Why Ramit Sethi recommends TDFs for his own family. | Jobs Vox

“I Will Teach You To Be Rich” is highly recommended by the author, but not everyone agrees.

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Main points

• Ramit Sethi frequently recommends investing in target date funds.
• A target-date fund builds a portfolio based on your chosen retirement age.
• Some people argue that TDFs are not worth the fees and better returns.

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Most of us have heard how important it is to invest. The stock market is arguably the most proven way to build wealth, so it’s a great place to grow your retirement savings. But this does not mean that you need to choose stocks yourself, and in fact, there are much simpler options.

Financial advisor Ramit Sethi often advises people to take the easy option. For this reason, the investment of choice is target-date funds, or TDFs for short. He even says that he recommends them to his family. Here’s why he loves them.

How a target date fund makes it easy for investors

Building an investment portfolio from scratch is a time-consuming process. It takes 20 to 30 stocks to get a diversified portfolio, when you are not too dependent on any one company. In addition to acquiring stocks, you need to manage your portfolio and adjust your asset allocation by deciding when to sell your investments. That can be a lot of work, especially if you’re new to investing.

A target date fund is an investment that does all the work for you. This type of fund is built around a specific retirement age, and designs your portfolio based on when you want to retire. For example, if you want to retire in 2045, you can invest in a 2045 target date fund.

These funds conduct asset allocation. When you’re decades away from retirement, a target date fund invests more in stocks because it offers more growth potential. As your chosen retirement age approaches, your portfolio will gradually shift to more conservative investments.

When you invest in a target-date pension fund, all you need to do is transfer money into it. Most good stockbrokers allow you to set up recurring transfers, so you can contribute automatically. You get a diversified portfolio that puts you on track to retire whenever you want, with zero work required on your part.

Debate on target-date funds

While Sethi is a fan of target-date funds, there are others who feel that such an investment is not the best option. There are two downsides that people typically bring up: expense ratios and low returns.

The expense ratio is the fee you pay for an investment fund. Frankly, this is not a concern. Although target date funds are known for having somewhat high expense ratios, these have declined in recent years, and there are many low-fee options available.

Poor returns are especially problematic for retirees. Target-date funds generally tend to be more conservative in retirement, which limits growth. A more equal split between stocks and bonds offers higher growth while still providing more safety.

Some argue that target date funds are not suitable for young investors. Target-date funds typically invest heavily in stocks, but they also invest in bonds. If you’re still in your 20s or 30s, you can go all in on stocks and rebalance your portfolio later. There are many exchange-traded funds (ETFs) and mutual funds that invest exclusively in stocks. Your portfolio will be more flexible, but it can also grow.

Is a target date fund right for you?

Target date funds are the best choice for most investors. While they may not suit every investor’s preferences, they have no glaring flaws. If you’re looking for a retirement plan you can set up, automate your contributions and leave it alone, then target date funds will meet your needs.

One thing to keep in mind with target-date funds is that they are not suitable if you plan to make other investments on the side. It is designed to serve as your sole investment, and the portfolio it builds is based on that assumption. If you add other investments to the mix, your portfolio will not be as balanced as intended.

If you want more flexibility and control, there are other ways to invest. But Ramit Sethi is right that target-date funds are one of the best options available for direct retirement savings.