Why I Still Won’t Invest in Target-Date FundsConsidering my indecision about how to invest my retirement portfolio (see “Do I Really Need Foreign Stocks in My 401(k)?”) you would think theres an easy solution staring me in the face: target-date funds, which shift their asset mix from riskier to more conservative investments on a fixed schedule based on a specific retirement date. These funds often come with attractive, trademarked names like “SmartRetirement” and are marketed as “all-in-one” solutions. But while they certainly make intuitive sense, they are not remotely as simple as they sound. First introduced about two decades ago, the growth of target-date funds was spurred by the Pension Protection Act of 2006, which blessed them as the default investment option for employees being automatically enrolled by defined contribution plans, such as 401(k)s. And indeed, investing in a target-date fund is certainly better than nothing. But the financial crisis of 2008 raised the first important question about target-date funds when some of them with a 2010 target turned out to be overexposed to equities and lost up to 40% of their value: Are these funds supposed to merely take you up to retirement, or do they take you through it for the next twenty to thirty years? The answer greatly determines a funds “glide path,” or schedule for those allocation shifts. The funds that take you “to” retirement tend to be more conservative, while the “through” funds hold more in stocks well into retirement. Still, even target-date funds bearing the same date and following the same “to” or “through” strategy may have a very different asset allocations. For a solution thats supposed to be easy, thats an awful lot of fine print for the average investor to read, much less understand. Then there is the question of timing for those shifts in asset allocation. Some target-date funds opt for a slow and gradual reduction of stocks (and increase in bonds), which can reduce risk but also reduce returns, since you receive less growth from equities. Others may sharply reduce the stock allocation just a few years before the target date—the longer run in equities gives investors a shot at better returns, but its also riskier. Which is right for you depends on how much risk you can tolerate and whether youd be willing to postpone retirement based on market conditions, as many were forced to do after 2008. In short, no one particular portfolio is going to meet everyones needs, so theres a lot more to consider about target-date funds than first meets the eye. If I were to go for a target-date fund, I would probably pick one that doesnt follow a set glide path but is instead “tactically managed” by a portfolio manager in the same manner as a traditional mutual fund. A recent Morningstar report found that “contrary to the academic and industry research that suggests its difficult to consistently execute tactical management well, target-date series with that flexibility have generally outperformed those not making market-timing calls.” Maybe its the control freak in me, but I prefer selecting my own assortment of funds instead of using a target-date option where the choices are made for you. Granted, managing my own retirement portfolio was a lot simpler when I was young and had a seemingly limitless appetite for risk. But even as I get older and diversification becomes more important, I still want to be in the drivers seat. Anyone can pick a target, but there is no one, single, easy way to get there. Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. Related links: Saying No Put Me on the Path to Financial Independence Your Biggest Financial Asset Is You. And That May Put Your Portfolio at Risk ...read moreBy Penelope Wang Considering my indecision about how to invest my retirement portfolio (see “Do I Really Need Foreign Stocks in My 401(k)?”) you would think theres an easy solution staring me in the face: target-date funds, which shift their asset mix from riskier to more conservative investments on a fixed schedule based on a specific retirement date. These funds often come with attractive, trademarked names like “SmartRetirement” and are marketed as “all-in-one” solutions. But while they certainly make intuitive sense, they are not remotely as simple as they sound. First introduced about two decades ago, the growth of target-date funds was spurred by the Pension Protection Act of 2006, which blessed them as the default investment option for employees being automatically enrolled by defined contribution plans, such as 401(k)s. And indeed, investing in a target-date fund is certainly better than nothing. But the financial crisis of 2008 raised the first important question about target-date funds when some of them with a 2010 target turned out to be overexposed to equities and lost up to 40% of their value: Are these funds supposed to merely take you up to retirement, or do they take you through it for the next twenty to thirty years? The answer greatly determines a funds “glide path,” or schedule for those allocation shifts. The funds that take you “to” retirement tend to be more conservative, while the “through” funds hold more in stocks well into retirement. Still, even target-date funds bearing the same date and following the same “to” or “through” strategy may have a very different asset allocations. For a solution thats supposed to be easy, thats an awful lot of fine print for the average investor to read, much less understand. Then there is the question of timing for those shifts in asset allocation. Some target-date funds opt for a slow and gradual reduction of stocks (and increase in bonds), which can reduce risk but also reduce returns, since you receive less growth from equities. Others may sharply reduce the stock allocation just a few years before the target date—the longer run in equities gives investors a shot at better returns, but its also riskier. Which is right for you depends on how much risk you can tolerate and whether youd be willing to postpone retirement based on market conditions, as many were forced to do after 2008. In short, no one particular portfolio is going to meet everyones needs, so theres a lot more to consider about target-date funds than first meets the eye. If I were to go for a target-date fund, I would probably pick one that doesnt follow a set glide path but is instead “tactically managed” by a portfolio manager in the same manner as a traditional mutual fund. A recent Morningstar report found that “contrary to the academic and industry research that suggests its difficult to consistently execute tactical management well, target-date series with that flexibility have generally outperformed those not making market-timing calls.” Maybe its the control freak in me, but I prefer selecting my own assortment of funds instead of using a target-date option where the choices are made for you. Granted, managing my own retirement portfolio was a lot simpler when I was young and had a seemingly limitless appetite for risk. But even as I get older and diversification becomes more important, I still want to be in the drivers seat. Anyone can pick a target, but there is no one, single, easy way to get there. Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. Related links: Saying No Put Me on the Path to Financial Independence Your Biggest Financial Asset Is You. And That May Put Your Portfolio at Risk ...read more Source: Time ift.tt/1gB4pon
Posted on: Mon, 21 Jul 2014 16:37:00 +0000
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