there's reason why Americans have 20% of their retirement assets in target-date
funds that's because target-date funds are an
easy and effective way to invest what is up everyone I'm rose and welcome back to
my channel the number one place for financial education empowerment and
inspiration in today's video I'm going to be talking about fidelity target date
funds also known as Fidelity's freedom funds you'll learn the answers to common
questions like how does a target date fund work our fidelity target date funds
a good investment and I'll also wrap up with some recommendations on whether
target date funds are a good fit for you or not in this day and age nobody is
responsible for your retirement but you your country your company ain't nobody
looking out for you as much as you look out for yourself and in case you're not
aware many of you actually already have target date funds in your 401 K by
default so I think it's important for everyone to understand how target date
funds work target date funds are mutual funds that target a specific date for
retirement whenever you look up a target date fund you'll see that it has a
target retirement year as part of its name I'm 30 years old right now so I'm
assuming I'm planning to retire around age 65 so I'd go for the 2055 target
date fund like this one here okay on a side note I actually never plan on
retiring because I love to work I love what I do and I'm pretty sure I'll be
making youtube videos for you until I'm at least 90 years old anyway so why our
target date funds age-specific let's take a look at an example the
fidelity Freedom Index 2055 fund so here it is I've pulled up the fund summary
page for the fidelity Freedom Index 2055 fund just a couple things to note here
has a very low expense ratio of 0.1 percent so that's low and that's good
general rule of thumb is anything under 0.2 percent is considered cheap and now
let's just take a look at what's inside this fun so as I said target date funds
are mute all funds and you'll see here that
there's gonna be a number of different funds usually anywhere from three to
five funds inside this mutual fund and they're gonna each give you exposure to
a different portion of the market so this is domestic equities and they also
have international equities equities is jargon for stocks they also have
exposure to bonds and then exposure to short term debt and net other assets
which essentially means cash and what's interesting here is so I just want to
point out that target-date funds are actually a fund of funds because they
are a mutual fund that contains other funds inside it so that's something
interesting to note and because it's a 2055 fund it's going to have a pretty
aggressive stock allocation so if you add up the domestic and international
stock allocation that is about what is that about
about 90% and then bonds and cash make up the other 10% roughly just rounding
up here and if we go over to the the 2025 fund which is for someone who would
be retiring in the next couple years so they would probably be in their 60s then
they would be looking at something more like this to fidelity freedom index 2025
fund and it has a lot of the same characteristics expense ratio is the
same it's just the target retirement here is different and what's interesting
is that of course their allocation is a little slightly different again it's
going to be a fund of funds it has multiple different funds in it but the
percentage allocations between stocks and bonds is very different so domestic
and international stocks add up to about about 60% and then the rest of the rest
of the 40% is in bonds and cash so as you can see the 20 2015 5 fund has sixty
sixty to forty stock bond allocation whereas the twenty fifty five fund
remember has a 90 stock 10 bond allocation so 90 percent stocks 10
percent buns the 2055 fund for the 30 year old has a bigger chunk allocated to
stocks whereas the 20 25 fund in other words the fund for the 60 year old has a
lot less in stocks and more in bonds and cash
that's because stocks are more volatile stocks are pieces of ownership in
companies if the company can sell its products keep expenses down and make a
good profit the stock price is gonna go up to reflect that success but that is
all based on a very uncertain future in all kinds of assumptions and
expectations so there's really no guarantees however on the other hand
uncertainty is exactly what causes the huge potential for growth in stocks if
you didn't have uncertainty you wouldn't have growth either so stocks have more
volatility uncertainty and more growth however a 90 year old granny she doesn't
want uncertainty she can't afford that she needs stability and that's why the
older you are the last year target-date funds will be allocated to stocks and
the more it'll have in bonds instead bonds are more stable than stocks
because bonds are essentially loans they're contractual and when you own a
bond somebody actually has a legal obligation to pay you back so compared
to stocks there are a lot more reliable but you're also not gonna get very high
returns you already know what your return is gonna be when you go in in
other words what interest rate you're gonna get and that's that there's no
growth beyond that of course that's assuming you're gonna hold the bond to
maturity but that's a conversation for another day I'm covering a lot of
information here so I want to just check in with you really quick with a fun
challenge now if you were to invest in a target date fund what would be your
targets retirement year in other words what would the number at the end of the
target date fund that you buy what would that number be so do the calculation
just really quick figure out your year and just type it in the comments below
for me it's 20 55 for some of you it might be 20 65 and everything in between
so whatever your year is just drop it below in the comments okay in addition
to automatically adjusting your portfolio as you get
older the target date fund also balances it what this means is that as the market
value of your investments shift the target date fund is gonna buy and sell
the stocks and bonds in your portfolio in order to maintain those initial
percentage allocations so for example when the stock prices go up a lot
relative to bond prices then the target date fund is gonna sell some stocks and
buy more bonds in order to stay at the 90 percent stock ten percent bond
allocation or whichever allocation you started with because the markets are
always moving the pie chart that I showed you earlier that's always gonna
shift depending on how the market is moving and so the fund needs to
proactively buy and sell constantly in order to maintain those that pie chart
what rebalancing forces you to do is to sell something after the price has gone
up and to buy more of something after it's gone down and this results in
automatically selling high and buying low and that juices your returns even
more so rebalancing is a big part of long-term investing success and with
target-date funds they do rebalancing for you automatically
the thing about investing is that unless you pay someone to do it for you you've
got to really roll up your sleeves and do some work not only do you have to
pick the asset allocation you also have to choose the index fund and you have to
rebalance it really regularly and of course remember to adjust the
allocations to get more and more conservative as the years go by but with
a target date fund all of this gets done for you the way I see it if you want
everything to be done for you you only have three options the first option by a
target date funds and pay the funds management fee the second option is you
can pay a financial advisor and pay their 2% annual fee or the third option
is you can pay a Robo advisor and Robo advisors have a point two five percent
fee usually even fidelity they have their own in-house Robo advisor platform
I think it's called fidelity go and they charge
I believe point three percent so anyway Robo advisors they all charge similar
fees across the board so of all three options target date funds are the
cheapest way to go and compared to target date funds of
other companies fidelity target date funds offer the lowest expense ratios
that I've seen anywhere that's compared to Vanguard and Schwab and some of the
other big names fidelities lowest cost target date fund
charges will point 12 percent which is less than half the fee of the typical
Robo advisor so that means that for a ten thousand dollar investment you'll
only pay twelve dollars in fees compare that to twenty five dollars for
a Robo advisor which is almost double and something else you need to keep in
mind is that Robo advisors invest your money in ETFs or exchange-traded funds
and those exchange-traded funds also have a fee so you're paying the Robo
advisor fee as well as the underlying fees of the ETF that you're invested in
so this usually results in a total fee of about 0.4% which is 0.28 percent more
than a fidelity target date fund that doesn't sound like a huge difference but
compounded over time a small difference like that in fees adds up to tens of
thousands of dollars don't believe me check this out
so here's what happens when you invest ten thousand dollars back in 1970 so
this is over almost a forty year period and the red line represents if you
invested with a theoretical Robo advisor that charges 0.4% all in costs including
the underlying ETF fees and then the blue line represents the fees are the
returns of a if you'd invested in a target date fund that returns 0.12
percent and of course we're assuming that they both return the same amount
they're they've invested in the same indexes but at the end of that period
the Robo advisor will have you'll have $10,000 will have turned into $280,000
and with the target date fund your $10,000 would have turned into $320,000
so that's a $40,000 difference just from a tiny point to 8% difference in fees so
the bottom line is fees matter every percent
point counts moving right along by now you're probably wondering our fidelity
target date funds a good investment am I gonna make money well let's see so
here's a chart comparing the performance of the fidelity freedom index 2055 fund
so the target date fund for someone who's about thirty years old right now
I'm comparing that to two things so this is the blue line here type the target
tape fund and the yellow line here is the International stock market and the
purple line here is the US stock market so as you can see ever since 2000 about
2011 which is how far I could get the data to go back the target date fund has
definitely lagged the US stock market in other words the S&P 500 but it's
outperformed the International stock market so it's been somewhere in the
middle so you're probably thinking well why would I invest in a target date fund
when I could have invested in the S&P 500 just 100% stocks and made that much
more versus just 67% so that is kind of the tricky part here you actually never
know when u.s. stock markets will outperform the international stock
markets it just so happened that over the last decade the US stock market has
been on a really really really hot streak compared to the rest of the world
but there have been periods when it's been the other way around where this
yellow line would be way up there and this purple line would be way down here
such as in the 1970s the 1980s or in the early 2000s right after the.com bubble
then anyone who was in international stocks was a happy camper so that is
sort of the benefit of target-date funds that even though it doesn't look so good
over the last decade in the future you might be glad that you're here in the
middle forces somewhere down here so and remember that the target date fund it
has a 90 percent stock allocation and about a third of that stock allocation
is in international stocks so without I would say is the first benefit
of being in a target date fund even though it doesn't look so good
you actually just never know when domestic stocks will be doing better
than international so that is the first benefit the second benefit of investing
in target date funds is that during a really crazy time in the market like the
2008 financial crisis you wouldn't lose as much as someone who had invested in a
one hundred percent stock portfolio so this start here compares the 2008 that
crazy time for someone who had a 100 percent stock portfolio in the S&P 500
index fund so that's this yellow line here and the blue line represents what
would have happened in 2008 for someone who had their money in a target date
fund I actually put in the target date Vanguard 2015 fun because fidelity
doesn't have data going that far back and this is someone who was probably
getting ready to retire soon and really cannot afford big losses in the stock
market so someone who was in the target date fund would have lost 39 percent
just from the high to the low and anyone who has invested in a 100 percent stock
portfolio in the S&P 500 they would have gone down 56 percent from high to low so
that's a pretty tough psychological hit to overcome 56 percent lost compared to
a 39 percent loss I mean 39 percent still sucks but it's a lot better than
losing 56 percent obviously all of these numbers recovered later on and we're way
up here now but still I mean if you're getting ready to retire in seven years
you know if it was back in 2008 could would you be able to sleep at night if
your portfolio took a drawdown of 56% I think 39% would have been a lot easier
to stomach so that is the second benefit of target date funds which is that
because it's diversified into bonds and they automatically move you to a more
conservative a location as you approach retirement
age any sort of market crash which let's be honest could happen at any time is
not going to affect you as much if you owned a target date fund during the 2008
financial crisis versus an SMP 500 index fund it would have been much easier to
survive that recession psychologically emotionally and financially
so although the potential returns of investing in a fidelity target date fund
probably won't be as high as if you put a hundred percent of your money in a
super aggressive 100 percent stock fund but at least you'll be able to sleep at
night and you'll experience a smoother ride during recessions and with target
date funds you'll still collect a respectable 7 to 8 percent return if
you're considering investing in fidelity target date funds then definitely sign
up for my free crash course get started investing how to build a starter stock
portfolio in just three days you can take action on this course it's just a
hundred dollars and I know the fidelity website can be a little hard to navigate
so I've also included step-by-step tutorials so you can just have two tabs
open and follow along with me on the screen to set up your very first target
date fund investment there's also a bonus cheat sheet in that course with
links to all of Fidelity's best target date funds so I've made it super easy
for you and it's especially made for beginners who need a lot of hand-holding
so click the link below to sign up it's free in my opinion the number one hurdle
to getting invested is getting over that analysis paralysis I know there's an
overwhelming amount of decisions to make just to get started so most people end
up not making a decision at all what platform do I use what account do I open
and then once you even get past all of that it's like how much money do I
invest and then what do I invest in so the thing about target date funds is
that it completely eliminates this analysis paralysis they make most of the
decisions for you all you have to do is open your account at fidelity and pick
the year that you are retiring everything else will be taken care of
for you so if you've been wanting to put your money to work but for one reason or
another you've just never gone around to then I do think investing in a fidelity
target date fund is a great place to start so that's it for this video I hope
it's been really helpful for you definitely sign up for my free crash
course for an even deeper dive into target date funds if you think that's
the path for you for those of you who prefer to be more actively involved with
your investments consider building your own portfolio of index funds and succs
I've got some great videos on how to do that so check them out right here as
always thanks so much for watching I really appreciate you please like this
video if you liked it and post new videos every Wednesday so I'll see you
next week same time same place