Always question assumptions - even from "experts."
This week’s Barron’s cover story glorifiesTarget-Date funds.
The idea behind the concept is that investors are simply too dumb to effectively manage their own retirement accounts. Buy a target-date fund, though, and one of the big investment managers like Fidelity, Vanguard or T. Rowe Price (TROW), will allocate your money between stocks, bonds and cash based on your projected retirement year.
The theory is that investors will be spared the pain of extreme bear markets via professional decision-making regarding the distribution of 401k or IRA assets on the way to your golden years.
Barron’s noted that about 20% of all retirement plan assets are now held in target-date funds. With around $1 trillion already in AUM, there is big money in their management fees, which run much higher than those of plain vanilla index funds.
The market for these funds soared after the Pension Protection Act of 2006 allowed companies to automatically enroll employees in 401(k) plans. Many firms encouraged the use of target-date funds as the ‘default’ option since it lowered employers’ legal liability.
Is limiting equity exposure a good idea for folks with many years left until retirement? History says “No.” Stocks are where the money has been made over the lifetimes of everyone working today.
Did target date 2030 funds protect their investors from the carnage of 2008? The answer is once again, “No.” The five target-date funds that Barron’s favored pretty much matched the market’s plunge that year.
Have target-date funds performed well for investors over time? Barron’s top 5 showed average one-year and five-year total returns of 19.44% and 14.84% (annualized) in the period ended June 30, 2014. Those raw numbers sound good until you compare them to the S&P 500’s results over the same time frames.
Skeptics will point out that the last five years were extraordinarily bullish ones for stocks. Fair enough. Check out the results from the most recent decade, which included 2008’s severe damage.
The only people who made out badly were short sellers, perma-bears and most market timers. Traditional buy-and-hold dinosaurs had the last laugh.
From 1994 through the present we’ve experienced 17 positive calendar years, including 2014 YTD, against just 4 negative years. Why fight an 80.9% chance of success? Why dilute your potential gains by holding cash or bonds, especially in today’s insane ZIRP (zero interest rate policy) world?
Even if you are close to retiring, there will likely be many more years before you’ll be cleaning out your retirement accounts. Men are expected to live to about 84 years old and women to 86.
Target-date funds are fee-generating, return-lowering devices you would be better off avoiding. Stick with stocks. When the time comes to draw down your life savings you will find that you can’t spend risk-adjusted returns.
Disclosure: Heavy in stocks. I own no CDs, bonds... or target-date funds.
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