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Fidelity Target Date Funds (PERFECT FOR BEGINNERS!) - YouTube
Channel: It's Your Girl Rose
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there's reason why Americans have 20% of
their retirement assets in target-date
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funds
that's because target-date funds are an
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easy and effective way to invest what is
up everyone I'm rose and welcome back to
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my channel the number one place for
financial education empowerment and
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inspiration in today's video I'm going
to be talking about fidelity target date
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funds also known as Fidelity's freedom
funds you'll learn the answers to common
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questions like how does a target date
fund work our fidelity target date funds
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a good investment and I'll also wrap up
with some recommendations on whether
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target date funds are a good fit for you
or not in this day and age nobody is
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responsible for your retirement but you
your country your company ain't nobody
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looking out for you as much as you look
out for yourself and in case you're not
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aware many of you actually already have
target date funds in your 401 K by
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default so I think it's important for
everyone to understand how target date
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funds work target date funds are mutual
funds that target a specific date for
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retirement whenever you look up a target
date fund you'll see that it has a
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target retirement year as part of its
name I'm 30 years old right now so I'm
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assuming I'm planning to retire around
age 65 so I'd go for the 2055 target
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date fund like this one here okay on a
side note I actually never plan on
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retiring because I love to work I love
what I do and I'm pretty sure I'll be
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making youtube videos for you until I'm
at least 90 years old anyway so why our
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target date funds age-specific
let's take a look at an example the
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fidelity Freedom Index 2055 fund so here
it is I've pulled up the fund summary
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page for the fidelity Freedom Index 2055
fund just a couple things to note here
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has a very low expense ratio of 0.1
percent so that's low and that's good
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general rule of thumb is anything under
0.2 percent is considered cheap and now
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let's just take a look at what's inside
this fun so as I said target date funds
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are mute
all funds and you'll see here that
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there's gonna be a number of different
funds usually anywhere from three to
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five funds inside this mutual fund and
they're gonna each give you exposure to
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a different portion of the market so
this is domestic equities and they also
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have international equities equities is
jargon for stocks they also have
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exposure to bonds and then exposure to
short term debt and net other assets
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which essentially means cash and what's
interesting here is so I just want to
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point out that target-date funds are
actually a fund of funds because they
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are a mutual fund that contains other
funds inside it so that's something
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interesting to note and because it's a
2055 fund it's going to have a pretty
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aggressive stock allocation so if you
add up the domestic and international
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stock allocation that is about what is
that about
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about 90% and then bonds and cash make
up the other 10% roughly just rounding
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up here and if we go over to the the
2025 fund which is for someone who would
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be retiring in the next couple years so
they would probably be in their 60s then
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they would be looking at something more
like this to fidelity freedom index 2025
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fund and it has a lot of the same
characteristics expense ratio is the
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same it's just the target retirement
here is different and what's interesting
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is that of course their allocation is a
little slightly different again it's
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going to be a fund of funds it has
multiple different funds in it but the
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percentage allocations between stocks
and bonds is very different so domestic
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and international stocks add up to about
about 60% and then the rest of the rest
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of the 40% is in bonds and cash so as
you can see the 20 2015 5 fund has sixty
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sixty to forty stock bond allocation
whereas the twenty fifty five fund
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remember has a 90 stock 10 bond
allocation so 90 percent stocks 10
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percent buns the 2055 fund for the 30
year old has a bigger chunk allocated to
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stocks whereas the 20 25 fund in other
words the fund for the 60 year old has a
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lot less in stocks and more in bonds and
cash
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that's because stocks are more volatile
stocks are pieces of ownership in
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companies if the company can sell its
products keep expenses down and make a
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good profit the stock price is gonna go
up to reflect that success but that is
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all based on a very uncertain future in
all kinds of assumptions and
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expectations so there's really no
guarantees however on the other hand
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uncertainty is exactly what causes the
huge potential for growth in stocks if
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you didn't have uncertainty you wouldn't
have growth either so stocks have more
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volatility uncertainty and more growth
however a 90 year old granny she doesn't
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want uncertainty she can't afford that
she needs stability and that's why the
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older you are the last year target-date
funds will be allocated to stocks and
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the more it'll have in bonds instead
bonds are more stable than stocks
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because bonds are essentially loans
they're contractual and when you own a
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bond somebody actually has a legal
obligation to pay you back so compared
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to stocks there are a lot more reliable
but you're also not gonna get very high
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returns you already know what your
return is gonna be when you go in in
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other words what interest rate you're
gonna get and that's that there's no
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growth beyond that of course that's
assuming you're gonna hold the bond to
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maturity but that's a conversation for
another day I'm covering a lot of
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information here so I want to just check
in with you really quick with a fun
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challenge now if you were to invest in a
target date fund what would be your
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targets retirement year in other words
what would the number at the end of the
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target date fund that you buy what would
that number be so do the calculation
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just really quick figure out your year
and just type it in the comments below
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for me it's 20 55 for some of you it
might be 20 65 and everything in between
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so whatever your year is just drop it
below in the comments okay in addition
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to automatically adjusting your
portfolio as you get
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older the target date fund also balances
it what this means is that as the market
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value of your investments shift the
target date fund is gonna buy and sell
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the stocks and bonds in your portfolio
in order to maintain those initial
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percentage allocations so for example
when the stock prices go up a lot
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relative to bond prices then the target
date fund is gonna sell some stocks and
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buy more bonds in order to stay at the
90 percent stock ten percent bond
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allocation or whichever allocation you
started with because the markets are
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always moving the pie chart that I
showed you earlier that's always gonna
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shift depending on how the market is
moving and so the fund needs to
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proactively buy and sell constantly in
order to maintain those that pie chart
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what rebalancing forces you to do is to
sell something after the price has gone
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up and to buy more of something after
it's gone down and this results in
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automatically selling high and buying
low and that juices your returns even
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more so rebalancing is a big part of
long-term investing success and with
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target-date funds they do rebalancing
for you automatically
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the thing about investing is that unless
you pay someone to do it for you you've
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got to really roll up your sleeves and
do some work not only do you have to
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pick the asset allocation you also have
to choose the index fund and you have to
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rebalance it really regularly and of
course remember to adjust the
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allocations to get more and more
conservative as the years go by but with
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a target date fund all of this gets done
for you the way I see it if you want
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everything to be done for you you only
have three options the first option by a
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target date funds and pay the funds
management fee the second option is you
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can pay a financial advisor and pay
their 2% annual fee or the third option
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is you can pay a Robo advisor and Robo
advisors have a point two five percent
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fee usually even fidelity they have
their own in-house Robo advisor platform
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I think it's called fidelity go and they
charge
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I believe point three percent so anyway
Robo advisors they all charge similar
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fees across the board so of all three
options target date funds are the
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cheapest way to go
and compared to target date funds of
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other companies fidelity target date
funds offer the lowest expense ratios
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that I've seen anywhere that's compared
to Vanguard and Schwab and some of the
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other big names
fidelities lowest cost target date fund
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charges will point 12 percent which is
less than half the fee of the typical
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Robo advisor so that means that for a
ten thousand dollar investment you'll
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only pay twelve dollars in fees
compare that to twenty five dollars for
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a Robo advisor which is almost double
and something else you need to keep in
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mind is that Robo advisors invest your
money in ETFs or exchange-traded funds
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and those exchange-traded funds also
have a fee so you're paying the Robo
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advisor fee as well as the underlying
fees of the ETF that you're invested in
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so this usually results in a total fee
of about 0.4% which is 0.28 percent more
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than a fidelity target date fund that
doesn't sound like a huge difference but
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compounded over time a small difference
like that in fees adds up to tens of
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thousands of dollars don't believe me
check this out
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so here's what happens when you invest
ten thousand dollars back in 1970 so
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this is over almost a forty year period
and the red line represents if you
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invested with a theoretical Robo advisor
that charges 0.4% all in costs including
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the underlying ETF fees and then the
blue line represents the fees are the
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returns of a if you'd invested in a
target date fund that returns 0.12
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percent and of course we're assuming
that they both return the same amount
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they're they've invested in the same
indexes but at the end of that period
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the Robo advisor will have you'll have
$10,000 will have turned into $280,000
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and with the target date fund your
$10,000 would have turned into $320,000
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so that's a $40,000 difference just from
a tiny point to 8% difference in fees so
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the bottom line is fees matter every
percent
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point counts moving right along by now
you're probably wondering our fidelity
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target date funds a good investment am I
gonna make money well let's see so
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here's a chart comparing the performance
of the fidelity freedom index 2055 fund
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so the target date fund for someone
who's about thirty years old right now
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I'm comparing that to two things so this
is the blue line here type the target
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tape fund and the yellow line here is
the International stock market and the
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purple line here is the US stock market
so as you can see ever since 2000 about
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2011 which is how far I could get the
data to go back the target date fund has
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definitely lagged the US stock market in
other words the S&P 500 but it's
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outperformed the International stock
market so it's been somewhere in the
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middle so you're probably thinking well
why would I invest in a target date fund
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when I could have invested in the S&P
500 just 100% stocks and made that much
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more versus just 67% so that is kind of
the tricky part here you actually never
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know when u.s. stock markets will
outperform the international stock
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markets it just so happened that over
the last decade the US stock market has
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been on a really really really hot
streak compared to the rest of the world
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but there have been periods when it's
been the other way around where this
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yellow line would be way up there and
this purple line would be way down here
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such as in the 1970s the 1980s or in the
early 2000s right after the.com bubble
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then anyone who was in international
stocks was a happy camper so that is
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sort of the benefit of target-date funds
that even though it doesn't look so good
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over the last decade in the future you
might be glad that you're here in the
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middle forces somewhere down here so and
remember that the target date fund it
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has a 90 percent stock allocation and
about a third of that stock allocation
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is in international stocks so
without I would say is the first benefit
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of being in a target date fund even
though it doesn't look so good
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you actually just never know when
domestic stocks will be doing better
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than international so that is the first
benefit the second benefit of investing
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in target date funds is that during a
really crazy time in the market like the
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2008 financial crisis you wouldn't lose
as much as someone who had invested in a
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one hundred percent stock portfolio so
this start here compares the 2008 that
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crazy time for someone who had a 100
percent stock portfolio in the S&P 500
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index fund so that's this yellow line
here and the blue line represents what
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would have happened in 2008 for someone
who had their money in a target date
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fund I actually put in the target date
Vanguard 2015 fun because fidelity
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doesn't have data going that far back
and this is someone who was probably
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getting ready to retire soon and really
cannot afford big losses in the stock
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market so someone who was in the target
date fund would have lost 39 percent
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just from the high to the low and anyone
who has invested in a 100 percent stock
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portfolio in the S&P 500 they would have
gone down 56 percent from high to low so
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that's a pretty tough psychological hit
to overcome 56 percent lost compared to
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a 39 percent loss I mean 39 percent
still sucks but it's a lot better than
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losing 56 percent obviously all of these
numbers recovered later on and we're way
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up here now but still I mean if you're
getting ready to retire in seven years
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you know if it was back in 2008 could
would you be able to sleep at night if
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your portfolio took a drawdown of 56%
I think 39% would have been a lot easier
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to stomach so that is the second benefit
of target date funds which is that
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because it's diversified into bonds and
they automatically move you to a more
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conservative
a location as you approach retirement
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age any sort of market crash which let's
be honest could happen at any time is
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not going to affect you as much if you
owned a target date fund during the 2008
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financial crisis versus an SMP 500 index
fund it would have been much easier to
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survive that recession psychologically
emotionally and financially
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so although the potential returns of
investing in a fidelity target date fund
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probably won't be as high as if you put
a hundred percent of your money in a
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super aggressive 100 percent stock fund
but at least you'll be able to sleep at
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night and you'll experience a smoother
ride during recessions and with target
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date funds you'll still collect a
respectable 7 to 8 percent return if
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you're considering investing in fidelity
target date funds then definitely sign
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up for my free crash course get started
investing how to build a starter stock
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portfolio in just three days you can
take action on this course it's just a
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hundred dollars and I know the fidelity
website can be a little hard to navigate
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so I've also included step-by-step
tutorials so you can just have two tabs
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open and follow along with me on the
screen to set up your very first target
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date fund investment there's also a
bonus cheat sheet in that course with
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links to all of Fidelity's best target
date funds so I've made it super easy
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for you and it's especially made for
beginners who need a lot of hand-holding
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so click the link below to sign up it's
free in my opinion the number one hurdle
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to getting invested is getting over that
analysis paralysis I know there's an
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overwhelming amount of decisions to make
just to get started so most people end
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up not making a decision at all what
platform do I use what account do I open
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and then once you even get past all of
that it's like how much money do I
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invest and then what do I invest in so
the thing about target date funds is
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that it completely eliminates this
analysis paralysis they make most of the
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decisions for you all you have to do is
open your account at fidelity and pick
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the year that you are retiring
everything else will be taken care of
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for you so if you've been wanting to put
your money to work but for one reason or
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another you've just never gone around to
then I do think investing in a fidelity
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target date fund is a great place to
start so that's it for this video I hope
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it's been really helpful for you
definitely sign up for my free crash
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course for an even deeper dive into
target date funds if you think that's
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the path for you for those of you who
prefer to be more actively involved with
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your investments consider building your
own portfolio of index funds and succs
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I've got some great videos on how to do
that so check them out right here as
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always thanks so much for watching I
really appreciate you please like this
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video if you liked it and post new
videos every Wednesday so I'll see you
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