Guide to investing in Target Funds

Out of our three recommended ways to invest, we think that Target-Date Funds are the best choice for most people. They won our top pick because they are an “all-in-one” portfolio that runs on autopilot and typically doen’t have management fees. By avoiding fees you will likely end up tens of thousands of dollars richer than with a Roboadvisor or human advisor.

For this illustrative guide, we’ll be using the brokerage firm Vanguard since they invented Index Funds and have a solid reputation. But you can loosely follow this same guide for other firms. We are not getting paid in any way by Vanguard or anyone else for this guide.

#1

Find the Target Fund for your age

Estimated time to complete: 5 minutes

Go to Vanguard’s Target Fund page and click on the Target Fund that matches the year you were born.

Since you’ll be investing in your Target Fund for a long time it’s worth familiarizing yourself with the assets it invests in and how it divvies your money across stocks and bonds.

#2

Take an investor questionnaire

Estimated time to complete: 5 minutes

Now that you’re acquainted with Target Funds, let’s double-check that the one for your age is a good match for you. This is smart to do because people that are the same age have different risk tolerances and goals. For example, someone who can’t stomach market downturns might need to pick a Target Fund for an older age group since it’s less volatile.

To check where you land, take Vanguard’s 11-question investor questionnaire and compare your personalized Asset Allocation to the Target Fund for your age to make sure they ballpark match.

#3

Sign up for your investor accounts

estimated time to complete: 20 minutes

Once you’ve figured out which Target Fund is right for you, it’s time to sign-up for an account.

For tax optimization purposes, most people are going to want to sign up for two Vanguard accounts: A traditional brokerage account and a retirement Roth IRA. But you can always call Vanguard for free to make sure that’s right for you or ask your tax person if you have one. We go into more detail in our video.

#4

Set up automatic contributions

estimated time to complete: 5 minutes

Now it’s time to buy your fund. We strongly encourage setting up automatic contributions so you can save and invest on autopilot without ever having to think about it.

#5

Sit back and relax

estimated time to complete: 0 minutes

Woo! You made it! Just keep contributing to your fund and your money will grow over time. Remember to stay the course by contributing to your Target Fund even during market downturns. Market volatility is common in the short term and you should never, ever panic sell. In fact, buying during those times is like shopping at a discount since the market has historically always recovered and gone up over the long run.