Keep your eyes on your target-date fund
If you began putting money in a target-date retirement mutual fund five years ago and then tuned out, you'll find it's changed beyond the gradual shift from stocks to bonds that's supposed to occur.
These funds used to focus just on U.S. stocks and bonds, but they're now buying a broader mix of investments, from foreign stocks to commodities. Many moves made in recent years help investors in the long term, analysts say, but could make short-term returns choppier.
A refresher course. With target-date funds, you pick one set for the year you hope to retire: Those in their early 30s might pick a fund targeted at retirement in 2045, for example.
When retirement is far off, target-date funds invest heavily in stocks. That's because investors have the luxury of time to ride out potential dips. Each of the biggest target-date fund providers - Fidelity, Vanguard, and T. Rowe Price - keeps at least 85 percent of its 2045 fund in stocks.
As the years progress, target-date funds shift some money from stocks into bonds and cash because investors should take less risk as retirement approaches. Fidelity's target-date funds reduce the percentage of assets held in stocks from 85 percent to 50 percent over the course of 30 years, steadily dropping along the way.
No two funds are alike. A target-date fund is built to be the only one you own for retirement savings. But each fund holds hundreds of stocks and bonds, and two for the same year can look very different.
Some providers are more aggressive, putting a heavier emphasis on stocks; others are more conservative. The Wells Fargo Advantage Dow Jones 2020 fund (WFDTX) has 43 percent of its money in stocks, and T. Rowe Price's Retirement 2020 fund (TRRBX) has 68 percent.
That will lead to differences in performance. In 2008, when the financial crisis was pummeling stocks, the Wells Fargo fund lost 22 percent. That was a milder drop than the 33 percent loss for the T. Rowe Price fund. But the recovery in stocks since the recession means the T. Rowe Price fund has had stronger returns in the last few years.
They're more foreign. Japanese stocks have been some of the world's best over the last year, and European stocks are climbing as worries about the region's debt crisis fade.
Target-date investors have reaped those gains as the industry has upped its reliance on foreign stocks. The average 2040 fund now has 36 percent of its stock investments in foreign companies. That's up from 24 percent in 2005, according to investment-research firm Morningstar.
More passive, too. Target-date funds are typically made up of other mutual funds. The majority of the industry's assets are invested in actively managed mutual funds. But a growing number of target-date funds are relying on index funds, which passively follow an index rather than try to beat it.
Last year was the first in which more dollars flowed into funds that invest in index funds than into actively managed funds.