Target Date Investment Models for Investors

All of the following text moved to be part of the Money eBook: Why We Feel You Should NOT Invest in Target Fund Strategies, and then Okay... if You Insist, We Offer a Superior Investment Strategy to Negate the Major Disadvantages While Keeping the Minor Advantages of Life Cycle Investing

To make a very long story very short - Our Target Date Portfolio Model calculator generates the most appropriate mix of 16 asset classes of any investment strategy in the business. So we feel they will provide vastly superior results, compared to everyone else's generic cookie-cutter approach that totally ignores you as a human being.

We looked at everyone else's target date strategy and found them all lacking. This is mostly because they only work with two (and sometimes only one) life factor. The one life factor is the target year of retirement. The second is investment risk tolerance (most life-cycle strategies don't even account for risk tolerance - which is way more important than the target year). Our target year investment models have six life factor inputs, as you can see on the Investment Models demo.

General Information About Retirement Target-Date Funds and Investment Strategies Comprised of them

A target-date fund is just a mutual fund that gradually reduces risk as time goes on. Target-date is just the most common name given for the basic concept and/or investment strategy. It's just the name of this product's wrapping. Underneath the wrapper, it's the same basic concept that's been going on for decades to describe becoming more conservative as time goes on and retirement nears.

Target date funds are also known as target-risk funds, life cycle, target year, life style funds, and the list of things marketers call them continues to grow. No matter what they're called, they're all the same thing and there are no new ideas going on here - so all of the naming variations designed to make this investing strategy look different is just a marketing trick.

Target date investing strategies are for investors investing for retirement. Our Dynamic Target Date Models are hard-wired into the Model Portfolios program (so the only way to get them is to buy the model allocation program).

They are "dynamic," because all you do is input the year you plan to retire, choose one of the five Investment Risk Tolerance Categories, other investor life-factors, and the asset allocation mix comprised of the current mutual fund picks change.

So if you're investing for retirement, then all you have to do is buy and hold the mutual funds in that investor model and you're done. Then you redo these the inputs annually and repeat (yes, rebalancing is still required).

This target date strategy has a much higher probability of helping you have a far lower-risk when you retire and want to start taking income to pay living expenses than any other investor strategy designed for money managers and do-it-yourself investor (actually, the best thing to do if you're a conservative investor, is to just use our No-load Conservative High-Income Model a few months before retiring). Ours' have all of the advantages of everyone else's strategy, and ours also negates most all of the disadvantages of other similar retirement strategies.

To make this very long story very short, target date models are just a mix of asset classes that hold more fixed income securities and less equity as time goes on. So at the beginning of every year, a tiny bit of equity (or "riskier" asset classes) is replaced by the same tiny amount of fixed income (or "safer" asset classes). The theory is that when the year of retirement happens, your allocation mix will be what you want it to be (less risky and has more income distributions) so you can just flip a switch and they'll start sending you a retirement paycheck from the portfolio (with minimal selling of equity shares, which minimizes capital gains taxes).

We simply use the normal model asset allocation process and make your investment portfolio become more conservative and provide more income as you approach retirement. Yes this is really all there is to this investment strategy, so it was easy to just get with the same program the marketers are using (too easy, sorry it took so long).

These retirement models are "dynamic," because all you do is input the year you plan to retire, choose one of the five Investment Risk Tolerance Categories, other life factors, and the asset allocation mix comprised of the current mutual fund picks change. It's dynamic because risk tolerance and other life factors can change more than annually. Most life cycle strategies are static because there is nothing generating the asset class mix but the target year - so they're static, meaning it's not going to change regardless of what changes in your life. This is never good, you need to roll with the punches in life or life will roll you.

For professional money managers, you can also choose which type of funding vehicle you want to use in each asset class. For example, if you're working on a fee-basis, then you can only use the mutual funds that are used in the Fee-Based Models. If you're working on a commission-basis, then you'd choose to use only the load funds. Do-it-yourself investors would choose no-loads, ETFS, and index funds. You can choose between Fee-Based, No-Load, All-Load, Index Fund, and ETF in each of the 15 asset classes in the models (yes you can mix them up all you want to).

It's critical to buy the annual subscription service so you can keep up with the actively-managed monthly mutual fund picks and changes in the models.

There's nothing to see regarding our life-cycle models in the demo, except the input sheet, because things are too easy for competitors to copy. There is also no investment return track record because there's hundreds of combinations between the inputs (which one do you pick and use? Whichever one is chosen, you'll be accused of "cherry-picking").

If you've noticed, there's not one large firm with a long-term track record for their target-date models. There may be soon, as this whole packaging wrapper has only been around since 2005 or so. So the only thing you can do is compare our long-term performance of the regular models to other firm's investment strategies. then you'll see the night and day differences (or we should say, the steak vs. dog food for dinner at retirement differences!)

Something else that's important to keep in mind. Now that you know what this is all about, the logical question is, whom do you trust to make these models? Every time you see a set of Retirement Target Date Models, the buck usually stops with one person. It's usually a bunch of marketing people sitting around a conference table tackling the target date project, but these folks don't know much about investment management. So they pass they buck off to someone that does (usually a junior analyst, as the senior ones are too busy managing money). Then they make the allocation and pass that off to the financial calculator making people to create the money tool for it (if you noticed, just about every mutual fund family has a free target year calculator). The point is if you add up all of the people-years of money management experience all of these folks have between them, Mike (the one that set these up here) more than likely has five to ten times more experience managing money for investors in the Real World than everyone else involved in the project combined. Every time Mike sits in these kinds of meetings, he has five to ten times more time in the biz than everyone at the table combined. So whom do you trust to set up your Retirement Target Date Models? A bunch of marketing people that don't know much about much and then pass the real work off to a junior analyst; or someone that's managed money for Real World clients for over 20 years, maintains investment models since '98, and has a long-term track record that's better than anyone we've seen? The bottom line is that only one to three people usually are responsible for setting up their life cycle models. Just because a huge firm like Vanguard has them doesn't mean a master money manager set them up. From what we've seen, the larger the firm, the more generic and cookie-cutter they are (and the more they are "dumbed-down for the masses"). So whom do you trust to do that? Mike or the Mike equivalent with much less experience that just got told what to do by the VP of Marketing? Anyway, we thought you should know that there's no super-genius with special magic powers setting up life cycle models at the biggest firms. Just the opposite. The bigger the firm, usually the hoakier their target year models seem to be. So it's the opposite of what one would expect (which is par for the course in this biz, eh?).

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