Alex Anderson at Forbes does a nice job highlighting what we see as the major drawbacks of target date mutual funds, the popular funds in which portfolio managers slowly move from more aggressive to less risky as the fund's target date (and presumably investors' retirement) approaches.
First, within the equity oriented target funds, the portfolio consists largely of mutual funds. Management fees piggyback on both the target-date fund and the underlying mutual funds. Unless the sponsoring fund company is committed to low fees (like Vanguard), the total fees associated with the newer version of target-date funds can be double those of other funds.
Second, many target-date fund sponsors upped their average equity exposures during the recent bull market--probably in an effort to juice up investment returns. This has been unfortunate of late, as the bear market has hurt the recent performance of those target-date funds with heavy stock allocations.
Finally, the newer target funds have a 'one size fits all' approach. There are many valid reasons why two investors with the exact same retirement date should have dramatically different asset allocations. Perhaps there are differences in health and life expectancy, in risk tolerances and in basic financial circumstances.
The major drawback of the bond-oriented target date funds is reinvestment risk. Should investors receive their lump sum payments at a time of inflated equity prices and/or low interest rates, they would have limited opportunity to reinvest the lump sum proceeds advantageously. A second drawback is the fact that the investment structure is completely bonds.
Historically, equities have provided higher returns than bonds over the long term, and some portfolios with a conservative mix of both bonds and equities can actually be less risky than those that are completely bonds."
While a quality target date fund is a good choice for smaller portfolios and set-it-and-forget it types, they just aren't a substitute for a low cost portfolio of funds specifically tailored to an investor's retirement goals.
Alex Anderson at Forbes does a nice job highlighting what we see as the major drawbacks of target date mutual funds, the popular funds in which portfolio managers slowly move from more aggressive to less risky as the fund's target date (and presumably investors' retirement) approaches.
First, within the equity oriented target funds, the portfolio consists largely of mutual funds. Management fees piggyback on both the target-date fund and the underlying mutual funds. Unless the sponsoring fund company is committed to low fees (like Vanguard), the total fees associated with the newer version of target-date funds can be double those of other funds.
Second, many target-date fund sponsors upped their average equity exposures during the recent bull market--probably in an effort to juice up investment returns. This has been unfortunate of late, as the bear market has hurt the recent performance of those target-date funds with heavy stock allocations.
Finally, the newer target funds have a 'one size fits all' approach. There are many valid reasons why two investors with the exact same retirement date should have dramatically different asset allocations. Perhaps there are differences in health and life expectancy, in risk tolerances and in basic financial circumstances.
The major drawback of the bond-oriented target date funds is reinvestment risk. Should investors receive their lump sum payments at a time of inflated equity prices and/or low interest rates, they would have limited opportunity to reinvest the lump sum proceeds advantageously. A second drawback is the fact that the investment structure is completely bonds.
Historically, equities have provided higher returns than bonds over the long term, and some portfolios with a conservative mix of both bonds and equities can actually be less risky than those that are completely bonds."
While a quality target date fund is a good choice for smaller portfolios and set-it-and-forget it types, they just aren't a substitute for a low cost portfolio of funds specifically tailored to an investor's retirement goals.
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