Nearly every mutual fund, index or exchange traded fund has lost significant value in 2008. However, one group, Target Date Funds, specifically the “2010” funds, have performed worse than nearly all others given their objective. These mutual funds, also known as lifecycle funds or age based funds are designed to provide a simple investment solution through a portfolio whose asset mix becomes more conservative as the target date (usually retirement) approaches.
Laura Bruce with Bankrate.com describes them as follows: “The formula seems simple. Determine the year in which you want to retire and put a bull's-eye on the calendar. Go to your employer-sponsored 401(k) or IRA, or to your individual brokerage account, and find the "target date" mutual fund that matches your retirement date. Start pouring your retirement dollars into that one fund. As the years go by, your fund is routinely rebalanced and becomes incrementally more conservative. The theory is that as your retirement date arrives, the changing asset mix will provide the proper recipe for stability and growth.”
In addition, a February 2008 article of Kiplinger Magazine touted this simple approach to investing. “Target-date funds simplify long-term investing. Choose the year you wish to retire, then pick the fund with the date closest to your target.” Simple as that! The article goes on to recommend their favorites, T. Rowe Price, Fidelity and Vanguard, coincidently the same companies that advertise in Kiplinger’s Magazine.
Investors have pumped nearly $26 billion into Target Date funds. Most of these investors are the leading edge of the baby boomers born in the mid-1940s and are now nearing retirement. So how has this “simple” new investment performed in the current environment?
Target Date 2010 funds, those with the earliest retirement target and presumably the most conservative, were pounded in 2008. Here is a sample as to how these funds performed so far this year:
Laura Bruce with Bankrate.com describes them as follows: “The formula seems simple. Determine the year in which you want to retire and put a bull's-eye on the calendar. Go to your employer-sponsored 401(k) or IRA, or to your individual brokerage account, and find the "target date" mutual fund that matches your retirement date. Start pouring your retirement dollars into that one fund. As the years go by, your fund is routinely rebalanced and becomes incrementally more conservative. The theory is that as your retirement date arrives, the changing asset mix will provide the proper recipe for stability and growth.”
In addition, a February 2008 article of Kiplinger Magazine touted this simple approach to investing. “Target-date funds simplify long-term investing. Choose the year you wish to retire, then pick the fund with the date closest to your target.” Simple as that! The article goes on to recommend their favorites, T. Rowe Price, Fidelity and Vanguard, coincidently the same companies that advertise in Kiplinger’s Magazine.
Investors have pumped nearly $26 billion into Target Date funds. Most of these investors are the leading edge of the baby boomers born in the mid-1940s and are now nearing retirement. So how has this “simple” new investment performed in the current environment?
Target Date 2010 funds, those with the earliest retirement target and presumably the most conservative, were pounded in 2008. Here is a sample as to how these funds performed so far this year:
How did this happen? According to Craig L. Israelsen, Ph.D., an associate professor at Brigham Young University, the Target 2010 Index had an equity allocation of about 8%. However, the four largest Target 2010 funds had equity allocations in excess of 50%. In order to compete for more assets, fund managers went for higher returns in an attempt to beat the index. They failed.
There are a number of lessons to be learned from this. First, investing is never “simple” or “easy”. If it were, we would have a lot more wealthy people on this planet. Second, Kiplinger and Money Magazine are in the business of making money, not investing your money. Following their advice generally ends you up at the bottom of the heap. Third, never put all of your eggs in one basket. There is simply too much risk in investing in one fund.
There are a number of lessons to be learned from this. First, investing is never “simple” or “easy”. If it were, we would have a lot more wealthy people on this planet. Second, Kiplinger and Money Magazine are in the business of making money, not investing your money. Following their advice generally ends you up at the bottom of the heap. Third, never put all of your eggs in one basket. There is simply too much risk in investing in one fund.
