I have a relative, who is well into her 70’s, and she absolutely loves stocks. Can’t get enough of them. Any other asset class is simply too boring.

#-ad_banner-#But she’s making a huge mistake. At her age, her retirement portfolio should also have ample exposure to bonds and other stable assets. After all, the next 40% stock market pullback (which seems to happen nearly once a decade) can always appear without much notice.

Yet it’s hard to make a case against stocks and for bonds with such people. After all, bonds offer insulting yields right now. Annuities don’t fare much better.

But these are anomalous times. The value of bond yields will eventually increase, and for long-term focused investors, it’s crucial that a constantly changing mix of assets make up your portfolio, so risk is reduced as you get closer to retirement.

That’s the clear concept behind target date funds, which automatically adjust portfolios as the years pass. I discussed these funds roughly two years ago on our sister site InvestingAnswers.com. I encourage you to read that piece to get a key sense of the approach and the best funds available in this category.

Why am I talking about target date funds now? Because they have just proved their mettle once again in 2014. The leading target funds continue to rack up double-digit annualized gains (on a three-year basis). While they are not blowing away the S&P 500, they are delivering solid gains with much less risk than an all-stock portfolio.

Although a number of firms now offer such funds, let’s focus on the offerings from Vanguard Investments. These funds typically carry the lowest expense ratios, and they are the largest in their categories, as measured by assets under management (AUM).

As you would expect, the fund with the furthest target date (The VFORX) delivered the best multi-year returns, simply because it has the greatest exposure to stocks. But the other two funds deliver an equally important metric: a higher Sharpe ratio, which means that their returns are quite impressive on a risk-adjusted basis. That’s a crucial thought as we’ll soon be approaching the six-year anniversary of the current bull market (which began on March 9, 2009).

Recent history gives the impression that market pullbacks are only minor and merely set the stage for the next sharp rally. One of these days, though, investors will be focusing on the need for capital preservation, which is one of the key tenets of these target date funds.

Still, investors need to do their homework about which target date fund family offers the most suitable approach for their interests. Some of these funds are diversifying into other asset classes such as commodities, which may or may not be your cup of tea, as noted in a recent The New York Times article.

One key result of distinct approaches: an Oppenheimer target date 2010 fund lost 41% of its value in 2008, while a similar Wells Fargo fund lost just 11% that year, according to that New York Times article.  You can read more about the varying approaches to such funds by reading this academic paper.

My colleague Michael Vodicka previously wrote about other hidden risks that these funds carry. Those risks are another reason I prefer Vanguard’s funds. The core philosophy at Vanguard is to deliver a low-cost sensible product, without the aggressive risk-taking seen by other fund families that are anxious to make their mark with a swing-for-the-fences approach.

Risks To Consider: The inevitable rise in interest rates means that the fixed-income part of these portfolios may lose short-term value. That’s why it’s wise buy and hold these funds for the long-term.  

Action To Take –> It’s worth noting that some of these funds carry expense ratios as low as 0.16%. Try to find a financial advisor that can manage your retirement portfolio for such a low cost. (This is not a knock against financial advisors, who provide a range of important services beyond portfolio management.) Target date funds will never outperform stocks in a raging bull market, but over the long haul, they are likely to deliver solid returns with a lot less risk.

If you’d like to learn more about utilizing stocks for your retirement, then you should check out The Daily Paycheck. This newsletter focuses on putting dividend payers to work for you — and your retirement. The Daily Paycheck strategy has helped Amy Calistri, our resident income investor, pocket more than $76,000 since she began using it in December 2009. And her portfolio is safer than the S&P 500. We, at StreetAuthority, have been so impressed that we urged her to spread the word to a wider audience. That’s why, for the first time, Amy took the stage to explain exactly how The Daily Paycheck strategy works. If you haven’t already, I encourage you to watch the exclusive presentation here. You won’t be disappointed.