About Target Date Mutual Fund Strategy Investing
|Our Portfolio Models, Which has a Target-Date Strategy Calculator, are Here|
(is listed below. The financial planning software modules for sale are on the right-side column)
Confused? It Makes More Sense if You Start at the Home Page
Discounts for Financial Advisers
Questions about Personal Finance Software? Call (503) 309-1369 or Send E-mail to email@example.com
Free Downloads and Money Tools
We have Dynamic Target Date Investing Models Too
Target-date mutual funds were approved by the Department of Labor as a Qualified Default Investment Alternative (QDIA) for 401(k) investors in 2007.
First, 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 an appropriate mix of 17 asset classes, and is different from 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 severely 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 your retirement. The second is investment risk tolerance (most life-cycle strategies don't even account for risk tolerance - which is much more important than the target year).
The only way to properly evaluate a target fund or strategy is to use complex benchmarking techniques to dissect them. Once you can dissect them, the individual parts (the actual bond and stock holdings) can be evaluated.
Every time this was done, their performance was pathetic.
So we made something that would do a better job.
Our target year investment models have six life factor inputs, as you can see on the Investment Model's demo.
General 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 this 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 mutual 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 gimmick.
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 it).
So if you're investing for retirement, then all you'd have to do is buy and hold the mutual funds in that investor model and you're done. Then you'd redo these inputs annually and repeat (yes, quarterly rebalancing is still required).
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 the advantages of everyone else's strategy, and 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 equities as time goes on. So at the beginning of every year, a tiny bit of equity exposure (or "riskier" asset classes) is replaced by the same 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 with 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).
This rarely works out as planned.
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.
These retirement models are "dynamic," because all you’d 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 changes.
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 - until another year just goes by.
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, or 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).
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 are 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 2006 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.
The math in our Money eBook shows how getting just 2% less rate of return long-term results in having about half as much retirement income.
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 just one person. It's usually a bunch of marketing people sitting around a conference table tackling the target date project, but these folks usually don't know much about investment management.
So they pass the buck off to someone that does (usually a junior analyst, as the senior ones are usually too busy marketing or 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).
Why Target Funds and Models Should Be Avoided
What are the problems with this investing strategy? For target funds that are comprised of actual index funds, then there’s not much to complain about. All you’d be doing here is changing the mix held over time. But there’s little incentive in packaging them up logically like this, because what the product packagers and distributors want is to make easy money (that’s really all everyone wants in this industry).
There’s usually no compensation generated from just changing the mix of a few index funds annually, because index funds don’t pay high loads, management fees, 12b-1, or other fees (that can be shared with the product packagers).
So mutual funds that charge high fees, and can pay them out to “grease the skids,” are usually used. The combination of high fees, combined with the usual sub-par performance, are the problems.
First, as usual, performance is the biggest problem. There’s little to no way to get an idea how well a target fund has really performed, which is needed to gauge how it might perform in the future. Why:
• There are no benchmarks, or anything "proper" to compare to.
• Even if there were a valid benchmark, it would change annually as the mix changes.
• They're so new that most results would be inconclusive. Few investors with them have retired yet.
These are financial products that are, as usual, just the same old things wrapped up in a different packaging wrapper. Here they're usually just either a few mutual funds blended together, or just the same underlying basket of stocks and bonds that's in all other similar mutual funds at the time.
Most of the attention paid during the packaging process is on the blending of the equity and fixed income. So unless a target fund is just using other mutual funds for their core holdings, the actual job of stock picking and market timing of the underlying assets is usually a lower priority. So there's a tendency for nobody to be minding the store inside the funds when it comes to job of daily portfolio Management.
Then if you were to make an ad hoc benchmark to properly compare performance, you'd find that target funds rarely beat their benchmark. Again, if they used index funds, then they'd automatically just get benchmark returns by default, and there wouldn't be much to whine about. But they rarely do that.
So if you have a target fund that's currently 10% cash, 40% stock, and 50% bonds, then all you'd need to do is calculate what the returns were over a set time frame on a benchmark portfolio of 10% cash, 40% S&P 500, and 50% Barcap Aggregate Bond. Then the risk / return characteristics can be compared apples-to-apples.
The point is that every time we've done this, the target fund has underperformed by a very large margin. This just tells us that the underlying funds are being poorly managed en-mass.
Lastly, the problem of the packaging people not being investment management experts was touched upon earlier. This all comes down to usually one person setting the allocation mixes on the portfolios. This is an art form, so it can't really be criticized objectively.
It's just our opinion that these people usually do a very poor job at determining the mix of just a few asset classes relative to how much someone should own, given the year they want to retire. They're just not put together very well; big surprise. This is because there's not a lot of compensation involved.
So like most things in investing, there's not much good going on here. But the invention makes it so un-enlightened investors can do a better job at these things themselves than basically doing nothing. So "set it and forget it," sort of works better than what was going on before, just not very much better.
|Financial Planning Software Modules For Sale
(are listed below)
Financial Planning Software that's Fully-Integrated
Goals-Only "Financial Planning Software"
Retirement Planning Software Menu: Something for Everyone
Our Unique Financial Services
Mr. Market Timer's Unique Market-neutral Stock Market Timing Services
Miscellaneous Pages of Interest
© Copyright 1997 - 2017 Tools For Money, All Rights Reserved