no warning, the “glide path” (i.e., the progression from aggressive to conservative) might not be appropriate for your situation, they’re not particularly tax efficient, and so forth.
While I wouldn’t go so far as to call them a terrible investment idea, one size doesn’t necessarily fit all, and there are some really bad target date funds out there. Nonetheless, as long as you’re careful to choose a low cost fund from a reputable company, target date funds can be a great way to get your feet wet in the world of investing – especially if you hold them in a retirement account.
In my view, the best funds in this category are the Vanguard Target Retirement Funds. In fact, we’ve used these ourselves in the past. Unfortunately, these Vanguard funds have historically had a high barrier to entry in the form of a $3000 minimum investment. Since several of their Target Retirement offerings are clearly aimed at young investors, this has never made sense to me.
Well, guess what? Vanguard has reduced the minimum on these funds to $1000. This is great news for the “little guy, ” as it allows people to start investing even earlier than they otherwise might have. Yes, $1000 is still a decent chunk of change for many people, but it’s hardly insurmountable.
If you don’t have $1000 in investable assets, then here’s my advice:
While it’s possible to get started with even less with certain other mutual fund families, I wouldn’t bother. Instead, stash your money in your savings account and then hit the library. While you’re building toward that $1000 minimum, spend your time reading a few good books about investing.
Here are some ideas to get your started:
- Eleven Great Books About Money
- Sixteen Books About Money
- Pre-Retirement Reading: Three Great Books About Investing
- The Bogleheads’ Favorite Books