An investor’s time horizon is the amount of time between today and the day in which you will first need to access your invested funds (retirement).
The mutual fund is the standard type of investment within a 401(k). Mutual funds are comprised of a variety of individual stocks and/or bonds, depending upon each fund’s specific objectives. Our view is that the key to maximizing your 401(k) depends on the combination of mutual funds being used, and the percent of your overall contributions being committed to each fund. This practice is called asset allocation, and should be customized to match each investor’s unique characteristics. Assessing your long-term financial goals, investment time horizon, and personal feelings about risk are all critical factors in determining an individual’s optimal 401(k) asset allocation strategy.
These mutual funds are comprised of a mixture of both stocks and bonds. It’s designed as a “middle of the road” option for investors who are looking to simplify their investment approach while having somewhat equal exposure to both safety and risk (balanced fund composition is typically 60% equity and 40% fixed income).
Target date funds are dynamic investment funds that are designed to reflect the asset allocation needs of an investor relative to their age. Each fund is based on a specific future date, with the underlying allocation designed to adjust itself over time, from aggressive to conservative, as the investor approaches the specified future date.
This is the preferred option of individuals looking to personalize their 401(k) investment strategy. Portfolio construction requires a great deal of knowledge and expertise that most people don’t possess on their own. As such, we strongly encourage investors to consult with their financial advisor when developing their personal asset allocation strategy.