Should You Buy Target-Date Funds?

Comments

• JohnChisum

  May 2015

  This is a hard to read article with all the "artifacts" sprinkled throughout the writing.
  
  Target Date funds serve a purpose if you are a novice investor and want a set it and forget it type of portfolio. These same investors would do better with a fund or etf that mimics the broad index. These are available for a very low fee from Vanguard, Schwab and other outlets. Another better method IMO are Asset Allocation funds.
  
  
• hank

  May 2015

  Good point John.
  
  If you are reading this board (and therefore Ted's link) .... you probably shouldn't buy these funds.
• Sven

  May 2015

  @ John, Agree. For those who are starting to invest but lacking much knowledge and decent options/choices. Target date funds, providing they have low ER and appropriate allocations as you pointed out, are not bad choices. So it really depends...
• Tampabay

  May 2015

  401k's
• jerry

  May 2015

  hank said:

  Good point John.
  
  If you are reading this board (and therefore Ted's link) .... you probably shouldn't buy these funds.

  I put 10% of a price target fund (an appropriate year) as a control on how I was doing.While probably not as capable as some on this site I suspect I am at least average. Some years I outperformed, other years I didn't My underperformance in recent years occurred for two major reasons. Too much in emerging markets in recent years and using more stable income than a bond fund. Both strategies were wrong in recent years/I think you have to be very capable to have a diversified portfolio that will outperform a decent target fund over a longish period of time
• msf

  May 2015

  "Target-date funds have selected dates at which time the assets will be liquidated"
  
  Once again we find a financial writer who doesn't seem to know what he is talking about.
  
  Target date funds' dates refer to the general date of one's retirement. They tend to come in two varieties: one with a glide path that reaches its terminal allocation at the retirement date (e.g. 70/30 or 80/20), and one where the fund holds a gradually declining amount of equities for 10-15 years into retirement (in anticipation of a 25-35 year need). Either way, these funds are not liquidated.
  
  There are two types of funds I'm aware of that are liquidated on a specified date (excluding UITs that pretty much by definition terminate). One type is target maturity bond funds, like the American Century Zero Coupon Bond Funds, or Fidelity's newer Defined Maturity Funds, or Guggenheim BulletShare ETFs. Here's a good Vanguard paper on defined-maturity bond funds.
  
  Another type includes some managed payout funds. Managed payout funds are funds that are designed to work like annuities (if all goes well - they're not guaranteed). Some, like Vanguard's, are designed to pay out in perpetuity. Others, like Fidelity's Income Replacement Funds, are designed to terminate on a specific date. These funds hold a mix of equity and debt, and are liquidated on the specified date.
  
  That subtype of managed payout fund is the only one I know that match the description of a "target date fund" given in the article here.
• hank

  May 2015 edited May 2015

  "I put 10% of a price target fund (an appropriate year) as a control on how I was doing.While probably not as capable as some on this site I suspect I am at least average. Some years I outperformed, other years I didn't My underperformance in recent years occurred for two major reasons. Too much in emerging markets in recent years and using more stable income than a bond fund. Both strategies were wrong in recent years/I think you have to be very capable to have a diversified portfolio that will outperform a decent target fund over a longish period of time."
  ---
  
  Jerry: I assume your reference is to T. Rowe Price. Yep - they do a great job overall. I like not only their retirement funds, consisting largely of holdings in other Price funds, but also most of their "fund-of-funds." During healthy markets it's difficult for an individual to outperform these. What you give up is the ability to overweight sectors (be it cash, currencies, gold or whatever) that you think are undervalued. I'm not sure that's a great idea anyway.
  
  Currently hold TRRIX and RPSIX. I read somewhere once that they give investors a slight break when they determine fees for these funds, figuring it's cheaper for them to administer a single fund for someone rather than having the person own, say, a half dozen different funds. I haven't been able to re-confirm that however. That would mean you can own several funds under the umbrella of one of these at a lower ER than if you owned each fund individually.
  
  The strong performance of their fund-of-funds, including the target date series, is likely related to three factors: (1) a strong underlying fund line-up, (2) attractive fees on these funds, (3) excellent calls when it comes to underweighting or overweighting specific areas inside their fund-of-funds. In addition, I think you'll also find Price generally takes a somewhat more aggressive position on the amount of equity exposure an individual should undertake at various stages of their life.
  
  My one concern about all target date funds is the glide path that moves to increasingly higher bond allocations over time. This near 0% interest rate environment is unprecedented as far as I know. And where I think JohnC and others have a valid point is that one can own the same types of investments these target date funds hold at a substantially lower cost. In theory, anyway, that should translate into better long-term performance.
  
  Regards