Monday, July 9, 2012

Target Date Funds---Hazardous to Your Wealth

Another article in the WSJ this morning on target date funds, here is the link if you are a subscriber:

Here are some of the key points:

Despite that uncertainty, money is flowing into target-date funds at a brisk pace. Their assets now total around $400 billion, more than five times the amount at the end of 2005, according to Morningstar.

 In 10 years, target-date funds could represent half of all the assets in U.S. 401(k) plans and other defined-contribution plans, says David Bauer, a partner at asset-management consultant Casey, Quirk & Associates, Darien, Conn.

The idea makes sense on the surface-----older investors who may be closer to needing to withdraw money can't afford to sustain large losses so target date funds naturally get more "conservative".  However, in practice this doesn't work for a number of reasons:

1. Life expectancy is too long-----If I retire at 65 and have all my money invested "conservatively" I could still live another 30-40+ years.  Add inflation into the mix and this is a recipe to run out of money.

2. What is conservative?  Is investing a bunch of money into bonds at these yields conservative?  I don't think so.  Long term interest rates can't go much lower but they can go a lot higher.

3. Nobody should subject their portfolio to large losses, at age 65 or 20, that is why for the average investor nothing significant ever happens with their money---they get good returns in the up years and then give it all back in then some in the down years.

4. The market doesn't care how old you are----moving money based on your age makes no sense, move it based on market dynamics.  During a period like 1995-1999 when making money in the market was easy a 65 year old has just as much a right to earn 30% a year as a 30 year old did.  During 2000-2002 and 2008  a 30 year old has just as much right to be protective as a 65 year old does.

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