The Target Date Fund

The Target Date Fund

Many 401(k) and 403(b) plans include Target Date Fund choices.  These generally list the fund company, a year (somehow related to your retirement year), and some kind of reference to Target Date or a brand name such as “Freedom Fund”, Fidelity’s target date funds.  There are some pros and cons to these funds, and some things you should know before you use them in your investment portfolio.  In this blog, I’ll describe some of the “pros” and “cons” of target date funds. Pros: 1.  They’re on “autopilot”.  You don’t have to worry about rebalancing or adjusting your allocation; that’s all done for you.  For younger participants, equity exposure can be 85% or even more of the total invested fund.  As the target date gets closer, the fund allocation automatically adjusts and may add more retirement-appropriate investments such as inflation-protected bonds, and may focus more on short-term bonds rather than longer-term bonds.  In general Target Date funds tend to get increasingly bond-allocated over time, presumably to provide more stability. The automatic nature of the Target Date fund is to me one of its most attractive features.  It can be particularly well suited to young, starting investors who are saving most of their money into a tax deferred option and simply want a strategy that’s appropriate to their time horizon. 2.  You may only need to pick one fund.  Target Date funds generally come in “five year increments”: for example, a Target Date fund from Fidelity will have the name “Fidelity Freedom 20XY Fund”, where XY is divisible by 5.  If you plan to retire in 2021, you would most likely pick the Fidelity Freedom 2020 fund, which Fidelity...
Actively managed vs. indexed mutual funds – Why I use a passive approach to investing

Actively managed vs. indexed mutual funds – Why I use a passive approach to investing

I’ve just finished listening to a webinar session led by Rick Ferri, who offers low cost passive investment management at his firm, Portfolio Solutions (www.PortfolioSolutions.com).  Rick has been at nearly every Garrett Planning Network retreat that I’ve attended, and I’m always impressed with his passion and knowledge about investments. This particular webinar is titled “The Death of ‘Buy & Hold’ Has Been Greatly Exaggerated”.  Rick summarized the findings in his most recent book, “The Power of Passive Investing”.  Rick talked about 2 types of active management – active management through using actively managed mutual funds, and active management through tactical allocation (a.k.a., market timing). Actively managed mutual funds vs. indexed funds Rather than the usual focus on fees, he shows that across most asset classes, two thirds of actively managed mutual funds underperform the index.   (Which means, most would underperform a low-cost index fund, just by a bit less.)  Similar findings are found in past studies, and can be seen to some extent in the S&P Indices Versus Active Funds Scorecard, available at the Standard and Poor’s website (http://www.standardandpoors.com/indices/spiva/en/us). Market timing Can you pick the best day to get into and out of the market, or a sector, or a geographic area?  Books on behavioral economics tell us that we want to believe that it’s possible to foresee changes in the market, and that we can be successful doing so.  However, evidence typically refutes our impressions, and Rick presents some interesting evidence about tactical allocation.  For example, he showed a “buy and hold” vs. tactical allocation strategy for the years 2000-2010.  The “buy and hold” – with no rebalancing,...