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Jonathan Clement's Blog: Missing The Target: TDFs

FYI: USE THE RIGHT tool for the job and you’ll get the best result. If you need to connect two boards, you could use a hammer and a nail or a screwdriver and a screw. Either methods work—and they’re certainly better than banging in a screw with a hammer, which I’ve seen tried. It was not effective.

Participants in 401(k) plans, alas, display similar behavior with target date funds, or TDFs. A TDF offers a diversified portfolio in a single fund, with the mix of stocks and bonds changing as you approach retirement. When used correctly, the fund’s asset allocation should be appropriate for your age—aggressive while you’re young and becoming more conservative as you age. There’s no need to trade or adjust the mix. The fund does that automatically. The evidence, however, suggests many people use TDFs incorrectly.
Regards,
Ted

Comments

  • @Ted: Link missing.
    Derf
  • Derf: Sorry about that'
    Happy Thankgiving
    Ted
    https://humbledollar.com/2019/11/missing-the-target/
  • msf
    edited November 27
    Link or no link, IMHO this is obvious. Target date funds are designed to manage an entire portfolio for a hands off approach. If an investor isn't using the TDF for virtually one's whole portfolio, then the investor isn't buying into that idea, and the glide path won't work as designed.

    I've since modified my view to include a couple of variations:

    1. TDFs are designed with retirement glidepaths. If one is planning to bequeath an investment to someone, it might make sense to put that investment into a separate TDF with a target date matched to the legatee's age. This expands the ability to use TDFs in a hands-off manner.

    2. On the opposite end of the spectrum, some people want to be actively involved in managing their portfolios. A TDF's glidepath may not exactly match what they they want, e.g. they may want equities a bit higher than the glidepath in pre-retirement and a bit lower in early retirement. Such investors could build their own portfolios and manage their own glidepaths. Or they could use a TDF as the foundation ("core") of their portfolio and manage smaller complimentary investments to fine tune their holdings.

    Here's the Humble Investor post by "Mark Eckman, a data-oriented CPA with a focus on employee benefit plans."
    https://humbledollar.com/2019/11/missing-the-target/
  • edited November 27
    Derf said:

    Link missing.

    Ted said:

    Sorry about that'.Happy Thankgiving

    Lay off the eggnog @Ted!
  • @msf, that is what we have done in last several years. TDF forms the foundation and gradually consolidate other actively funds into TDF
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