Investing on Target

For years, Vanguard's target-retirement funds have been Caspar Milquetoasts. Bonds, bonds and more bonds were the order of the day for the cautious wizards who engineered the funds. Now the wizards have turned adventurous. Instead of offering some of the most conservative target funds, Vanguard will soon offer funds that contain more stocks than the funds of archrival Fidelity.

Vanguard's Target Retirement 2015 fund, recently 45% in stocks, will invest two-thirds in stocks. The 2025 fund, 56% in stocks, will allocate 82.5% to stocks. All funds maturing in 2035 or later will contain 90% stocks. Vanguard is also dedicating a bit of its stock allotment to emerging overseas markets.

Everyone knows stocks return more than bonds -- generally about twice as much over the long haul. But stocks bounce around a lot more than bonds, and Vanguard feared investors would abandon their funds when the stocks hit rough water. After conducting new research, says Vanguard's Catherine Gordon, the company believes stock-heavy funds are "a better fit with most investors' preferences and tolerances for market risk."

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Vanguard isn't the only major firm tinkering with its retirement funds. Fidelity is also tweaking its mix, albeit only in its four target funds dated 2000 through 2015. Those funds are for people who are already retired or retiring within ten years. Each of Fidelity's four Freedom funds has increased its stock holdings by between three and five percentage points. The 2005 Freedom fund now has 50% of assets in stocks, and the 2015 fund has 58%.

For investors, target funds are simplicity itself. All you do is pick the fund that ends in the year closest to your retirement. Then add money monthly and watch it grow.

The trick is to find a well-constructed target fund. On that score, the target funds of Fidelity, T. Rowe Price and Vanguard all look solid.

Steve has been writing for Kiplinger's for more than 25 years. As an associate editor and then senior associate editor, he covered mutual funds for Kiplinger's Personal Finance magazine from 1994-2006. He also authored a book, But Which Mutual Funds? In 2006 he joined with Jerry Tweddell, one of his best sources on investing, to form Tweddell Goldberg Investment Management to manage money for individual investors. Steve continues to write a regular column for Kiplinger.com and enjoys hearing investing questions from readers. You can contact Steve at 301.650.6567 or sgoldberg@kiplinger.com.