Thanks to no-brainer shortcuts such as target-date funds, index funds and lifestyle funds, people who might not otherwise venture out in the stock market can do so without having to constantly tweak their portfolios or pay advisers to do so.
"There are so many forces out there that lead people to believe that they've got to make investing more complicated than what it is, and the beauty of the funds ... is that they greatly simplify investing," says Eric Tyson, author of "Mutual Funds for Dummies."
"But investors need to recognize that is threatening to people who make their livelihood off the complications in the world. Whether it's actively managed fund companies or financial advisers who make their living by giving advice or managing money, people are going to hear counterarguments," he says.
Of course, like any investment, these simple mutual funds have drawbacks and benefits. Consider the following pros and cons before getting your investing feet wet.
- Target-date fund
- Lifestyle fund
- Index fund
The target-date fundWhat it is: Also known as a target-maturity, target-retirement or life-cycle fund, the target-date fund is the one with a number on it -- it's your retirement year, or the year you plan to start extracting money from the fund. As the date nears, the fund's asset allocation shifts into a more conservative stance.
Pros: You get diversification in a single fund and automatic adjustment of your asset allocation as you approach your target year. "The advantage of the target-date fund is that as you're getting closer to using the money, then they will be gradually scaling back the risk, which is what you want to do," says Tyson.
However, some funds get conservative faster than others, so people need to look at not just the current asset allocation but also how it changes over time, says Greg Carlson, a fund analyst at Morningstar. "They need to think about where that fits in with their own risk tolerance and maybe their expectation for returns."
Cons: Life-cycle funds can charge high fees that are worth avoiding whenever possible. "You'd want to be down around an expense ratio of 1 percent or less, if you could," says Gail MarksJarvis, author of "Saving for Retirement (Without Living Like a Pauper or Winning the Lottery)."
Not every target-date fund offers quality diversification. People should examine the quality of the underlying funds and how they've performed. Target-date funds are usually funds of funds, meaning they hold other mutual funds in their portfolios, often from the same firm. The tenure of the managers on those underlying funds matters, too. "You're going to be holding the target-date fund for a long time. You don't want a target-date fund where the underlying funds are changing managers all the time," says Carlson.
These funds might also skimp on international stocks. "I think the typical target-date fund has something like 20 percent overseas, and that's on the light side," says Carlson. "I would shoot for 30 percent or even more, maybe, because there are a growing number of really good businesses outside the United States. You're really limiting your opportunities if you don't have much exposure to foreign stocks."