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BY WARREN BOROSON
NEWJERSEYNEWSROOM.COM
BOROSON ON MONEY
Yes, target retirement funds have their drawbacks. They can be very different from one another. They can also be too aggressive. And some of them stink on hot ice. (AllianceBernstein target-retirement funds, for instance.)
Even so, they remain one of the best financial ideas ever to come down the pike. (See the comments from a Morningstar staffer at the bottom of this article.)
Their benefits:
They give you a well-diversified portfolio in just one mutual fund – because they contain a bunch of different mutual funds. A variety of stocks and bonds. I've examined scores of portfolios, and it seems to me that very few people, on their own, wind up putting together a nicely diversified portfolio.
Second, unlike the similar life-strategy funds, TR funds become more conservative as the investor grows older; their exposure to stocks declines. I've spoken to people who didn't get around to moving their kids' college-savings accounts from stocks to bonds when their kids approached 18 – and disaster ensued.
To cut to the chase: Morningstar recommends mostly Vanguard TR funds and T. Rowe Price TR funds. A wise selection. Vanguard's passive index funds along with T. Rowe Price's excellent active funds. Morningstar thinks Fidelity TR funds could be better. A few of its Freedom funds get four stars, for above average; a few get three stars; one gets two stars.Among the worst performers is AllianceBernstein. It has 12 TR funds, ten of which are old enough to be rated. One gets two stars, for below average; the other nine get one star, for lousy. Over three years, 2045 Retirement has lost 10.92 percent a year. (By the way, these funds have 4.25 percent sales charges.)
Not surprising. Garbage in, garbage out. Gold in, gold out.
Just look at M*'s ratings of AllianceBernstein's 16 major funds (skipping the TR funds): an average of 2.56, with 3 being average.
In short, when searching for a good TR fund, look for a fund family with a generally fine record. (Granted, the American funds' TR funds haven't covered themselves with glory, as admirable as that family is, despite its sales charge.)
My second piece of advice is: Consider being more conservative than the TR funds suggest. Have less exposure to the stock market than the TR funds recommend. The fact is that the stock market can go down and stay down for a long time - and people prefer to forget that. Investors who had money in the market in 1929 didn't get their money back for around 10 years – assuming that they had courageously held on.
An old rule was: Subtract your age from 100, and put the remainder in the stock market. So, if you're 50, have 50 percent in stocks. The new, more aggressive rule is: Subtract your age from 110. A 50-year-old would have 60 percent in stocks. My own rule is: Subtract your age from 90. (Unless you're so well to do that you're really investing for your kids and grandkids. But don't have less than 20 percent in stocks.)
Now, if you plan to retire in 2040, Vanguard 2040 would put you 89 percent in stocks; T. Rowe Price Retirement 2040, 88.6 percent. Not much difference.
But let's assume that you want a Vanguard TR fund.
To be very conservative, even if you plan to retire in 2040, you might choose Vanguard Retirement 2025 – it's only 74.9 percent in stocks. To be very, very conservative, there's the Vanguard 2015 fund, which is 60.1 percent in stocks. To be extremely conservative, there's the Vanguard 2005 fund (you've retired already), which is 36.9 percent in stocks. To be conservative as all get out, there's Vanguard Target Retirement Income, which is 29.8 percent in stocks.
As mentioned, TR funds can differ a lot among themselves. Some own emerging market stocks, high-yield bonds, and commodities; others don't. Some become more conservative relatively quickly, some relatively slowly.
Still, the most important decision is which fund family you sign up with.
Some further pieces of advice:
Don't limit your portfolio to one TR fund. Choose two of them – ideally, somewhat different ones. Vanguard 2040 gained 28.32 percent in 2009; T. Rowe Price 2040, 39.07 percent. But the T. Rowe Price fund lost more in 2008.
Don't limit your portfolio to TR funds. While TR funds might be the core of your portfolio, there are any number of splendid funds out there for you to consider as well.
Comment from Laura Pavlenko Lutton, editorial director of the Funds Research Group at Morningstar:
Target-date funds are a huge improvement over other traditional 401(k) default investment options, such as money-market or short-term bond funds. That said, not all target-date funds are best-of-breed, and a one-size-fits-all asset allocation may not be appropriate for every investor.
It takes some digging to understand what's inside a target-date fund and determine whether the investments and the asset allocation is appropriate given an investor's goals and appetite for risk. Morningstar's Target-Date Series Ratings and Research, which is a qualitative and quantitative assessment of entire line-ups of target-date funds, looks at factors most likely to impact the success of a target-date series over decades of investment. To determine the rating, Morningstar looks at the management behind the funds; the stewardship record of the parent; the quality of the underlying funds in the portfolios; the cost of the funds; and the performance of the series. (Here's more detail on that research) It's a complex evaluation because these are complex investments.
Some target-date funds may have warts, but generally speaking, investors are much better off letting the professionals manage their asset allocation and keep their portfolio diversified. If a target-date fund is too aggressive, you can always add a fixed-income fund to the mix or choose a fund aimed at older investors. Likewise, if the fund is too conservative, you could add more equity exposure – perhaps emerging markets, international, or smaller cap U.S. stocks, if the funds are short on those.
Readers are encouraged to send their financial questions to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
