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Friday, April 10, 2015

How to Boost a Target Date Return

Paul Merriman of MarketWatch has written an interesting article,

How to double your target-date retirement fund's return in a single move

that is worth reading and considering by target fund investors, especially younger investors, many of whom have been opted into target date type funds.

The gist of the article is straightforward:  put the bulk of your automatic 401(k) contribution into a target date fund, but also put a percentage in a small-cap fund. 

Why small-cap funds?  Although small-cap funds are volatile (will remind you of Jack Nicholson going beserk at various times!), they make up for it with exceptional long-term performance.

A couple of important points:  you need to be able to handle the volatility.  The article doesn't really spell out the asset allocation over time for Jessica, the fictional investor; but it would have been interesting to see where she stood on 1/1/2008 with a "free falling Tom Petty," off-the-cliff experience immediately ahead.  In 2008, stocks fell 37% and then in early 2009 dropped another 50%!

Sadly, the best laid plans many times are trashed in the real world of investing.  It is hard for most people to see something they have built up over a number of years crumble in front of their eyes.

Also, keep in mind the long term covered by the study.  A quick glance at the 

BlackRock sector returns 

(see page 2) for the past 20 years shows that Large Cap Core achieved an average annualized return of 10.5% versus 9.6% for Small Cap.  Standard deviation was 15% for the former compared to 19.6% for the latter!  Thus, you would have slept better and been ahead using Large Cap.

By the way, if you can only stand to read one person in the investment arena,  

Paul Merriman 

would be an excellent choice.  He stands out even among all the other excellent "Retirement" writers at MarketWatch.

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