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Monday, January 11, 2016

Target Date Funds Comparison

Here is a nice article on Target-Date Funds by John Presto at MarketWatchOpinion:  Target-date retirement funds may miss the mark for investors.

This is the type of article that is mostly not read by investors who need to read it because, by definition, most target date Fund investors are in these types of Funds because they don't want to make their own decisions on which Funds to buy and how to allocate their overall assets.

The article emphasizes the important points to consider.  First, you want to ascertain that index funds, as opposed to actively managed funds, are used.  Secondly, you want to understand the asset allocation, i..e., the percentage in stocks and bonds.  Is 87.1% or 89.5% the right percentage to be invested in stocks?  Only Dr. Who knows; and he is in a cave at an undetermined location--so forget trying to figure that out.  And thirdly, you want an idea of the "glide path," that is, how the Fund becomes more conservative over time.
You do however, want the Fund to have a decent "glide path."  Moving through the years from being 30 years from retirement to retirement should result in a substantive increase in bonds and a consequent reduction in equities.  The table in the article showing only a slight equity exposure reduction for the Fidelity Fund was puzzling.

Another consideration is the risk tolerance of young people.  In an ideal world, young people should be aggressively invested, contribute on a regular basis at least 12% of gross income, and ignore the market value of their Funds as well as financial news.  Financial news, like news in general, is biased to be negative and will cause some younger people to stress out over the ups and downs of their portfolio as well as the potential for such based on pundits' assessments of financial events.  Young investors can easily dampen the volatility by utilizing a money fund in conjunction with the target-date Fund or choosing a Fund 10 years prior to their retirement date.

The bottom line on target-date funds is that they are better than investing in money funds, as the article points out.  Also, they have in this regard been a positive, in that they are the right vehicle to opt employees into the company 401(k). There also can be some exploitation of investors by adding Funds that a Fund provider is trying to build up in terms of assets under management, and they are a bit more expensive compared to constructing the same basic allocation with the lowest cost index Funds.

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