What is a target-date fund designed to do?

A target-date fund is designed to automatically adjust its asset allocation as the target retirement date approaches. These funds typically start with a higher allocation in stocks, which are considered riskier but have the potential for greater returns, especially in the earlier years when the investment horizon is longer. As the target date gets closer, the fund gradually shifts towards safer investments, such as bonds or cash equivalents, to protect against market volatility. This dynamic adjustment helps investors who may not have the time or knowledge to manage their asset allocation independently as they near retirement.

The goal of a target-date fund is to provide a diversified investment strategy that aligns with the investor's retirement timeline, making it a popular choice for retirement plans like 401(k)s. This feature of automatic rebalancing sets target-date funds apart from other investment options, ensuring that they can adapt to changing market conditions and risk tolerance over time.