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Investing

The Best Target-Date Funds Have These Traits in Common

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

coins in hands and a sign that says retirement
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When it comes to investing in your future, understanding your options can be overwhelming. Trying to learn about stocks, bonds and mutual funds can be stressful, leaving you confused and maybe even causing you to put off saving for retirement entirely.

That’s where target-date funds can help. According to the Financial Industry Regulatory Authority, approximately 90% of employer-sponsored retirement plans, such as 401(k)s, offer target-date funds, making them a convenient choice for your investments.

But how do you choose a target-date fund? Below, find out how target-date funds work and how to select the best one for your situation.

What is a target-date fund?

A target-date fund is a fund offered by an investment company that aims to grow your investment over time until your retirement. You typically choose a target-date fund based on the year you plan to retire, such as a “2040 Fund.” Investments start off aggressive but become more conservative as you near retirement age to decrease the risk of losing money.

According to Alex Caswell, a certified financial advisor and certified financial planner with RHS Financial, target-date funds are often a good choice for beginner investors. “The No. 1 reason why target-date funds are appealing is because they are simple to understand and to implement,” he said.

Target-date funds allow someone to get started without having an in-depth knowledge of the stock market. “The advantages are their simplicity and cost,” Caswell said. “The simplicity allows an investor to actually get invested. There is a big information hurdle to getting invested correctly. A target-date fund can make this decision very easy and get someone started on the right path.”

Chances are your 401(k) plan offers some form of target-date fund, so you already may have invested in one without realizing it.

5 things the best target-date funds will have

There’s a lot more to choosing a target-date fund than selecting the first one you see with your goal retirement date. Instead, consider these five variables before selecting a fund.

1. Strong past performance

While a strong past performance doesn’t guarantee high returns in the future, it is a good indicator that the fund may be successful. Before selecting a fund, study its performance over the last 10 years. Find this information by reviewing the fund prospectus, which you can request from the investment company. Some companies even post the prospectus online.

2. Low fees

Fees play a big role in the performance of your target-date fund. High fees can eat up your returns, decreasing how much money your fund earns. That’s why it’s so important to search for low-cost funds.

According to Vanguard, a leading investment company, the industry average expense ratio for target-date funds is 0.50%. However, you can find lower expense ratios by shopping around. For example, Vanguard’s average expense ratio is just 0.13%.

3. A glide path that fits your goals

“Glide path” is a common term used in reference to target-date funds, and it’s an important one to understand. The glide path is the asset allocation of a target-date fund — or what percentage of your money is invested in stocks, bonds or other assets. There are several types of glide paths that vary depending on your comfort with risk.

A common misconception is that if you invest in target-date funds, you’re guaranteed to have enough money when you reach your goal retirement date. That’s not true. A target-date fund simply means that your investments will adjust their aggressiveness as you get closer to your goal date.

That’s why choosing an end date and glide path that match your retirement needs is so important. When you’re young and just starting out, you likely want an aggressive glide path that rebalances regularly to gradually become more conservative as you near retirement age. If you’re closer to retirement age, you want a more conservative path that protects your investments.

4. An end date that matches your retirement needs

One important thing to keep in mind is that some funds are set to run until you retire, while others run through your retirement. What’s the difference? A fund that runs only until you retire will reach its most conservative point upon reaching the date you select.

A fund that runs through retirement will continue to rebalance and get increasingly conservative during your retirement. It may not reach its most conservative point until you’re well into your 60s. You may get higher returns, but you’ll also have more risk with this approach.

5. A management style that fits your comfort level

When it comes to management styles, you have two options: passive management and active management. Passive management is when the fund is set to rebalance automatically and follows the stock market’s trends. Active management is when an individual or firm chooses investments and manually adjusts those investments to try to beat the stock market’s performance.

There is a lot of debate about which approach is best, so it’s important to choose a management style that fits your comfort level. Many people are fine with passively managed accounts, while others want a human professional’s touch.

Investing your money

Saving for your retirement is important, but with all the investment options out there, it can be tough to decide what’s right for you. Target-date funds help simplify the process, empowering you to invest in your future without having to understand all the nuances of the stock market.

By exploring your options and comparing target-date funds, you can choose the best one for you and start building your retirement nest egg.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kat Tretina
Kat Tretina |

Kat Tretina is a writer at MagnifyMoney. You can email Kat here

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Investing

E*Trade vs. TD Ameritrade

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

E-Trade and TD Ameritrade are two of our picks for the best online brokers available in the market today. While these firms share broad similarities in the services they offer, there are some important differences that can hopefully help you make an informed choice between these two key industry players.

Based on our comparison, E-Trade is less expensive for high volume traders who do more than 30 trades per quarter. TD Ameritrade seems to offer a wider range of trading options, including foreign exchange and cryptocurrency, plus more portfolio management options for larger balance accounts.

E-Trade vs. TD Ameritrade: Feature comparison

E-TradeTD Ameritrade
Current promotions

For customers who deposit at least $10,000, E-Trade offers up to 500 commission-free trades for each stock or options trade executed within 60 days of funds becoming available.
For new accounts with a deposit of at least $25,000, you'll also receive a cash bonus, which can range from $200 to $2,500 depending on the amount deposited. 

Deposit $3,000 or more and get 60 days of commission-free online equity, ETF and option trades.
Stock trading fees
  • $6.95 per trade (less than 30 trades per quarter)
  • $4.95 per trade (more than 30 trades per quarter)
  • $6.95per trade
Amount minimum to open account
  • $500
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
  • Futures/Commodities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
  • Futures/Commodities
  • Forex
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $75 full account transfer fee
  • $25 partial account transfer fee
  • $0 yearly inactivity fee
  • $0 annual fee
  • $75 full account transfer fee
  • $0 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • Custodial IRA
  • SEP IRA
  • Solo 401(k) (for small businesses)
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
  • Guardianship or Conservatorship
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • Custodial IRA
  • SEP IRA
  • Solo 401(k) (for small businesses)
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
  • Guardianship or Conservatorship
Ease of use
 
 
Mobile appiOS, AndroidiOS, Android, Windows phone
Customer supportPhone, 24/7 live support, Chat, Email, 30 branch locationsPhone, 24/7 live support, Chat, Email, 364 branch locations
Research resources
  • SEC filings
  • Mutual fund reports
  • Earnings press releases
  • SEC filings
  • Mutual fund reports
  • Earnings press releases
  • Earnings call transcripts
  • Earnings call recordings

E-Trade vs. TD Ameritrade: Fees & account minimums

Some brokers charge an annual or monthly fee to maintain your account. Neither E-Trade nor TD Ameritrade impose such a fee, nor do they charge a fee if your account is inactive during the year. However, E-Trade does impose a $500 minimum to open an account at the firm. TD Ameritrade requires no minimum account balance.

E-Trade and TD Ameritrade charge investors a flat fee for each stock trade. At E-Trade, the charge is $6.95 a trade for the first 30 transactions in a quarter. When you make more than 30 transactions per quarter, E-Trade drops its commission to $4.95 per trade. TD Ameritrade charges a flat $6.95 commission per trade. This makes E-Trade less expensive for high volume traders. Both firms offer a range of commission-free exchange traded funds (ETFs) and the ability to purchase mutual funds without a transaction fee.

Both brokers charge fees for professional account management services. At E-Trade, fees range from 0.30% to 0.90% of assets under management, depending on the services chosen by the investor. At TD Ameritrade fees are similar, ranging from 0.30% to 0.90% of assets the firm manages.

E-Trade charges a $75 fee for a full account transfer and a $25 fee for a partial transfer. TD Ameritrade charges the same $75 fee for a full account transfer. However, at TD Ameritrade, partial account transfers are free, offering investors additional flexibility.

Many online brokers offer special incentives to attract investors. E-Trade and TD Ameritrade both currently offer commission-free stock and options trading. At E-Trade you get $600 (and up to 500 free trades) for a $10,000 deposit. At TD Ameritrade you must deposit at least $3,000 to get 60 days of free trades. In addition, you get $100 if you deposit $25,000, $300 if you deposit $100,000 and $600 if you deposit $250,000. Offers vary over time.

E-Trade vs. TD Ameritrade: Tradable securities

In addition to trading stocks and bonds, E-Trade and TD Ameritrade offer their customers a wide range of investable asset classes to choose from:

  • Mutual funds: For investors interested in the professional management that mutual funds offer, at E-Trade you can invest in more than 4,400 mutual funds with no transaction fee. Meanwhile, TD Ameritrade offers more than 13,000 mutual funds.
  • Options: An option allows an investor to sell a security at a predetermined price for a certain period of time. At E-Trade investors can trade options at regular commission rates plus an additional fee of $0.75, which drops to $0.50 with 30 or more trades per quarter. TD Ameritrade permits investors to trade options for $6.95 plus $0.75 per contract.
  • ETFs: Including ETFs in your portfolio is a great way to add an element of diversity. E-Trade gives investors access to more than 250 ETFs free of commission. At TD Ameritrade, investors have access to more than 550 ETFs that are commission-free.
  • Foreign exchange trading. At TD Ameritrade, investors can access the currencies of more than 20 countries. E-Trade does not offer foreign exchange trading.
  • Futures. If you decide to trade in futures you are essentially agreeing to sell a security or other asset at a set price at a predetermined time in the future. E-Trade offers futures trading for $1.50 per transaction. TD Ameritrade gives investors access to more than 70 futures products.
  • Cryptocurrency. TD Ameritrade recently began offering cryptocurrency investing through ErisX, a regulated exchange for cryptocurrency trades. E-Trade does not offer the ability to invest in cryptocurrency.

E-Trade vs. TD Ameritrade: Special features

E-Trade offers two levels of managed account services. Core Portfolios is the company’s robo-advisor product, which offers you an automated portfolio of ETFs customized to your investment goals. Just complete a five-minute online questionnaire to get started, which includes information about your goals, timelines and attitudes about risk. The minimum investment is just $500 and the annual fee is 0.30% with no commissions.

Blended Portfolios is E-Trade’s second level of managed accounts. Investors work with a financial consultant to tailor a portfolio that meets their needs, however you need a $25,000 minimum balance to gain access to Blended Portfolios. Annual management fees range between 0.65% and 0.90%, depending on the total amount of money invested under the service.

TD Ameritrade offers investors three levels of managed portfolios. Essential Portfolios is the firm’s robo-advisor option, offering five goal-oriented ETF portfolios. The minimum investment is $5,000 and the annual management fee is 0.30%.

Selective Portfolios offers more personalized service, and invests in both ETFs and mutual funds. A financial consultant helps you set investing goals, and a support team that regularly updates you on how the account is tracking towards those goals. The minimum investment is $25,000, while annual fees range from 0.55% to 0.90% depending on account balance.

Personalized Portfolios provides TD Ameritrade’s highest level of service, with tailored advice and portfolio construction. It gives you a one-on-one relationship with a financial consultant, plus extra guidance and support from a team of investment professionals. The minimum investment is $250,000, and annual fees range from 0.60% to 0.90%, depending on portfolio type and the total amount invested.

E-Trade advantages

  • If you are a high-volume stock trader, after you do 30 trades in a quarter, the cost per trade drops to $4.95 from $6.95. TD Ameritrade offers only a flat fee of $6.95 per trade.
  • E-Trade offers its clients access to solid research tools including market news, recordings and transcripts of earnings calls as well as the ability to analyze companies with fundamental stock research, technical research and bond, mutual fund and ETF research tools.
  • E-Trade has a “better” bonus for new clients. For a deposit of only $10,000 you get $600 and up to 500 free trades. While TD Ameritrade offers 60 days of free trades for only a $3,000 deposit, you need to deposit $250,000 to get a $600 cash bonus.

TD Ameritrade advantages

  • TD Ameritrade does not impose a minimum balance to open an account. At E-Trade, the minimum initial investment to open an account is $500.
  • Some transfer fees at TD Ameritrade are lower. For example, there is no charge for a partial account transfer while E-Trade imposes a $25 fee.
  • TD Ameritrade has 364 branches located around the country to provide customer support. E-Trade has only 30 branches.
  • TD Ameritrade offers investors access to more mutual funds and ETFs that are free of transaction fees. For example, TD Ameritrade offers more than 13,000 mutual funds, nearly three times the number of mutual funds at E-Trade(4,400).

E-Trade vs. TD Ameritrade: Which is best for you?

When the time comes to choose between E-Trade and TD Ameritrade, E-Trade is likely to appeal to high volume traders, since the cost per trade drops to $4.95 after 30 trades in a quarter. Similar price cuts are available for options as well. TD Ameritrade will appeal to investors who are looking to trade foreign exchange and cryptocurrency. And for investors who are looking for stronger portfolio consulting options, TD Ameritrade offers a wider choice of customized investing advice for larger account balances.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Peter Fleming
Peter Fleming |

Peter Fleming is a writer at MagnifyMoney. You can email Peter here

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Investing

Where Investing in Housing Outperforms the Stock Market

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The housing market has come a long way since the Great Recession. The demand for homes has reached such a fever pitch that in certain U.S. metro areas, the equity you have in a home outperforms investments in index funds tracking the S&P 500 — long considered one of the most reliable vehicles for investors and a strong indicator of how the stock market is performing as a whole.

Key takeaways

  • We examined the performance of home prices in 20 U.S. metro areas from 2012 to 2018. Of these 20 areas, housing appreciation in the Los Angeles, San Francisco, San Diego, Miami and Seattle markets outpaced the S&P 500 over this period.
  • San Francisco outperformed the S&P 500 by the greatest margin, growing approximately 127 percentage points from 2012 to 2018, compared with the S&P 500’s gain of nearly 98 percentage points.
  • Among the five metro areas that outperformed the S&P 500, only Los Angeles has a majority of homes occupied by renters rather than by owners. Renters obviously don’t reap any benefits from the explosive growth in home values — in fact, they often see their rents rise as landlords see the growing value of their real estate.
  • From 2012 to 2018, the housing markets in all 20 cities we looked at increased in value. The slowest-growing market, Cleveland, still rose by almost 22 percentage points.

How we know housing markets have outperformed the stock market

Among the most reliable and most widely cited indices used to measure housing markets are the Case-Shiller indices, calculated each month by Standard & Poor’s and CoreLogic. There are several Case-Shiller indices, but we chose the Composite 20 index, which tracks housing values in the following 20 metropolitan areas:

  • Atlanta
  • Boston
  • Charlotte
  • Chicago
  • Cleveland
  • Dallas
  • Denver
  • Detroit
  • San Francisco
  • Seattle
  • Las Vegas
  • Los Angeles
  • Miami
  • Minneapolis
  • New York
  • Phoenix
  • Portland (OR)
  • San Diego
  • Tampa
  • Washington D.C.

The index examines the change in home prices for each of these cities by looking at residential home sales and running that data through an algorithm. To learn more about the Case-Shiller index, there’s plenty of information from Standard & Poor’s here.

In the 2012-2018 time period of our study, the Case-Shiller Composite 20 index showed a growth in average home values in all 20 metropolitan areas. You can then compare the Case-Shiller index to the growth in the S&P 500, an index of roughly 500 stocks that often serves as a bellwether for the U.S. stock market as a whole.

The chart above indicates that according to the Case-Shiller Composite 20 index, the housing markets of five metro areas grew quicker than the S&P 500 in the 2012-2018 period, which saw a rise of 97.97 percentage points:

  • San Francisco (+127.26 percentage points)
  • Los Angeles (+111.57 percentage points)
  • Seattle (+110.95 percentage points)
  • Miami (+109.10 percentage points)
  • San Diego (+98.67 percentage points)

That means in theory, the equity you have in a home in one of these markets may have appreciated by a greater amount than if you had invested it in an index fund that tracks the S&P 500 — a common stand-in for the entire stock market.

Good news for homeowners, bad news for renters

While homeowners may be celebrating, our study gives the renters living in these five metro areas little reason for joy. As the value of a home goes up, landlords increase rents to reflect the broader housing market (as much as they are able under the constraint of local housing laws and regulations). The chart below estimates the performance of rents in the five metro areas that outperformed the stock market from 2012 to 2018:

In San Francisco, for example, the average rent rose nearly 46% during the time period in question from $2,359 to $3,433 a month. While the City by the Bay offers the most dramatic example of rent increases, tenants in the other four metro areas also had to pay more for the privilege of renting in a hot housing market.

Another concerning consequence of rising home values in these cities is that homeowners in these markets tend to already be wealthier than their non-owning neighbors, which means real estate appreciation widens the wealth gap. For example in Los Angeles, only approximately 31% of renters have an income of $75,000 or more a year, compared with 63% of homeowners. Homeownership also has a racial disparity in these metro areas: Almost 71% of African American households in Seattle rent, compared with just 36% of white households.

Why stocks are still a better bet than housing

Despite the value of housing outpacing the growth of the stock market in certain metro areas, homeowners should think twice before funneling funds earmarked for their investment accounts into hearth and home.

The most obvious difference is the relative liquidity of investment securities and a house (especially one that’s your primary residence). Selling a house comes with a litany of costs that eat up both your time and your money, while cashing out on your investments can usually happen in a matter of days (not that selling an investment in an index fund or stock is without potential tax costs and other potential losses).

There’s also the matter of putting all of your eggs in one basket. The ability to diversify your investments is one of the greatest advantages of investing in markets. By placing your money in a diverse array of securities, from stocks, to bonds, to money market accounts, it can help shield you from volatility in any one particular market. But if you put all of your money in your home as an investment and the housing market crashes (like it did most recently in 2008), then your nest egg is scrambled.

Finally, owning a home comes with property taxes you need to pay every year. In the city and county of San Francisco, the property tax rate for the financial year of 2018-2019 was 1.1630%. With investments, you typically only pay a capital gains tax one time: when you sell it.

Methodology

Data on change in S&P 500 value over time comes from the Stern School of Business at New York University. Data on home value for each of the metro changes comes from the Case-Shiller Index of home values and is pulled from the Federal Reserve Economic Data. Data was analyzed over the 2012-2018 time period.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James Ellis
James Ellis |

James Ellis is a writer at MagnifyMoney. You can email James here