Given how difficult the struggling stock market has made it for investors to make money managing their own investments, you can't blame anyone for giving up and looking for simple, automatic solutions to their savings needs. Yet, such investments have disappointed a number of investors who didn't understand the ins and outs of how they really work.

Saving for retirement the easy way
For instance, one increasingly popular vehicle for those saving for retirement is the target date mutual fund. Typically marketed as one-stop shopping options for long-term investors, target funds use a specific asset allocation strategy to put together a portfolio of stocks, bonds, and other types of investments that fund managers deem suitable for investors with a particular time horizon.

Each fund has a particular time frame assigned to it, corresponding to the date on which you plan to retire. So, a fund designed for those retiring in 2045 will have a more aggressive allocation to stocks than the same fund family's 2015 fund. It may also have a larger allocation to more volatile small-cap stocks like Manitowoc (NYSE:MTW) as well as international stocks and other subasset classes. Then, as time passes and a particular fund gets closer to its target date, the fund managers shift investments around to reduce overall risk.

To many, target funds sound like the ideal investment: You just invest money and let the fund manager do all the work. Yet many investors find that by turning over control of their money to a target fund without understanding exactly how fund managers are investing it, they are taking on more risk than they ever imagined.

The downside of target funds
Specifically, target funds gave many investors a nasty surprise last year. Funds with target dates far in the future took some of the biggest hits, as they were most aggressively invested.

Yet the bigger surprise came from funds with target dates in the near future. Vanguard's 2010 target fund (VTENX), for example, lost nearly 21% during 2008. Many funds did even worse.

What happened? A number of factors combined to create big losses:

  • Target funds took more risk than many would have thought. For instance, with just a year to go before the fund hits its target date, the Vanguard fund still has a 52% allocation to stocks, versus just 47% to bonds.
  • Many target funds own shares of other mutual funds from the same fund family, so they're largely dependent on their performance. For instance, Vanguard's target funds hold mostly Vanguard index funds, so when major index components like Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), and General Electric (NYSE:GE) fell sharply, shareholders suffered.
  • Similarly, with a fund family like Fidelity that favors actively managed funds, you'll often find a lot of overlap among holdings. For instance, with Fidelity Freedom 2010 (FFFCX) -- which lost 25% last year -- you'll find many different active funds. But those funds own a lot of the same stocks; drilling down, you'll find names like Wal-Mart (NYSE:WMT), ExxonMobil (NYSE:XOM), and Apple (NASDAQ:AAPL) come up again and again.

To be fair to the fund companies, they didn't hide any of this information. Anyone who thoroughly researched the funds could find out the asset allocations they used, and that there'd be overlap among some fund holdings. But if you merely bought the fund that matched up to your retirement date and looked no further, you might have been shocked at the result.

Do it yourself
What you have to learn from this is not to take anything for granted. You may find that the appropriate fund for your mix of risk tolerance and financial resources is one whose target date doesn't match up with your time horizon. And if you can't find a fund that puts together the right mix, it's easy to use a combination of mutual funds and ETFs to create your own. It just takes a little more work.

As tempting as it may be, don't just pass off responsibility for your investments to someone else. Sometimes you'll get just the results you want, but more often, what you buy won't live up to your expectations.

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Fool contributor Dan Caplinger does his own asset allocations. He owns shares of General Electric. Apple is a Motley Fool Stock Advisor pick. Wal-Mart is a Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days. You can rely on the Fool's disclosure policy.