Many physicians don’t want to think too hard about investing. There are a lot more fun things to do in life than worry about the minutiae of index funds.

One of the best investments for beginner investors are target-date funds. It’s a great way to get started with investing, while you learn more about the principles of asset allocation.

But there are literally hundreds of target-date funds available. How do you pick the target-date fund that’s right for you?

Benefits of target-date funds

Target-date funds are portfolios of index funds whose asset allocation changes with time as you get older. In general, the portfolios become more conservative (i.e., more bonds, fewer stocks) as you get older and your investing time horizon shortens. There are many advantages to target-date funds:

Simple

It doesn’t get much more simple than one fund. You buy a single mutual fund, and all of your investing is done.

Diversified

With a single target-date fund, you get exposure to a wide variety of index funds. Most index funds will be diversified, but only within an asset class, such as international stocks, or U.S. bonds. With a target-date fund, you are able to be invested in multiple asset classes within a single fund.

Adjusts asset allocation over time

Most investors will choose to be more conservative with their investments with time. When you are young and have a long investment time horizon, you can afford to be more aggressive with your investments and include more stocks with your portfolio. However, as you get older and you get closer to your retirement, you’ll want to be more conservative and include more bonds in your portfolio.

Target-date funds take care of adjusting your asset allocation over time, and your portfolio will gradually become more conservative as you get older.

Rebalances for you

Rebalancing is an important part of any investment asset allocation strategy. It can be time-consuming and stressful for new investors. Target-date funds take care of rebalancing for you, so you don’t have to worry about it.

Low cost

The best target-date funds have very low expense ratios. They may not be as low as the individual index funds, but they still have significantly lower expense ratios than the typical actively-managed mutual fund.

Less flexibility

For some, the decreased flexibility of a target-date fund would be considered a disadvantage. But for many investors, the inflexibility of a target-date fund keeps them from making bad investment decisions. It’s easy to shift from the S&P 500 to international stocks to cryptocurrencies based on the flavor of the month in the financial markets. Target-date funds help investors keep a steady hand, forcing them into a balanced asset allocation that may not be absolutely optimal for every investor, but will work for the majority of investors.

How to select a target-date fund

Step 1: Decide whether a target-date fund is right for you

A target-date fund is not for everyone. If you want to absolutely minimize your fees, then using a portfolio of individual index funds will be slightly cheaper than a target-date fund.

The other major reason not to purchase a target-date fund is if your risk tolerance does not match that of the target-date fund. The target-date fund’s asset allocation is designed to match that of the typical investor, but if you have a lower risk tolerance than the average investor, than the target-date fund will be too aggressive for you. Choosing a fund designed for someone 10-20 years older than you is not a good alternative, because the asset allocation is designed for someone retiring 10-20 years earlier.

Step 2: Pick a mutual fund provider

In general, you should pick the target-date fund from the company where you invest your money in order to minimize transaction costs.

Vanguard, Fidelity, and Schwab are the three major players in the target-date fund market. You can’t go wrong with any of these three options.

Vanguard

Vanguard calls their target-date funds “Target Retirement Funds.”

Ticker	Name	Expense Ratio
VTINX	Vanguard Target Retirement Income Fund	0.13%
VTXVX	Vanguard Target Retirement 2015 Fund	0.14%
VTWNX	Vanguard Target Retirement 2020 Fund	0.14%
VTTVX	Vanguard Target Retirement 2025 Fund	0.15%
VTHRX	Vanguard Target Retirement 2030 Fund	0.15%
VTTHX	Vanguard Target Retirement 2035 Fund	0.16%
VFORX	Vanguard Target Retirement 2040 Fund	0.16%
VTIVX	Vanguard Target Retirement 2045 Fund	0.16%
VFIFX	Vanguard Target Retirement 2050 Fund	0.16%
VFFVX	Vanguard Target Retirement 2055 Fund	0.16%
VTTSX	Vanguard Target Retirement 2060 Fund	0.16%

Fidelity

Fidelity calls their target-date funds “Fidelity Freedom Index Funds” (don’t buy the Fidelity Freedom Funds, which are actively-managed and have a higher expense ratio).

Ticker	Name	Expense Ratio
FKIFX	Fidelity Freedom Index 2015 Fund	0.10%
FLIFX	Fidelity Freedom Index 2015 Fund	0.10%
FPIFX	Fidelity Freedom Index 2020 Fund	0.10%
FQIFX	Fidelity Freedom Index 2025 Fund	0.10%
FXIFX	Fidelity Freedom Index 2030 Fund	0.10%
FIHFX	Fidelity Freedom Index 2035 Fund	0.10%
FBIFX	Fidelity Freedom Index 2040 Fund	0.10%
FIOFX	Fidelity Freedom Index 2045 Fund	0.10%
FIPFX	Fidelity Freedom Index 2050 Fund	0.10%
FDEWX	Fidelity Freedom Index 2055 Fund	0.10%
FDKLX	Fidelity Freedom Index 2060 Fund	0.10%

Schwab

Schwab calls their target-date funds “Target Index Funds” (don’t buy the Schwab Target Funds, which are actively managed and have a higher expense ratio).

Ticker	Name	Expense Ratio
SWYAX	Schwab Target 2010 Index Fund	0.08%
SWYBX	Schwab Target 2015 Index Fund	0.08%
SWYLX	Schwab Target 2020 Index Fund	0.08%
SWYDX	Schwab Target 2025 Index Fund	0.08%
SWYEX	Schwab Target 2030 Index Fund	0.08%
SWYFX	Schwab Target 2035 Index Fund	0.08%
SWYGX	Schwab Target 2040 Index Fund	0.08%
SWYHX	Schwab Target 2045 Index Fund	0.08%
SWYMX	Schwab Target 2050 Index Fund	0.08%
SWYJX	Schwab Target 2055 Index Fund	0.08%
SWYNX	Schwab Target 2060 Index Fund	0.08%

Always look at the expense ratio before buying

There are target-date funds that have the principles of target-date funds (i.e., an asset allocation that becomes more conservative over time), but use actively-managed mutual funds instead of index funds. These funds can be much more expensive than target-date funds that use index funds. Look for a target-date fund with an expense ratio less than 0.20%, such as those offered by Vanguard, Fidelity, or Schwab.

Step 3: Assess your retirement age

The next thing you need to decide is your expected retirement age. For example, if you are 32 years old and plan to retire at age 65, then a target-date 2050 fund would be most appropriate.

However, if you are planning to retire earlier, then you should pick an earlier target-date fund. For example, a 40-year-old investor who plans to completely retire from clinical medicine at age 50 might want to use a target-date 2030 fund.

Step 4: Use automatic contributions to consistently contribute to the account

Keep on investing money into the target-date fund. Ideally, you should automate this process so that a portion of each paycheck goes into investing.

Conclusion

Picking a target-date fund can be daunting for new investors, but with a little planning, it’s not as hard as it looks. A target-date fund can be a great starting point, or an investment you hold for your entire career.

“Wall Street Physician,” a former Wall Street derivatives trader , is a physician who blogs at his self-titled site, the Wall Street Physician.

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