Daily Archives: March 27, 2009
In theory I have always been excited about target date asset allocation funds because I have seen the bizarre and down right scary portfolios individual investors have constructed. I get asked by inexperienced investors how they should allocate their retirement accounts and usually start with telling them to take a look at target date funds.
However, I was wrong. This bear market has shown these funds to be disappointments. Target date funds providers are cheating! Shorter target date funds are much too heavily invested in stocks. For example, those retiring in 2010, which is about a 1 year time horizon have anywhere for 59% to 48% percent of their portfolio in stocks. Why would these fund families allocate so much to stocks? Mutual fund shops sell performance numbers and the marketers realize in bull markets you get better performance numbers by investing in stocks compared to boring old bonds. As a group, target date fund providers invest too much in stocks because they need competitive performance numbers. Without strong performance numbers what will those NFL halftime commercials of the guy rowing a boat, riding a bike or climbing a mountain have to tell you about how their funds?