Target-Date Funds Are Crushing DIY Rebalancing in 2025

Why Target-Date Funds Are Outperforming DIY Investors

The data is in, and it’s not flattering for hands-on investors. Study after study shows that target-date fund investors are outperforming those who manage their own asset allocation—not because target-date funds have superior returns, but because they prevent the behavioral mistakes that cost DIY investors dearly.

The Behavior Gap Problem

Dalbar’s annual study of investor behavior consistently finds that average equity fund investors underperform the funds they invest in by 3-4% annually. How? They buy after markets rise and sell after markets fall. They chase last year’s winners. They panic during corrections.

Target-date funds eliminate these decisions. You pick your retirement year, invest, and the fund handles everything else. There’s nothing to do—which turns out to be exactly what most investors need.

How Target-Date Funds Work

A target-date fund automatically adjusts its asset allocation based on your expected retirement year.

Example: Vanguard Target Retirement 2040 (VFORX)

• 2025 (15 years to target): 85% stocks, 15% bonds
• 2035 (5 years to target): 70% stocks, 30% bonds
• 2045 (5 years past target): 50% stocks, 50% bonds
• 2055 (15 years past target): 30% stocks, 70% bonds

The fund gradually shifts from aggressive growth to capital preservation as you approach and enter retirement. This “glide path” happens automatically—no rebalancing decisions required.

2023-2024 Performance Comparison

During the 2022 downturn and 2023-2024 recovery, target-date investors stayed fully invested. Their funds automatically rebalanced, buying more equities when prices were low.

Typical DIY investor behavior:

• Sold stocks in October 2022 near the bottom (“cutting losses”)
• Waited for “certainty” before re-entering
• Missed the 26% S&P 500 gain in 2023
• Finally returned to stocks in late 2023 at higher prices

Target-date fund behavior:

• Stayed fully invested throughout
• Automatically rebalanced during the decline
• Captured the full 2023-2024 recovery
• No decisions required

The difference: 10-15% in cumulative returns over two years—not from superior fund selection, but from avoiding behavioral mistakes.

The Cost Argument Is Obsolete

Critics once pointed to target-date fund expense ratios as a reason to DIY. That argument has collapsed.

Current target-date fund costs:

• Vanguard Target Retirement funds: 0.08%
• Fidelity Freedom Index funds: 0.12%
• Schwab Target Index funds: 0.08%

These are not high-cost products. A 0.08% expense ratio on a $500,000 portfolio is $400 per year. If automated rebalancing and behavioral guardrails save you from even one panic sale, the fund pays for itself thousands of times over.

When DIY Might Still Make Sense

Target-date funds aren’t perfect for everyone:

Tax optimization: Target-date funds can’t perform tax-loss harvesting or asset location strategies across multiple accounts. Sophisticated investors with taxable and tax-advantaged accounts might benefit from DIY approaches.

Customization: If you need a different glide path—more aggressive or more conservative than standard offerings—DIY allows precise calibration.

Cost sensitivity at scale: For portfolios over $2 million, even 0.08% adds up. Some investors build equivalent portfolios from individual index funds at slightly lower cost.

Investment enjoyment: Some people genuinely enjoy managing their portfolios. If you find rebalancing satisfying rather than stressful, DIY works fine.

The Rollover Decision

When rolling over your 401(k) to an IRA, you have a choice: recreate a diversified portfolio from individual funds, or simply invest in a single target-date fund matching your retirement timeline.

For the vast majority of investors, the target-date fund is the better choice. Not because it will necessarily generate higher returns—but because it will generate returns you actually capture, without the risk of selling at the worst possible time.

The 2025 Reality

Target-date funds have won. They dominate 401(k) default options. They hold over $3 trillion in assets. The evidence shows they produce better outcomes for average investors than self-directed alternatives.

If you rolled over to an IRA thinking you’d actively manage your allocation, ask yourself: have you actually rebalanced regularly? Did you hold steady during 2022? Are you confident you won’t panic in the next correction?

If the answer to any of these is uncertain, a target-date fund might be the best investment decision you make—not despite its simplicity, but because of it.