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'Target' Funds Still Missing The Mark On Returns Even As Their Popularity Surges Among Investors
Unfortunately a lot of investors are doing even worse than the target funds on their own. They are not perfect but often better choice in a lot of retirement plans.
The article focuses on 2015 Date funds. It makes one interesting observation: since 2009, their target asset-allocation has decreased from 49% to 40%. As market-timing generally goes, that was a poorly timed though the article offers no particular evidence that a 40% allocation is inappropriate for someone within a couple years of retirement.
Their other argument, about returns, strikes me as silly. In 2012, funds with this target date made 10.6%, only 66% of the S&P 500's return. Uhhh ... they had only 40% exposure to the stock market but generated 66% of its gains? On face, that seems like exceeding the mark by a lot.
The difference isn't made up for by their bond allocation alone since the bond aggregate rose just 4% last year. On average, 40% stocks/60% bonds should have led to a portfolio return of 8.8% but these guys managed 10.6%.
Dunno. You can always construct a portfolio that performs better than a given TD fund - especially with reverse-engineering. They're not all the same - that's for sure. And for that reason, due diligence is probably more important with these than with traditional funds. As others have mentioned in the past, I think the folk at T. Rowe Price do a bang-up job with their TD series.
Now - assuming the article's thesis is correct - what's that extra "cost" worth? Would expect it's worth something to most to be able to tune-out MFO, M* or cnbc in the interest of golf, travel or fishing. Maybe extra time out on the boat, at the beach or with the grandkids? So - I surely don't view TDs as a lose-lose proposition - even accepting some higher cost.
My argument against TDs is that by taking more control from an investor's hands, they put him more at the mercy of severe market fluctuations - including persistent overbought conditions. So, If you think you're smart enough to vary exposure to S&P or other risk assets - based on whatever barometer you employ - than you'd be wise to withhold some from TD funds to allow a degree of leverage here. Notwithstanding: target date funds as part of an overall approach ought to allow one to sleep better and devote more time to leisure pursuits - making them worth the "price" for many.
The operative word is "smart enough". I think many investors do not properly benchmark and do actually worse overall than these target funds. Not only their picks are usually not good, they are not smart enough to make correct timing decisions so they inflict a lot of damage by themselves.
Target funds (offered by Vanguard, Fidelity, TRP) might be marginally higher cost than individual funds that make them but investors on their own tend to own much more expensive and even loaded funds. So, target funds are cheaper in that respect. Besides you get professional management at really small costs.
I think there are probably not so smart investors in this board as well. I am probably one of them. I have done a bunch of mistakes over the years. I try to learn but probably I have more mistakes in my future. If I were not spending this much time, I probably would strongly consider TD funds for myself as well. Perhaps it would help me get more sleep as I do a lot of reading after everyone at home has gone to bed.
Target date funds provide professional management at really small costs. A lot of portfolio manages have vested interest for their bottom line so the information is usually somewhat biased against.
They are not perfect, but pretty darn good choice.
Reply to @Investor: "The operative term is 'smart enough.'" Yup - says it all. Some pretty smart cookies here and I count you one of them. But, G** forbid everybody in the universe shared our enthusiasm and passion for matters financial. I'm afraid the world would be a pretty drab place.
Any market timing is fraught with peril (one reason for using target funds). And I'm not referencing big "buys" or "sales" based on the latest Iranian saber rattling or whether the fizz-cliff gets resolved by X date. These fits and spasms get way too much attention here and generally. However, there are extreme periods where adding a little extra to the "risk" mix might be prudent (as in early '09) and pulling a little off the table might be wise (as when the NASDAQ topped 5,000).
Comments
The article focuses on 2015 Date funds. It makes one interesting observation: since 2009, their target asset-allocation has decreased from 49% to 40%. As market-timing generally goes, that was a poorly timed though the article offers no particular evidence that a 40% allocation is inappropriate for someone within a couple years of retirement.
Their other argument, about returns, strikes me as silly. In 2012, funds with this target date made 10.6%, only 66% of the S&P 500's return. Uhhh ... they had only 40% exposure to the stock market but generated 66% of its gains? On face, that seems like exceeding the mark by a lot.
The difference isn't made up for by their bond allocation alone since the bond aggregate rose just 4% last year. On average, 40% stocks/60% bonds should have led to a portfolio return of 8.8% but these guys managed 10.6%.
David
Now - assuming the article's thesis is correct - what's that extra "cost" worth? Would expect it's worth something to most to be able to tune-out MFO, M* or cnbc in the interest of golf, travel or fishing. Maybe extra time out on the boat, at the beach or with the grandkids? So - I surely don't view TDs as a lose-lose proposition - even accepting some higher cost.
My argument against TDs is that by taking more control from an investor's hands, they put him more at the mercy of severe market fluctuations - including persistent overbought conditions. So, If you think you're smart enough to vary exposure to S&P or other risk assets - based on whatever barometer you employ - than you'd be wise to withhold some from TD funds to allow a degree of leverage here. Notwithstanding: target date funds as part of an overall approach ought to allow one to sleep better and devote more time to leisure pursuits - making them worth the "price" for many.
The operative word is "smart enough". I think many investors do not properly benchmark and do actually worse overall than these target funds. Not only their picks are usually not good, they are not smart enough to make correct timing decisions so they inflict a lot of damage by themselves.
Target funds (offered by Vanguard, Fidelity, TRP) might be marginally higher cost than individual funds that make them but investors on their own tend to own much more expensive and even loaded funds. So, target funds are cheaper in that respect. Besides you get professional management at really small costs.
I think there are probably not so smart investors in this board as well. I am probably one of them. I have done a bunch of mistakes over the years. I try to learn but probably I have more mistakes in my future. If I were not spending this much time, I probably would strongly consider TD funds for myself as well. Perhaps it would help me get more sleep as I do a lot of reading after everyone at home has gone to bed.
Target date funds provide professional management at really small costs. A lot of portfolio manages have vested interest for their bottom line so the information is usually somewhat biased against.
They are not perfect, but pretty darn good choice.
Any market timing is fraught with peril (one reason for using target funds). And I'm not referencing big "buys" or "sales" based on the latest Iranian saber rattling or whether the fizz-cliff gets resolved by X date. These fits and spasms get way too much attention here and generally. However, there are extreme periods where adding a little extra to the "risk" mix might be prudent (as in early '09) and pulling a little off the table might be wise (as when the NASDAQ topped 5,000).