Wednesday, April 24, 2013

'Target' Funds Vulnerable to Rate Rise

Great article in the Wall Street Journal this morning on how target date fund investors could be at risk when/if interest rates increase.  Target date funds are supposed to get more conservative as you get older, the thinking being that the closer you get to needing your money the more conservative your investments should be.  This thinking has a number of major flaws:

1. What is conservative?  According to target date funds it is adding bonds because over the past 30 years bonds have gone up, and in years that stocks have done poorly bonds have done well.  So in the past bonds have been a risk reducer in portfolios, but if interest rates start to rise bonds will go down in value.  The true definition of conservative is whether or not you can lose money.

2. Your age and time horizon matter very little as to whether you should be conservative or not, what is going on in the market is much more important.  Nobody, regardless of age, should be trying to chase stock market gains during a market downturn like 2002 and 2008.  Just about everybody should be in stocks during a market upturn.  The key to safety is being in harmony with market trends, not pulling money out of stocks and shifting to bonds regardless of what happens in the market.

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