FYI: The author generally doesn't like the target-date funds strategy, though, because it’s “one-size-fits-all.” Target-date funds don’t speak to individual risk tolerance. The very fact that they are mechanical means that more savvy investors may miss out on opportunities to re-allocate capital depending on certain market or sector conditions.
Regards,
Ted
http://investorplace.com/2015/04/target-date-mutual-funds/print
Comments
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.
If you are reading this board (and therefore Ted's link) .... you probably shouldn't buy these funds.
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.
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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