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Having a good selection of investments is good, but having too big a selection can intimidate investors, especially if you're just starting out. If you're looking for a simple way to invest for retirement, you don't need any more new investments. You just need ones you can trust.

For many investors, that one-stop retirement investment was the target-date retirement fund. But during the market meltdown, target fund investors were betrayed by what turned out to be more aggressive investing than some expected. Now, the big question for those looking at target funds is whether they've fixed their inherent problems -- and whether they'll be safe the next time the market swoons.

Sounding the all-clear
The good news for target fund investors is that after the long bull run in stocks, many target funds have finally recouped the losses they suffered in 2008 and early 2009. According to Morningstar, target funds aimed at those retiring in 2010 have risen by 5% between October 2007 and mid-February 2011.

For a long time, though, it looked like target funds would prove to be one of the colossal failures of the lost decade. The idea behind them was simple: tailor an asset allocation strategy based on a person's age or expected retirement date, and adjust the allocations over the years to grow more conservative as the fund approached its target date.

Given that one of the fundamental tenets of financial planning is that you should invest less aggressively as you get older, many target fund shareholders made the mistake of assuming that with just two years left to go before their target date, 2010 target funds would have little or no exposure to the stock market. But as it turned out, many funds had relatively high percentages of their assets in stocks, and therefore the funds suffered big losses as the stock market collapsed.

Are they safe?
In response to the controversy, many target fund companies, including Schwab (NYSE: SCHW  ) , took steps to reduce stock allocations in their target funds. Others, including Principal Financial (NYSE: PFG  ) and ING (NYSE: ING  ) , expanded their funds to add alternative investments like commodities, real estate, and even hedge-fund-style investments.

In judging the quality of a target fund, low expenses are essential. That's why Morningstar awarded top ratings to target funds from T. Rowe Price (Nasdaq: TROW  ) , American Funds, and Vanguard, while hitting higher-cost providers AllianceBernstein (NYSE: AB  ) and Oppenheimer Holdings' (NYSE: OPY  ) OppenheimerFunds unit with low rankings.

But in the end, the key component of whether a target fund is safe enough for you depends on its unique way of allocating your money over time. Some companies believe that even retirees need substantial stock allocations in order to make sure their money continues to grow throughout their golden years. Others take less aggressive stances on the assumption that if you need more growth, you can get it on your own.

The best way to make easy money
In fact, given how easy it is to use exchange-traded funds to set up your own asset allocation strategy, coming up with a tailor-made allocation might be even better than relying on a target fund. With expenses on many ETFs from Vanguard, Schwab, and BlackRock (NYSE: BLK  ) at rock-bottom levels, cost isn't a big issue with asset allocation. And with many brokers offering their ETFs at no commission, you can adjust your allocation over time without worrying about paying an arm and a leg to do it.

With thousands of stocks and funds littering the investment landscape, it's easy to understand how target funds would be attractive to novice investors. But with a little extra effort, you can get exactly the exposure to various types of investments that you want without worrying about what your fund manager might do wrong. That's the best way to make sure you'll hit your target for financial success.

Learn all the basics of financial planning with our 13 Steps to Investing Foolishly. It'll get you on track to a great financial plan in no time.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

Fool contributor Dan Caplinger doesn't always take the easy path, but he usually gets where he wants to go. He doesn't own shares of the companies mentioned in this article. BlackRock is a Motley Fool Inside Value selection. Schwab is a Motley Fool Stock Advisor recommendation. The Fool owns shares of T. Rowe Price. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy puts you on the easy road to knowledge.

Read/Post Comments (2) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 07, 2011, at 4:01 PM, lowmaple wrote:

    ETFs Free now but for how long.We see how the frebies in banking fared. Possible this will happen in other areas once your hooked.

  • Report this Comment On May 09, 2011, at 12:17 PM, RobertC314 wrote:

    I thought this was an interesting comment:

    "But during the market meltdown, target fund investors were betrayed by what turned out to be more aggressive investing than some expected."

    Unless this is only referring to funds which were target 2008/2009 I don't really see how this is a betrayal. Stocks have since recovered nicely, and if those funds stuck to their allocations everyone's target 2011-and-beyond funds are right back in the game (and really, from what I recall target funds typically allocate from 0-10% in stocks in the last 5 years anyway, so the ones that did mature should not have needed the stock portion immediately anyway).

    I think this is yet another example of knee-jerk investor behavior hurting their bottom line. If you always pull out when the market gets back and put in once it's doing well you are literally buying high, selling low. No fund can overcome that type of stupidity. I don't recall which fund it was, but another MF article mentioned a case where a fund averaged 10% annual returns from 2000-2010, but the average investor in the fund lost money because they jumped in and out at the wrong times. Let this be a lesson to all the budding Fools out there :)

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