I talk a lot about the S&P 500 and I often recommend target date index funds. So I naturally get the question, “Which is better, an S&P 500 index fund or a target date index fund?”
The answer is it’s best to understand what’s really going on. So let’s say index funds are like ice cream.
Vanilla would be a US index fund which is all the stocks in the US (very similar to the S&P 500). This is your base. Your tried and true. It’s got Ford, Amazon, Exxon Mobil, Walmart, Nike, etc. It’s been doing great for 100 years and will probably continue to do so far into the future.
Chocolate is international stocks. Adds a little exotic flare. Maybe if vanilla isn’t doing great, chocolate will step it up. It’s got Samsung, Toyota, Nestle, Alibaba, etc
And Strawberry is bonds. Nobody’s favorite, but it’s the healthy choice. It will always be there for you providing a little return.
Most experts agree owning some of each of the above is a great way to have a well diversified portfolio. Each flavor above is an “asset class”. Choosing how much of which ice cream is called your “asset allocation.”
So enter the Target Date Index Fund (TDIF). This is your neapolitan. Instead of walking up and down the ice cream aisle trying to decide how many cartons of each flavor to get. Neapolitan has done the work for you. Your TDIF has picked your asset allocation automatically, all in a single package. Better yet, as you get older, it adds in more and more strawberry so you don’t die of a sugar rush when you’re 70.
So what’s better, an S&P 500 index fund or a TDIF? The S&P 500 is INSIDE of the TDIF. Plus it has those other delicious flavors for more delicious diversity. Keep buying tubs of TDIF and forget about trying to balance the flavors yourself.
This message was NOT brought to you by Breyers, but @breyers if you see this hit ya boy up with a free ice cream coupon! I’m getting too skinny over here!!!
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.