Are You Playing Roulette With Your Retirement?

Would you hire a money manager that manages your wealth on false assumptions?  

It seems like a bad idea, but many people unknowingly opt for such a management style in their retirement plans.

Target Maturity Funds are one of the fastest-growing mutual fund sectors of the last decade. These passive strategies are most popular in 401k and other retirement plans with limited options and long investment time horizons.

Wall Street nicknames them “set ‘em and forget ‘em” funds because their strategy purportedly adjusts risk lower as you age. At first blush, such a strategy makes sense as risk tolerance is often a function of age. However, the purveyors of these funds fail to disclose that measuring risk is a function of the prices and valuations of assets.

Changing asset allocations based solely on the calendar is playing roulette with your financial well-being.

What Are Target Funds

Target Funds are passive mutual funds run by basic algorithms. The funds slowly allocate away from stocks and toward bonds based on a target future date. For example, a fund with a 2050 target date will initially invest heavily in stocks, with the remainder in fixed income assets. As the fund ages, it reduces equity exposure leaning more toward fixed income.

The table below shows how the Vanguard family of Target funds transition from 90/10 allocation of stocks to fixed income to 50/50 as they reach the target date.  

Retirement, Are You Playing Roulette With Your Retirement?


Unreliable Assumptions

Target date funds are based on one simple thesis- as we age, we should reduce financial risks.

There is sound logic to lessening financial risk as you age. First, there are fewer years of future income and investment gains to make up for potential investment losses with each passing day. Second, for those entering or already in retirement, the stability of wealth to cover current and future living expense is critical. 

Target funds fail in their complete lack of consideration for measuring risk. Equities, for example, are inherently riskier when fundamental valuations are above average and recent performance has been strong. Conversely, they are less risky at low valuations with beaten-down share prices.

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