Investing on 'Autopilot'

How target date funds can let you set it and forget it with Morningstar's Director of Investment Research, Ian Tam

Ian Tam, CFA 1 October, 2020 | 1:48AM
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Ian Tam: If you're saving for your child's education, target date funds can be a reasonable solution that allows you to put your investments on autopilot, especially if you don't have a lot of time to manage your investments on your own. These funds typically invest in a mix of stocks and bonds, with the added feature of automatically changing that mix overtime as you get closer to the period where you need to withdraw your investments, also known as the target date.

Here's an example of a target date fund from RBC. Initially the fund starts out with a relatively low allocation to bonds, but as time passes the amount held in bonds increases. Now the idea with these types of funds is to reduce risk gradually overtime, such that when it comes time to withdraw your investment for tuition, let's say the amount of risk in the portfolio is at its lowest, hence reducing any potential shocks or drawdowns from the market. That said, like all mutual funds the investments on target date funds are not guaranteed.

On the second chart, you'll see the performance of the category of 2025 target date funds against the S&P/TSX Composite. Now just like the index, target date funds, do go through periods of volatility, but also notice that during the pandemic target date funds didn't see nearly as much drawdown in value as the equity index did. All this said target date funds can be a great choice if you're looking to have someone manage this glide path for you. To see a list of good performing target date funds, click the link in the transcript to this video.

For Morningstar, I'm Ian Tam.

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Ian Tam, CFA  is Director of Investment Research at Morningstar Canada. 


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