SMI readers are regularly reminded that their most important investing decision is how they divide their money between different kinds of investments. This most commonly refers to their portfolio's mix of stocks and other equity investments on one hand, and money-market funds, CDs, and bonds on the other.

The general rule is that an investor's portfolio should start out heavily weighted toward the stock side when he or she is young, and move increasingly away from stocks and toward bonds as the years go by. This reduces risk as age increases. It's a great idea and one we endorse. As with many general guidelines, however, it can be tricky to know exactly how to apply this in practice.

Enter target-date mutual funds (TDFs). These funds are marketed as a "set-it-and-forget-it" option that frees investors from having to make decisions beyond the initial purchase. And even the purchase decision isn't complicated. Just figure out the year you plan to retire (your "target date"), then pick a fund with that year (or a year close to it) in the fund name. For example, a person intending to retire in 2024 could simply pick a "2025 Fund" — whether it's the version offered by Vanguard, Fidelity, T. Rowe Price, or any of the two dozen other companies offering 2025 funds.

TDFs came on the scene in the mid- to late-1990s, and became popular because they automate the "invest less in stocks, more in bonds as you get older" process for the investor. They do this on a predetermined schedule so the fund, in theory at least, carries ever-decreasing amounts of risk as the fund's target date approaches. (Typically, the holdings in a TDF are a collection of actively managed stock and bond funds from the same fund family that operates the target fund.)

Not surprisingly, TDFs have been a hit in the retirement-fund marketplace. More than 75% of 401(k) plans offer participants the option of choosing such a fund. In many plans, a target fund is now the default option. When SMI first wrote about these funds in 2005, they held about $70 billion in assets. Today, that total is roughly $500 billion.

But don't be fooled — all target date funds are not created equal, even those focused on the same year. They can (and do) vary widely in how quickly they move toward a safer portfolio mix. As The New York Times recently reported, the Vanguard Target Retirement 2030 fund has 77% of its assets in stocks, with the rest in bonds and cash. Meanwhile, the Fidelity Freedom 2030 fund (note the identical target date) has 61% in stocks, roughly 26% in bonds, and 7% in a commodity fund. Which is better? That's very difficult for even the experts to say, much less the common investor who is looking for simplicity.

The truth is, every fund company has its own ideas about the optimal "glide path" — that is, the way the mix of stock and bond funds should change as the fund progresses toward its target date. The significant disparity between the various glide-paths came into the spotlight following the 2008 financial crisis. As it turned out, some funds with a 2010 target date had about 20% of their holdings in stocks, while others had more than 50% in stocks. Not surprisingly, then, the range of performance was huge: from very modest losses of -3.5% all the way to massive losses of -41.3%. Remember, these were all funds labeled as being appropriate for those planning to retire in 2010, just two years later.

As you might expect, the criticism was well-spread. For example, from an article in Financial Planning magazine written in 2009: "These [2010] funds are [only] one year from reaching their target date. What would happen if investors intended to withdraw their money at the target date and purchase annuities? [Isn't] the glide path... supposed to guard against exactly this sort of meltdown?"

But that's only one side of the argument. Here's the flip side of that same coin: What if the 61-year old owner of that TDF goes on to live another 40 years? The article's author, Craig Israelsen of Brigham Young University, suggests that TDFs should hold equity positions of less than 10% as they approach their target date. That makes sense if the goal is essentially to simply live until the target date. But it makes no sense if the goal is to position the investor for decades of continuing income needs beyond the target date.

This debate over the proper allocation as the target date approaches leads us to the central problem with TDFs: they ignore all of the personal variables that ideally should be taken into account when setting one's portfolio mix. A very generic guideline based solely on age may be better than no guideline at all (subtracting your age from 100 to determine your stock allocation is a popular example). But a better approach is to also incorporate all the relevant factors, such as age, health, risk tolerance, savings level, and so on. There's no way a TDF can do that, so it winds up being a very blunt instrument, not to mention one that varies widely in interpretation from one fund company to the next.

The reason these fund companies can't answer the question of "what is the optimal allocation mix for near-retirees?" is that there isn't any one-size-fits-all answer.

No two investors have identical attitudes toward risk and exactly the same financial circumstances. The generic approach offered by target funds cannot offer a truly personalized retirement-planning strategy.

That's not to say there's no place for TDFs in the investing landscape. As a default option in a company retirement plan, where surveys regularly reveal many workers are making terrible allocation decisions, a reasonable, low-cost TDF may be a vast improvement over what the typical plan participant would otherwise choose.

But in our view, SMI readers — who have access to our Fund Rankings, Upgrading strategy, and Personal Portfolio Tracker  — are likely to be much better off keeping control in their own hands, rather than delegating important asset-allocation and diversification decisions to a target-fund manager. Maintaining control will help ensure that you have a personalized plan (see How to Write an Investment Plan) that aligns your investment choices with your particular temperament and goals.

Again, just to be clear, there is nothing wrong with investing in a target-date fund. If you have only a few investment choices in your 401(k) plan, a TDF may wind up being the best option for the time being. But before you invest, be sure to research the details, so you understand that fund's specific portfolio mix and "glide path" for moving toward more fixed-income investments as retirement approaches.