Comments on: Understanding the Risks of Target-Date Funds

By: Doug MacFaddin

Doug MacFaddin — Thu, 29 Jul 2010 20:17:49 +0000

The biggest problem with TDFs is duration. Investors thought they had a certain duration and it was quite different — unfortunately, this was highlighted by the horrific 08 equity market. I agree with the regulator that the marketing should be the focus. If the vendor is required to make the investment timeline clear to the investor through the life of the TDF, the investor can then decide if the risk profile (duration) makes sense to them. Clearly, their tolerance for risk will change as their lives become less and less complicated and their expense base continues to decrease.

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By: Landon Loveall

Landon Loveall — Thu, 29 Jul 2010 13:16:09 +0000

One criticism I have for Target Date funds is that they follow the traditional risk based on age models so that someone in their 20s will be heavily weighted in stocks. The post uses the example of the Vanguard 2040 with current allocation of 90% stocks and 10% bonds.

In a perfect world, where young people can look forward to a 40 year uninterrupted career with no unemployment and no possibility of health problems, this might work fine. But, this is not reality.

The standard recommendation that people in their 20s be heavily weighted towards stock because they have more time does not always work so well in real life.

The one point this post does make very well is that for an investor who simply wants to “fund it and forget it” target date funds can be a viable option. But, for someone who wants to take the time or hire an adviser to take the time, there are much better ways to allocate your assets.

By: Matthew Amster-Burton

Matthew Amster-Burton — Tue, 27 Jul 2010 22:49:29 +0000

Sounds great, Haggie, although there are few TDFs that do what you describe; the SMART Funds I mentioned in the article are collective investment trusts sold only through advisors and to institutional accounts.

A similar thing you can do is choose, say, the 2020 fund if you’re retiring in 2040; it’s a more conservative approach, and no one ever checks your age. As long as you have money to invest, you can be in the club.

By: Haggie

Haggie — Tue, 27 Jul 2010 19:53:39 +0000

What about selecting a TDF that goes to little or no stock by its target date (a “glide path” to absolute minimum risk), but choose a TDF date that is five years past your target retirement date.

So, when you hit 65, your TDF has reduced but not completely eliminated stock, but over the next five years will get even safer and move to 100% bonds. You give up some stock gains, but dramatically reduce risk, and you gain another five years of compound interest.

And, if the TDF does exceedingly well, you can cash out at 65 and roll it into a 100% bond fund to secure your profits.