I haven't read this weeks barron's yet, but.. On the cover, reference to an article on target-date funds. It suggests the article has a positive slant on these. Last week or so, a market guest on PBS suggested that target-date funds may not be a good idea if you plan on using those $$ soon. You might be going into fixed income instruments at just the wrong time. I don't know anything about them. I don't know how rigid or flexible the managers of such funds are allowed to me. Secondly, a full page article on page L-15 called Bond ETFs You Don't Need. I haven't read it yet. And you've got quarterly report of all mutual funds and ETFs in this issue.
Articles that criticize whatever is the subject of the day are routine in the world of investing. Most of them are not worth much. A few point out significant concerns.I think that is a lesson every new investor needs to learn. The advice from talking heads is not worth much. Most simply point out that investing has certain risks. Investors need to develop their own strategy and stick to it.So much bs floats around, its easy to get distracted.
These days, target date funds are so diverse that one cannot simply take any 2030 fund and assume it is comparable to any other 2030. In this respect, they are much like any other actively managed fund so any article that promotes them or comes out against them is going to be faulty if they do not consider this fact.Just yesterday I was reviewing two different 2030 funds and their stock to bond ratio varied by over 10%. Their domestic vs international stock also varied significantly. Some target date funds are managed so that income would start on that date while others are managed with the idea that they will in fact be liquidated on that date - resulting in very different management styles.Personally, I think they are a "very good" solution for the vast majority of 401k investors (and 1st time IRA investors) that have no desire to either learn more about investing or any desire to manage their own money. I have found the funds to have very similar expenses to (and often cheaper than) other actively managed diversified funds within the same fund family.
Hawkwin,You wrote, Just yesterday I was reviewing two different 2030 funds and their stock to bond ratio varied by over 10%. Their domestic vs international stock also varied significantly. Some target date funds are managed so that income would start on that date while others are managed with the idea that they will in fact be liquidated on that date - resulting in very different management styles.Well... I think they all tend to do much the same thing. They set an allocation for when the fund opens and they set an allocation for the target date. Then every so often (monthly or whatever), they adjust the allocation on a prorata basis in an effort to gradually slide the allocation from more aggressive to less.When you're comparing target date funds, part of the problem is that some funds will try to be more or less conservative than others. For instance, I have some of the Vanguard Target 2030 fund as a core investment. It's overly conservative to me and will have too large a bond allocation by 2030. But other funds aren't so conservative ... which explains your 10% spread.For me, I'd look at two things. The first is obviously the expense ratio. Some funds are stupidly expensive, when there's really no excuse for it as a computer program could automate this strategy using the trading of ETFs or other open-ended funds. But this only tells you if you want to be in that fund or not. The second is how conservative the fund will be at the target. You'll need to compensate if you think its being to aggressive or too conservative. You can compensate by buying some offsetting investments. Or you can buy a fund that has a longer (or shorter) target date.With that said, I'd also say that I kind of agree with PBS - even though I've not seen or read what was said. Use of any volatile investment is probably inappropriate if you really need the funds in the near future. But if you're really going to need the funds in say 2030, it might be an appropriate way to go - even if the funds aren't for retirement.- Joel
The second is how conservative the fund will be at the target.Still there is a paradox on target funds. If you own bond funds at the wrong time, you can be in for some sizable losses. But people want bonds in their target funds to reduce volatility and reduce risk when they need the funds.Do owners of Target funds realize they own bonds when interest rates are likely to rise? Are they comfortable with the risk?Conservative fund = fund that switches to short maturity bonds at the right time. That does mean reduced return. They have to do it right.But this is standard bond portfolio risk. Is the public well informed and comfortable? Do they know what they are doing? Can they trust their advisers? If they get hurt with bond holdings will they be surprised? Upset? Feel cheated? Or did they know the risk and take it willingly?
But this is standard bond portfolio risk. Is the public well informed and comfortable?They are not likely well informed, which is exactly why a TD fund is a welcome option compared to trying to build their own portfolio.Do they know what they are doing?No, see above.Can they trust their advisers?It is unlikely they have an advisor. That is the point behind a TD fund.If they get hurt with bond holdings will they be surprised?Possibly, but they are likely to experience less pain during bond bear market when they are appropriately allocated in a 2015 than if they owned 80% stock during a stock bear market. I could not tell you the number of people I know that held 100% (and in some times employer stock) all through 2008. GM employees, National City employees - they lost 100s of thousands of dollars. They would have been much better off in any mediocre TD fund.
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