Target Date vs. Build Your Own: How Two Similar Risk 401(k) Portfolios Can Work Very Differently

A target-date fund and a simple three-fund portfolio might both aim for the same level of risk, but they help you get there in different ways—and ask different things of you as an investor. Ultimately, the choice is about what fits you best: Do you prefer the ease of a one-fund solution, or do you want the hands-on control and transparency that comes from building your own mix of broad index funds?

The target‑date fund: one‑fund automation

A target-date fund (TDF) is a diversified “fund of funds” built around a retirement year, like 2040, that automatically adjusts its mix of stocks and bonds as you get closer to retirement. If you’re in the middle of your career, a typical TDF might have around 70% stocks and 30% bonds right now, then slowly shift to include more bonds as your target year approaches.

Inside a TDF, you’ll usually find broad index funds—U.S. stocks, international stocks, and bonds—much like what you’d use in a three-fund portfolio. The fund company takes care of the details: choosing the exact percentages, rebalancing, and managing the glide path. Your job is simple: pick a fund with a target year that corresponds to your expected retirement date, and keep contributing.

The three‑fund mix: a simple “build‑your‑own.”

A classic three-fund portfolio uses three affordable index funds: a total U.S. stock market fund, a total international stock fund, and a broad U.S. bond fund. To match the risk of a mid-career target-date fund, you might go with 60% total U.S. stock, 20% total international stock, and 20% total bond—or adjust those numbers to fit your own comfort with risk.

With this approach, you get to decide how much of your stock exposure is in U.S. versus international markets, and how much is in bonds. You can keep those percentages steady or adjust them as your life and goals change. The trade-off? You’re in charge of rebalancing back to your targets (say, once or twice a year) and deciding when to make your portfolio more conservative as you get closer to retirement.

Side‑by‑side: same risk, different trade‑offs

Think of two investors who both want a moderate mix—about 70% stocks and 30% bonds—for their long-term retirement savings. One picks a target-date fund with a current glide path of around 70/30. The other builds a three-fund portfolio: for example, 50% total U.S. stock, 20% total international stock, and 30% total U.S. bond. On paper, their overall stock/bond split and broad diversification look very similar—even though one is using a single TDF and the other is managing three separate funds.

Where they differ is in control and behavior. The TDF automatically maintains a 70/30‑style risk level in line with its glide path and gradually becomes more conservative without any action from the investor, which can help reduce the temptation to time the market or to forget to rebalance. The three‑fund investor has more flexibility to keep a chosen risk level for longer, tilt toward or away from international stocks, or change allocations based on their own plan, but that flexibility requires attention and discipline.

Costs, transparency, and fit with your situation

Both approaches can be implemented with affordable index funds, but some target‑date series layer their own fee on top of underlying fund expenses, while a do‑it‑yourself three‑fund portfolio lets you pick specific funds and expense ratios. Over long time periods, small fee differences can affect outcomes, though many analyses suggest that the gap between a low‑cost TDF and a comparable low‑cost three‑fund mix is often modest if the underlying building blocks are similar.

The three‑fund approach gives very clear visibility into each component—how much is in U.S. vs. international stocks and bonds—while a TDF bundles those pieces into a single line item, which some investors find simpler and others less transparent. Your broader situation also matters: for example, if you hold other accounts (IRAs, taxable portfolios) or have strong preferences about international exposure, you may find it easier to coordinate everything using a custom three‑fund allocation rather than a single target‑date fund.

How to think regarding choosing between them

For investors who want a straightforward, low‑maintenance path, are comfortable with the provider’s glide path, and primarily save in a single workplace plan, a target‑date fund can be a practical “default” that keeps them invested and automatically adjusted over time. For those who prefer more control, are willing to rebalance periodically, and want to modify their U.S./international mix or bond exposure, a simple three‑fund portfolio can provide similar diversification with added flexibility.

Neither approach secures profits or protects against losses, and both can be appropriate or inappropriate depending on your goals, risk tolerance, savings rate, and other assets. Many investors review their options with a qualified financial professional or their plan’s education resources to decide whether a one‑fund solution, a custom three‑fund mix, or some combination fits best with their long-range retirement plan.

Disclosure

This article is for informational and educational purposes only and does not constitute investment, tax, or legal advice or a recommendation to buy, sell, or hold any security, fund, or investment strategy. The information is general in nature and does not take into account the specific investment objectives, financial situation, or particular needs of any individual; decisions about using target‑date funds, three‑fund portfolios, or other approaches should be made based on your circumstances and, where appropriate, in consultation with a qualified financial professional. Investing involves risk, including the possible loss of principal, and there is no guarantee that any target‑date fund, three‑fund portfolio, asset‑allocation model, or rebalancing strategy will achieve its objectives; diversification and asset allocation do not ensure a profit or protect against losses in declining markets. Target‑date funds with the same target year and three‑fund portfolios with the same stock/bond percentages may differ significantly in underlying holdings, risk level, and fees, and past performance is not a guarantee or reliable indicator of future results. References to third‑party organizations, websites, or publications are provided for general information only and do not constitute endorsements or approvals of any products, services, or views.

Sources
Bogleheads – Three‑Fund Portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio​
Rob Berger – How to Build a Three‑Fund Portfolio: https://robberger.com/three-fund-portfolio/​
Financial Tortoise – DIY 3‑Fund vs Target Date Fund: https://financialtortoise.com/blog/diy-3-fund-vs-target-date-fund​
Bogleheads Forum – Target Date Fund vs 3‑Fund Portfolio: https://www.bogleheads.org/forum/viewtopic.php?t=460527​
John Hancock – Should You Choose a Target‑Date or Target‑Risk Fund in Your 401(k)?: https://retirement.johnhancock.com/us/en/viewpoints/investing/should-you-choose-a-target-date-or-target-risk-fund-in-your-401-​
Financial Tortoise – 3‑Fund (+1) Portfolio Strategy: https://financialtortoise.com/blog/3-fund-1-portfolio-strategy​
Debt Free Dr – How to Simplify Your Investing Using Only Three Funds: https://www.debtfreedr.com/vanguard-three-fund-portfolio/​
Morningstar via White Coat Investor – 60/40 Portfolio and Diversification Discussion: https://www.whitecoatinvestor.com/60-40-portfolio-better-than-diversified-portfolio/​
Morningstar – Three‑Fund IRA Portfolios for Fidelity Investors: https://www.morningstar.com/portfolios/three-fund-ira-portfolios-fidelity-investors​
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