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These Life-Cycle Funds Are Off-Target

edited December 2011 in Fund Discussions
FYI: Never been a fan of life-cycle or target-date funds.


  • It's not surprising to me that a seasoned investor would not like Target Date funds. But for the 90% or so people out there with IRA's and 401K's that don't know how to, or don't have the inclination to create a diversified portfolio themselves - I don't think there is anything better then these funds. Some are better then others of course. The T. Rowe Price Target funds, I think, are pretty good.
  • edited December 2011
    hello mike
    we have tsp so barclays target date funds; these TDF [imho] could be the best vehicles out there for lazy investors like myself. Cheap management fees/ price and reasonable return are some of the best traits about these funds... In longer term, only 10-15% of funds can beat indexes..

    I do learn much from MFO/FA members that you may consider being reasonable passive until maybe the last part of your work life [i.e. 3-5 yrs before retirement] then modify your portfolio into 20s-30s% stocks and 60s-70s% bonds...TDFs are best vehicles to do these tasks without much effort nor work so I do enjoy using these vehicles.

    About ~ 15% of my TSP account is in 2040 fund
  • First, clarification - the article (another Chuck Jaffe entertainment piece) is a criticism of Alliance Bernstein target date funds (as being poor choices within the target date universe). It's not a criticism (or even a critique) of target date funds in general.

    As usual, he is selective in his quotes. Where it suits his purpose to quote M*, he does so. But when he wants to denigrate A-B for including more than stocks and bonds in their funds, he eschews M*. Because that would undercut his criticism:

    "'The mainstream approach is a little bit of TIPS, a little commodity exposure and some real estate,' [Morningstar senior mutual fund analyst] Charlson says."
    From: Anti-Inflation Tactics Vary in Target Funds by the Editors of Dow Jones Newswires.

    Next - as to target date funds in general. I agree with Mike that for most people these are good options. Though it may seem counterintuitive, a problem is that these funds are underutilized. The idea of these funds is that they allocate your portfolio for you. If they only represent a small portion of your portfolio, then they're just messing with the allocation that you're managing on your own, and making it harder for you to get the allocation you want.

    It's like saying: right now, I want a 60/40 mix, but I've got 25% of my portfolio in a target date fund that's 70/30. What do I need to do with the other 75% of my portfolio to get my target mix? Next year, I'll want to keep that 60/40, but the target fund will have slipped to 65/35. How do I need to rebalance my portfolio? And so on. What's the point? If you like the glide path of the target fund, use it; if not, then it's only getting in your way.

    As to the usefulness of these glide paths - here's an interesting study from the Journal of Financial Planning, Asset Allocation for Retirement: Simple Heuristics and Target-Date Funds. They studied different products and examined their theoretical performance over rolling 40 year periods. They found that (as John suggested) a 100% equity approach until about 10 years to retirement works best, but is not without risks. That the target date funds do a pretty good job as well, but are not that much better than the 120-age heuristic. That you need to keep people's behavior in mind (e.g. they cite a study showing that many people, faced with n funds to choose from in a plan, simply allocate 1/n to each of them, even if most of the funds are all, say, large cap domestic stock).

    I've skimmed it; haven't read it through carefully yet. Much more interesting grist than Jaffe (who nevertheless has his entertainment value).
  • Reply to @MikeM: I agree. Most people actually do worse than the target funds on their own. I think everyone should at least pick a target date fund suitable for themselves and at least benchmark themselves. If they are not doing better on their own, perhaps they should consider using one.
  • Reply to @johnN: Just curious, do Barclays tdfs have lower expense ratio than that of Vanguard tdf?

  • edited December 2011
    Reply to @Sven:
    Hi sven I don't really know but it's around <0.1 or 0.2% annually. I think all Gov workers [Feds, Treasury, Veteran Affairs, etc...] are all under TSP plans
  • Both Vanguard and TSP provide expense ratios using 2010 figures (so they're both out of date, but comparable). TSP's 2010 expenses were 0.025%. Regardless of portfolio. Vanguard's target date funds were 0.16% to 0.19%. While very low, Vanguard is still inflating the cost by using Investor class shares for the underlying funds, rather than Admiral or Institutional class shares. M* and others have criticized them for this.

    See Vanguard Target Retirment Funds", and click on the "years to retirement" band that you're interested in.
  • Reply to @msf: Thank you for the info. My 401(K) has access to Fidelity TDFs. We have not used it due to the reason you stated below for the difficulty of integrating into our asset allocation plan.
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