'Is investing in two target-date funds smart?'

@Money August 3, 2012: 11:30 AM ET

(Money magazine) -- To better diversify, I invest $1,500 a month in two 2015 target-date funds from different fund companies. Is this a smart move? -- Ralph E., Chesterfield, Mo.

I wouldn't go so far as to say that putting your money into two target-date funds from different companies will ruin your retirement prospects. But it does undermine the purpose of going with this type of fund in the first place.

The reason to go with a target fund is that you're not entirely comfortable building a portfolio on your own, or you don't want to go to the trouble of creating one. So rather than assemble a mix of stock and bond funds yourself, you buy a target fund with a date that corresponds to the year you intend to retire, or 2015 in your case.

The target fund not only gives you a ready-made blend of stocks and bonds appropriate for your age, it automatically shifts that mix more toward bonds to preserve capital as you get older. Thus, when you invest in a target fund, you're getting more than just a pool of assets; you're getting a long-term investing strategy.

However, not all target funds pursue exactly the same strategy. Even if two funds have an identical target date, one might tilt its mix more toward stocks than the other.

And they don't invest in exactly the same types of assets, either. For example, one might include TIPS (Treasury-inflation Protected Securities) in its portfolio as a hedge against inflation, while another could invest in REITS (Real Estate Investment Trusts) or commodities-related stocks. Some target funds may invest in only a handful of underlying funds; some may spread their assets among a dozen or more.

Even more important, target funds with the same date can offer dramatically different "glide paths," or the rate at which the fund shifts from stocks to bonds just before and then during retirement.

Take, for example, the 2015 target funds from Vanguard and T. Rowe Price, the two firms whose target funds made our MONEY 70 list of recommended funds. By the time the Vanguard fund reaches its target date in three years, it will have reduced its stock stake to about 50% of assets. Over the next 10 years, the fund will then pare its equity exposure even further to just 30% of assets, where it will remain.

The T. Rowe Price 2015 fund, by comparison, will not only reach its target date with more of its assets in stock -- 55% vs. 50% -- it will take twice as long to reduce its stock holdings to 30% of assets -- 20 years rather than 10. But unlike the Vanguard fund, which never goes below 30% in stocks, the T. Rowe fund will continue to move assets out of stock until it hits a low of 20% in 2045, or 30 years after reaching its target date.

In short, the funds offer two different visions of how to invest during retirement, with Vanguard taking a more conservative stance early on but maintaining a higher level of stocks late in retirement, and T. Rowe doing the opposite.

Which brings us to the problem with your approach. By investing in two target funds with different strategies, you aren't following the course laid out by either fund. You're mixing two paths that weren't really meant to be combined at all.

As a result, you don't have a coherent investing strategy. What you have is a muddle, a jumble of assets that weren't all selected to complement one another and that are shifting out of stocks and into bonds on entirely separate schedules.

Target-date funds are meant to be complete portfolios, so they generally work best if you keep all or nearly all of your retirement savings in just one fund. So by all means evaluate several to make sure you're okay with their expenses, asset mix and glide path. But then just limit yourself to one. To top of page

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