Vanguard Study: Target-Date Investors Avoid Extremes

Their exposure to stocks also dips lower over time, versus non-target-date investors.

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Investors that put their retirement money in target-date funds tend to play it more conservative over time versus those who choose their own mix of funds, according to a new Vanguard study.

The report looks at the behavior of more than 1.24 million participants in retirement plans, including 357,000 who were actively contributing to target-date funds.According to the study, people who didn't invest in target-dates exhibited greater extremes in their stock holdings: 30 percent held all-stock portfolios, while 16 percent held highly conservative, zero-equity portfolios.

On the other hand, target-fund investors' stock exposure ranged from 40 percent to 90 percent, depending on their age and time to retirement.

For those in target-date funds, the study also found that stock exposure dips lower over time compared with non-target-date investors. For non-target-date investors, allocations to stocks decreased by less than 10 percentage points between the ages of 25 and 65. Equity allocations of target-date investors, on the other hand, declined more than 40 percentage points over the same age range.

That's not necessarily a good thing. While one explanation for the difference between target-date investors and those who choose their own mix may be that non-target daters don't monitor their allocations closely, a growing opinion among financial advisers is that even newly retired investors need to keep a significant amount of their portfolio invested in stocks. [See "6 Blunders that Ruin Retirement Plans.]