What type of investments do target-date funds typically include?

Target-date funds are designed to be a long-term investment solution tailored to meet the goals of investors who have a specific retirement date in mind. The correct answer points to the fact that target-date funds typically include a diversified mixture of stocks and bonds.

The unique aspect of these funds is their dynamic allocation strategy, which adjusts the proportions of stocks and bonds based on the target date. As the target date approaches, there is generally a shift towards more conservative investments, which means gradually increasing the allocation to bonds and reducing the proportion of stocks. This strategy helps manage risk while aiming for growth during the investor's accumulation phase and protecting capital as retirement nears.

This balanced approach mitigates the volatility commonly associated with high-risk assets by incorporating safer bond investments, which are intended to preserve capital as the investor reaches retirement. Thus, the mixture adapts in risk profile over time to align with the investor’s changing time horizon and risk tolerance as they get closer to the target date. This feature makes target-date funds appealing for investors looking for a hands-off approach to retirement planning.