Target Retirement Fund - Good or Bad

Tuesday, September 8, 2009 |

Investopedia definition for Target-Date Fund:

A mutual fund in the hybrid category that automatically resets the asset mix (stocks, bonds, cash equivalents) in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement.
Target Date Funds have come under fire recently, such as mentioned on here.  I personally think it is unfair.  I think the problem lies with investors not doing their homework.  One of the most common mistakes by funds investors is not reading the funds prospectus.  By the name, most people think they will not understand the information provided in the prospectus, while in fact, prospectus is written mostly in plain English.  By not reading the prospectus, many investors do not understand the risks and expectations involved in investing on target date funds and the fact that target date funds DO NOT guaranteed positive returns. I think overall, Target Date Fund is a good choice for people that have no clue about investing.  However, those people needs to realize the risks involve with Target Date Fund.

Having sort of trying to defend the target date funds, I don't necessary it is the best options for everyone or even for most people.  As I mentioned earlier, a lot of investors are confused by the name and think that they will have enough money during that target date.  They think it is guaranteed.  But again, those are minor.  Another con is that target date funds assumed that everyone with the same target retirement date has the same risks profile.  That is far for reality.  Your risks tolerance may be different than others risk tolerance funds that have the same target retirement date.  And another negative in my mind, the reason that I moved away from Vanguard Target Retirement 2045, is that I don't think most target date funds offer enough diversification.  For example, Vanguard Target Retirement 2045 asset allocation is about

  • 72% - Vanguard Total Stock Market Index Fund,
  • 9.2% - Vanguard European
  • 4.9% - Vanguard Pacific
  • 4.1% - Vanguard Emerging Market 
  • 10% - Vanguard Total Bond
I don't mind the 10% in bonds, since I think everyone should have some amount in bonds.  But on the equity side, about 80% of it is in domestic stock and only 20% in international stock.  I personally think the allocation in international stocks should be higher.  And I would also prefer more small cap and value in the domestic stock than what Vanguard Total Stock Market Index offers.

Remember, a lot of this is very personal and will be different for everyone.  But I think all you need is a little bit of homework and you can come up with better asset allocation option than what target date funds offers.  However, if you don't want to do your homework and at the same time doesn't want to pay for professional advices, then instead of simply leaving your money on savings account, then I would consider looking at Target Date Funds.  If you simply want several model portfolios, I would suggest looking at Paul Farrell's Lazy Portfolios.  However, do not simply copy one of these portfolios simply because of its past performance without understanding its goal, objective and your own risk profile.  This should be used as guidelines only.

* Photo by leeroy09481


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