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Most people saving for retirement are not sophisticated enough to really pick their investments. And if they did, they would always be second guessing their decision and thinking of bailing out in bear markets.
SO... Wouldn't it be better for 99% of the people who are saving for retirement to just put all their 401k and IRA money in a target fund for their age/expected retirement date and just forget about it until they are ready to retire?
no . they are the worst invention in my opinion . no one should invest just by age and with no respect for what is happening in the world around them . or their own pucker factor . they were conceived to cover wall streets butt .
as i said in other posts , a balanced fund would work better if they lacked pucker factor for higher levels of equities .
target date funds load you up on investments based on time instead of what is happening around you and what part of the cycle an asset is in with no regard for your own risk tolerance.
not only do they not take risk tolerance in to the equation there is no standard format for what a fund should hold. it varies from fund family to fund family.
keep in mind there is noooooooooo standard as to how risky a target date should be even if you are at retirement .
as mentioned a few times ,the same 2010 target date fund from wells fargo in 2008-2009 lost 11.5% while the t.rowe price 2010 target fund lost 26.5%. that is a target fund that had 2 years to go before retirement. in fact the t.rowe target date fund didn't fall to below 45% equities until 5 years after the target date.
to make things worse after the downfall instead of buying more equities over the next 5 years as good investing tactics would dictate target funds actually shed their holdings further as they reduced down by design the equity side and sold while they really should be buying.
they are quite poor for dollar cost averaging in to . because markets are up 2/3's of the time and down only 1/3 you are buying fewer and fewer shares as time goes on coupled with them reducing equities as part of their plan. the end result is your own performance will lag the funds intention over time.
any method of investing that uses age or age to an event with disregard for the persons own pucker factor and what is happening in the world around them you can bet will not end well.
my vote is for retirement investing stay away from target funds , concentrate on a portfolio of funds where you have control over what to shed and what to keep as the big picture changes or get a balanced fund ..
Mathjak is a smart investor and knows his stuff. A target fund is not for him or other experts but I think it is good for most people who don't have any knowledge and will likely make even worse retirement savings errors.
Is a target fund perfect? Of course not, but better for most people than the terrible decisions most people would make on their own.
my vote is a good balanced fund if they are not sure . few are really going to understand the changing of allocations and the effect it can have on them in target funds . the glide paths may not be right nor the allocations .
like the example above , a conservative investor who wanted a fund for close to retirement would have been down 26% from one family and 11% from another ..that in itself is to much for the newbee to understand . they are both targeted for the same date .
at least a balanced fund is easy . they stay in a range . what you see is what you get .
I use Vanguard Life Strategy Funds as opposed to target date as I don't want my investments changing over time. I've picked individual stocks, I've made some big gains and taken some big losses. I think indexing or using target date funds is ideal for probably 90% plus of investors
SO... Wouldn't it be better for 99% of the people who are saving for retirement to just put all their 401k and IRA money in a target fund for their age/expected retirement date and just forget about it until they are ready to retire?
It would certainly be better IF they can sit on their hands and do NOTHING going forward (except increase their yearly amount invested every time Congress raises the limits on retirement funds). The problem is that target funds are very stock-heavy in their first 2-3 decades, and that's more volatility than many investors can stand. A less volatile mixed stock/bond fund that holds the same fixed stock/bond ratio over time (such as the venerable Wellington, which is about 60:40) may actually work better for the average investor.
can you imagine how retirees would freak when rates start to normalize on bonds and those bond heavy portfolio's in target funds sustain losses .
I've bolded the relevant word. if you think about it, it's not that big a deal if the portfolio sinks a bit in the bond-heavy phase IF it made enough growth during the stock-heavy phase. But most average people don't think like that. They freak when they see the numbers go down, period. So the young-uns bolt when their target-date 90% stock portfolio tanks during a bear market, and thus lock in losses, and the retirees freak when the bond-heavy portfolio drops and they move their money into something that may be too risky for them at that point in their life.
So we're left with the Big Question: how do we best keep Joe and Jane Average from freaking out and inadvertently shooting themselves in the financial foot when the market goes down? What portfolio works best at that? I'm not sure there's a good answer (other than Social Security or a pension - a retirement fund they have absolutely NO personal control over).
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you can't and should not be investing without some regard for the external world in my opinion
Unfortunately the average investor will never be able to do that. They just aren't that interested in following financial trends.
there are enough services or newsletters to do all the work for someone today who has no interest or knowledge .
taking large sums of money and blindly doing things is silly . they do all kinds of research on their car or refrigerator yet one of the biggest financial decisions of their life they have no interest in .
it makes no sense .
they should at least understand the basics enough to understand the risks .
i was on the 401k committee at work . no one ever really understood the words "may contain risk " until 2008 hit .
The glidepaths on most of them are pretty steep at the end. The one my company offers is about 50% bonds, 48% stocks, and 2% cash at the target date. At 10 years after it was 55% bonds, 40% stocks, 5% cash. My target date is/was 55. Which means I'd have about 25-30 more years to live on a mostly bond and cash portfolio. Makes sense if you are planning to retire at 67 or 70, not so much if you are aiming for your early or mid 50s.
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