There’s no denying the fact that investing is complicated. Robo-advisors and target date funds can help with t💎hat, making it easier for investors to build and manage their portfolios. However, they are designed for different situations and achieve that goal in different ways.

Automated robo-advisors are generally more flexible and can build more complex portfolios suited for a variety of needs. Target date funds (TDFs), by contrast, have the more specific aim of helping people invest for retirement by slowly adjusting their holdings to reduce volatility and risk over time.

What Is a Robo-Advisor?

A robo-advisor is a program that helps people automate their investments. Typically, when you sign up for a robo-advisor, you’ll answer a survey that asks about your financial situation, age, and goals. It feeds your responses through an algorithm tha🍎t then produces investment advice. It also constructs and manages a portfolio for you.

Robo-advisors are relatively new, first reaching the market in 2008. However, they’ve grown significantly in the years since. The value of the global robo-advisor market was $6.5 billion in 2023 and is expected to grow to $69.32 billion in 2032.

What Is a Target Date Fund (TDF)?

A target date fund is a type of mutual fund designed to help investors save for a specific date in the future. They’re highly popular among investors who are saving forꦺ retirement.

Typically, in the early years, these funds hold a large percentage of their assets in stocks and riskier assets. As the target date nears, the fund 澳洲幸运5官方开奖结果体彩网:rebalances its portfolio to reduce its stock holdings and increase its stability by holding a larger portion of its money in bonds.

Key Differences

澳洲幸运5官方开奖结果体彩网:Robo-advisors and 澳洲幸运5官方开奖结果体彩网:target date funds are popular choices for investors who want a hands-off approach to building and 澳洲幸运5官方开奖结果体彩网:managing a portfolio. Before choosing one over the other, it’s important to understand the key ♔similarities🌼 and differences.

Fees

Fees can have a significant impact on investment returnsꦉ, so knowing what each charges is essential to deciding between robo-advisors and target date funds.

Robo-advisors typically charge a 澳洲幸运5官方开奖结果体彩网:management fee equal to a percentage of your invested asset༺s. For example:

• 澳洲幸运5官方开奖结果体彩网:Betterment charges $4 per month for accounts with balances under $20,000 and 0.25% annually for accounts with balances of $20,000 or more or accounts with monthly recurring deposits of at least $250.
• 澳洲幸运5官方开奖结果体彩网:Wealthfront charges an annual fee of 0.25%.
  

Robo-advisors typically build portfolios using mutual funds or 澳洲幸运5官方开奖结果体彩网:exchange-traded funds (ETFs), which charge an 澳洲幸运5官方开奖结果体彩网:expense ratio. For instance, Betterment builds its portfolios using index funds. A common holding like the Vanguard U.S. Total Stock Market fund (VTI) charges an expense ratio of 0.03%. This means that investors using Betterment pay the firm 0.2ꦓ5% annually plus 0.03% of the portion of their balance that Betterment invests in VTI to Vanguard.

Each ETF ch🧸arges♐ a different expense ratio, so investors who use a robo-advisor will pay fees to both the robo-advisor and the fund management company.

Target-date mutual funds only charge an expense ratio. Investors don’t pay an additional fee to a robo-advisor, which means the cost is often lower. For example, Vanguard’s Target Retirement 2060 fund (VTTSX) charges an expense ratio of 0.08%. Tha🅰t’s lower than the 0.25% charged by Betterment even before adding in the expense ratios of the funds in which they invest.

Investment Strategies

TDFs are generally built to help people 澳洲幸运5官方开奖结果体彩网:save for retirement. You choose a fund with a target date near the year when you plan to retire. The fund then adjusts its 澳洲幸运5官方开奖结果体彩网:portfolio b꧂ased on the amount of time left until the target date.

These funds typically invest in more 澳洲幸运5官方开奖结果体彩网:volatile assets with higher potential returns early on, then slowly decrease their stock holdings and increase their bond holdings as the target date nears. This reduces risk and 澳洲幸运5官方开奖结果体彩网:volatility as the time for investors🅠 to retire and start draꦫwing from their savings nears.

Many mutual fund companies structure their TDFs as 澳洲幸运5官方开奖结果体彩网:funds of funds, meaning that the target date funds hold shares in other mutual funds from that company. In this way, they work somewhat similarly to robo-advisors, which construct portfolios out of mutual funds.

Robo-advisors, on the other hand, have more flexibility. Some robo-advisors can invest for other goals, such as saving to buy a home or to cover other expenses. Many robo-advisors also tout advanced investment strategies like 澳洲幸运5官方开奖结果体彩网:tax-loss harvesting, which they argue can increase returns.

Personalization

Robo-advisors are the clear winner when it comes to personalization. They are much better at personalizing your portfolio. While most invest in 澳洲幸运5官方开奖结果体彩网:mutual funds and ETFs rather than using individual securities, they often have a large menu of funds in which they invest. This allows robo-advisors to personalize your portfolio more carefully based on factors like your age, 澳洲幸运5官方开奖结果体彩网:risk tolerance, and goals.

With a target date mutual fund, the most you can do is compare different funds from different management companies and choose the one that you like best. The underlying portfolio of each fund isn’t something that you can adjust.

Minimum Investment

Many investment products have a 澳洲幸运5官方开奖结果体彩网:minimum balance requirement. If you don’t have enough money to reach the minimum﷽, then you won’t be able to invest.

Investment minimums can vary widely, so it’s hard to compare robo-advisors and target date funds on this metric. The minimum for ETFs can be as low as the price of a single share, and many mutual funds have minimums of $1,000 or so while others have no minimum.

Minimums for robo-advisors can also vary significantly. For example, Betterment has no minimum balance requirement for most of its services, but it requires a $100,000 balance for access to its Premium service. Wealthfront has a $500 minimum balance.

Pros and Cons of Robo-Advisors

Robo-advisors can help automate your investment portfolio, but it’s key to consider both the pros a🦂nd cons bef🤡ore you start to invest.

Pros of Robo-Advisors

Robo-advisors are a good option for people who want to be very hands-off with their investing. Once you open an account and provide the program with information about your finances and goals, all you then have to ꧟do is decide when to make deposits 🍰and withdrawals. The robo-advisor will handle the rest.

They also serve as a good middle ground between DIY investing and 澳洲幸运5官方开奖结果体彩网:working with a human professional. You get some of the hand-holding you would get from a human advisor🌊, but typically at a much♍ lower cost.

The 澳洲幸运5官方开奖结果体彩网:best robo-advisors also tend to be better-suited than target date funds for saving for a variety of goals🅺. Target date funds are typically focused on one thing: helping maximize your portfolio’s value by a s𝓡pecific date.

Cons of Robo-Advisors

Robo-advisors tend to charge higher fees than target date funds. Keep in mind that with a TDF, you only pay the fund’s expense ratio. Ro𒆙bo-advisors charge a fee, then invest your money in mutual funds and ETFs that also charge an expeꦐnse ratio, which means a higher overall cost.

It’s also important to remember that robo-advisors rely on their programming and the data you give them. If you don’t answer its questions honestly and accurately, the 澳洲幸运꧅5官方开奖结果体彩网:robo-advisor could b🅠uild a portfolio that doesn’t align with your goals. A robo-advisor may also struggle to handle unusual financial situations where a human advisor would be more able to adaptౠ.

Pros and Cons of Target Date Funds (TDFs)

Target date funds are a good op𒁃tion for long-term savers, but ꦦthey also have cons to consider.

Pros of Target Date Funds (TDFs)

Target date funds are one of the simplest ways to save for retirement. If you feel like a target date fund’s portfolio aligns with your risk tolerance and goals, then all you have to do is choose the fund with a date that🥂’s close to your retirement date and start investing. The fund managers will handle rebalancing and adjusting risk over time.

Target date funds can also be a cheap way to invest, especially if you opt for one that uses an 澳洲幸运5官方开奖结果体彩网:indexing strategy rather than active investing. You can find expense ratios as low as 🐓a few hundredths of a percent, which is many times cheaper ꦫthan the fees charged by a robo-advisor.

Investment minimums are also low—sometimes lower than those of robo-advisors. You can often start with $1,000 or even less to invest.

Cons of Target Date Funds (TDFs)

A major drawback of target date funds is that they’re relatively cookie-cutter. There isn't a huge difference among TDFs, so if you’re looking for a more unusual portfolio or you don’t feel that the portfolio composition is right for you, then you might struggle to find a target date fund that is right for you.

They’re 🃏also only suited to saving money for a specific date. While that makes them good for long-term goals like retirement, robo-adv💎isors are better when it comes to targeting multiple goals at once.

Robo-Advisor vs. Target Date Fund (TDF): Which Is R♛ight for You?

Choosing between a robo-advisor and a target date fund can be difficult. If you have a relatively simple financial situation and are only saving🙈 for a specific long-term goal like retirement, then target date funds are a great choice.🦋 They’re inexpensive and designed to achieve a specific retirement goal.

On the other hand, a robo-advisor may be a better fit for people who have more varied financial sitꦬuations and want to save toward multiple goals. They can also appeal to people who want to use more complex investing strategies like tax-loss harvesting.

The Bottom Line

Both robo-advisors and target date funds offer a hands-off way to invest for the future. Target date funds are inexpensive, but are mostly designed to help retirement savers. Robo-advisors tend to ಌcharge more, but can offer a larger variety of investing options.