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DIY Investing: A Closer Look at Target Funds and Robo-Advisors


While the idea of having a financial planner may seem convenient, finding an affordable financial planner who has your best interests at hand can be a daunting task. Target funds and robo-advisors are two modern tools designed to help novice investors manage their own money. By Kayla Knuf, MD

Diversification, diversification, diversification. Most financial advice stresses that diversification is the key to minimizing risk while maximizing returns. But deciding how to diversify depends largely on one’s level of risk tolerance at a given point in time. 

Diversification often involves assets in the following classes: the domestic stock market, the international stock market, the international bond market, and the domestic bond market. In any given year, each asset classes will perform differently. Many experts recommend yearly rebalancing of funds in each asset class according to one’s original portfolio goals. This process protects the portfolio from becoming too heavily weighted in one asset class, which can become risky if that asset were to drop in value. 

Needless to say, maintenance of these assets can be confusing and overwhelming. Modern investment tools such as target funds and robo-advisors have emerged to meet the market need for simple strategies individual investors can use to manage their own money.

  • Target funds, popular investment strategy since the early 1990s, are designed to automatically rebalance portfolios as the target date approaches. According to Vanguard, more than 75% of investors have a portion of their portfolio in at least one target fund.

  • Robo-advisors offer a computerized but more personalized approach compared to target funds. The original robo-advisor was launched by Betterment in 2010 and has also become an increasingly popular resource.

Here’s what you need to know to take advantage of these do-it-yourself tools.

Target Funds

The target fund is a fund in which rebalancing and diversification is done for the investor. These funds have different names based on the company offering them. While they are termed  “Lifecycle Funds” at Vanguard and  “Freedom Funds” at Fidelity, they share the same overall concept. The target date fund is designed to be the main investment vehicle that one uses to save for retirement.

Most target funds invest in other mutual funds deeming it a “fund of funds” strategy. In younger investors who are further from their target retirement date, the assets of the fund are invested more heavily in stocks which are inherently riskier but offer a better opportunity for long term growth. As the fund nears its target date, the target fund’s investment asset allocation becomes more conservative. This decreases investment growth potential but is less volatile. This planned shift toward lower-risk investments as the target date approaches is known as the fund’s glidepath. Ultimately, target funds remove the work of diversification and rebalancing by the investor.

Illustration of the Glidepath: 


Target funds vary in their management style. A conglomeration of actively managed, passively managed, and combination strategies exist. Actively managed funds have at a higher expense ratio (average 0.68%) compared to a passively managed fund (0.06%). Actively managed funds may have increased return opportunities in certain market conditions, but they come at an increased management strategy cost. If the goal of fund allocation is diversification and asset balancing, utilizing an actively managed target fund may be more economical than working with a financial advisor who typically bills at a rate of 1-1.5%.

Target funds are designed as a one-size-fits-all approach for the average investor, sothey may not meet the needs of specific situations and may not be the best option for all people. Additionally, target funds may restrict investment choices and decisions by limiting fund allocation within the target fund. 


Robo-advisors offer another management strategy for retirement and wealth accumulation. The specific algorithms of robo-advisors vary with each firm. The largest current robo-advisor firm by assets managed is Vanguard Digital Advisor. Other large firms to offer these services include Charles Schwab, Betterment, and SoFi. The gist of the robo-advisor service is that personal goals and preferences are evaluated in conjunction with factors to include risk tolerance, age, income, and current savings through a questionnaire. This information is entered into an algorithm to curate an individualized portfolio of funds. The robo-advisor monitors and rebalances the portfolio over time. The interval of portfolio fund reallocation varies between robo-advisors. Some firms offer live consultant options in conjunction with their robo-advising.

The types of fees levied for robo-advisors varies with each firm. Robo-advising services typically charge two types of fees. The first is a management fee which is a percent of managed assets on an annual basis and ranges from 0-0.35%. Other fees associated with robo-advisors include investment expenses. If the robo-advisor choses to invest into funds with an expense ratio these costs are then passed along to the consumer. These fees range from 0.03-0.09%.

Some robo-advisors additionally offer tax-loss harvesting as a benefit. With tax loss harvesting, the robo-advisor will sell investments that have declined in value helping to offset the capital gains experienced that year. This is most important in large accounts or for those in a high tax bracket. This only applies to taxable accounts and will not apply to the IRA.

Robo-advisor services often require lower opening balances and minimum deposit requirements compared with live advisors, but some require minimums of $1000 or more. Regarding fees, they are typically less expensive than live financial planners. Robo-advisors may not be helpful in complex situations such as with estate planning or college savings funds. Some robo-advisors offer varying access to live financial advisors which may be helpful in these situations but may be subject to additional fees or only available with premium accounts.

If you do choose to manage your finances yourself, you don’t have to go at it alone; there are many tools available to help you take charge of your financial future. 

Kayla Knuf, MD is a board certified anesthesiologist who practices in Texas.

The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan. 


ASA Community Blog is published as a benefit for ASA members. The views expressed on this blog are those of the individual contributing writers only and do not necessarily represent the opinions of ASA.