How do target-date funds adjust their investment strategies?

Target-date funds are specifically designed to meet the retirement needs of investors by adjusting their asset allocation over time. The strategy employed by these funds is to gradually become more conservative as the target date approaches, which is typically aligned with the anticipated retirement date of the investors. This approach reflects the changes in risk tolerance that investors generally have as they near retirement.

In the earlier years of the investment timeframe, target-date funds usually have a heavier allocation to equities, which can offer higher growth potential. As the target date gets closer, the fund reallocates assets to fixed-income investments or cash equivalents, aiming to preserve capital and reduce volatility. This progressive shift helps to manage risk more effectively during a time when the investor might need to start withdrawing funds for retirement.

The other options do not accurately represent the behavior of target-date funds. Maintaining the same asset allocation throughout the investment period would not take into account the changing needs and risk tolerances of investors as they age. Focusing solely on equity investments ignores the need for capital preservation as the target date approaches. Additionally, not adjusting based on market conditions would disregard an important aspect of investment management, which is to adapt strategies to current market environments to optimize returns and risk.