Friday, August 10, 2012

Investing Tip: Be Careful of Target Funds Fees

You've probably heard the old saying, "You can learn for other people's mistakes, but sometimes you have to be the other people." I was the "other people" in my investments in target funds.
I was excited to hear about Target funds - funds that target a specific retirement year, like 2025, and automatically move assets into more conservative investments. I thought this would be great; I wouldn't have to worry about rebalancing my retirement fund - and my financial advisor recommended it.
But what I didn't research carefully enough is the management fees. My 2025 Target fund had a fee of .74% per year and was composed of index funds in US stocks, World bonds, International stocks. If you take the weighted average of my Target fund's components, management fees were only .26%. So I was paying .48% interest, hundreds of dollars, a year for the Target fund to slowly more to a more conservative balance. For half a percent interest, I could make a few trades at the end of the year.
Some target funds are a good deal. At Vanguard my target fund is cheaper than its weighted parts.
Moral of the story: Research your target funds and make sure the management fees are not excessive. Learn from my mistake so you don't have to be the "other people".

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