By using a TDF, savers can get professional help to manage the complex asset allocation decisions required for an investment strategy over time. This leaves savers with a sense of safety and protection – they can sleep at night knowing that a manager is monitoring their fund towards the target date and navigating it through the changing market and economic environment.
Making it easier
TDFs remove a lot of the stress of designing, managing and sticking to a diversified investment strategy to achieve a goal in the future. If the date of the goal changes, savers can switch to a different TDF, and like any other multi-asset fund, savers can top-up, or take out money at any time without penalty.
TDFs are therefore particularly good for inexperienced or time-poor savers who are looking to build a pot for a particular future goal, or as a core portfolio for more confident savers. There is no requirement for the investor to decide which funds, or combination of funds, to invest in from the thousands that are available. They simply choose one fund that is purposely designed to help them potentially achieve their goal, for example, providing for their retirement, building up a deposit for a house, or paying off a student loan. The TDF manager is then able to manage the balance between risk and return based on the remaining time horizon to the target date.
Avoiding common mistakes
By having a professionally managed portfolio over time, savers using TDFs are less prone to ‘behavioural biases’ that can damage long-term returns. Examples of these behavioural pitfalls that most savers can suffer include:
–chasing winning stocks or funds whose performance may subsequently decline,
–chasing star managers who are rarely able to maintain their record,
–holding on too long to poorly performing stocks or funds in the hope they might bounce back,
–allowing appetite for risk to be dictated by current market circumstances,
–not managing the investment mix of their portfolio over time because changing it requires too much hassle and thought.
The biggest behavioural pitfall of all is leaving money in cash because investment is simply too complicated. By using TDFs, you have a professional on your side to help make asset allocation decisions based on the time horizon to your goal and based on the changing market conditions.
Economies of scale
From an administrative point of view, having one fund that holds a managed portfolio as opposed to a ‘pick and mix’ of different funds whose weights need to be rebalanced or altered over time results in a lower management cost for TDFs. Additionally, since savers can share similar time horizons for their respective goals, there are economies of scale that reduce trading costs as well as increasing efficiency and convenience. This also ensures that the fund manager of each TDF has a daily oversight of the fund’s strategy, and has the flexibility to make changes to the fund’s asset allocation to adapt to market changes across the entire suite of funds for all target dates. This means there is a high level of risk management, fiduciary-style oversight and sensitivity to an economy that is constantly changing.
