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Is a Target-Date Fund a Good Way to Invest?

The answer depend on age and objectives.

Question: I’m 17 years old, and I have an IRA account with $1,000 saved so far. The money’s invested in a target-date mutual fund so that I can retire when I’m 65. Is that a good way to invest or would you recommend something else for me?

Ric: Didn’t you know you’re not allowed to start saving for retirement yet? I mean, you have to wait until you’re much older and then regret that you didn’t start two decades sooner.

Just kidding. Actually, congratulations — you deserve the applause of the day.

A target-date fund, as the name implies, is designed to invest the money between now and a certain future date. You say you plan to retire in about 45 years, so perhaps you picked the “2060” fund.

But here’s the dilemma: The fund probably has most of its money in stocks, with some in bonds. But at your age, we would advise you to invest entirely in stocks. Sure, that’s a more volatile way to invest, but history tells us that stocks produce higher returns over long periods than any other asset class.

To reduce your risk while still owning nothing but stocks, we’d recommend that you invest in a wide mix of large, medium and small U.S. and foreign companies. Low-cost mutual funds or exchange-traded funds that offer diversification can help you accomplish this. Then keep adding to your account regularly.

Do this and you will be astonished, my young friend, as to how much you will achieve over the course of your career.

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