Not everyone invests for a retirement day in the distant future when 35 years of savings turns into another 30 years of income.
If you’re investing for that big trip around the world or a child’s education through a registered education savings plan (RESP), your time horizon could be 15 or 20 years.
That’s when a target-date fund could come in handy. Also known as a lifecycle, dynamic-risk, or age-based fund, a target-date fund literally targets a year in the future when the fund will be needed.
Most financial institutions offer them and you can get them through a financial advisor. The strategy begins with higher-risk/higher-return equities and over time rebalances the portfolio with lower-risk/lower-return fixed income to be sure the money is there when the target date comes.
Maintaining growth toward the end of the cycle can be challenging in these times of low fixed-income yields, and that’s why it’s important to invest in target-date funds through a qualified professional.
Expertise, however, has its price. Target-date funds have annual fees, known as management expense ratios (MER), as high as 2.5 per cent. That means the fund will need to generate 7.5 per cent annually to give you a five per cent return. Many also have fees, known as loads, when the fund is bought or sold.
A trusted investment advisor, who manages your other investments, could probably do it for less and better tailor it to your specific personal goals.