401 (k) Help!

[kv968]

I'm not proposing that target funds are right for everyone but I think they are far better than what most people actually do with their money.

I couldn't agree with you more Steve. I've helped some of my co-workers with their 401k allocation if they ask and to tell you the truth I usually end up suggesting that they put most, if not all, of their money in the target date funds that are offered (T Rowe Price).

I know it may sound odd to most on these boards, but some (dare I say MOST?) people don't understand investing nor do they care to learn. I try to explain the very basics to them and the response I get more often than I'd like is them throwing up their hands and just saying "do whatever you want". Not very encouraging to say the least. Mind you, this isn't me trying to explain to them what a Sharpe Ratio is or how beta will affect their portfolio. This is just me trying to explain to them what a mutual or bond fund is and how they work. I don't know, maybe I'm just terrible at explaining things

I don't expect everyone to have the interest that I do in investing and I have no problem whatsoever taking the time to explain it to them (heck, I enjoy it), but a lot of people can't get over the fact that the basics aren't very hard to understand but they just don't want to deal with it. Is that a good attitude to have? I don't think so, but I can't force them to learn so I do the best I can and figure a target date fund would be the best in a situation like that.

Also I know most of them are "set it and forget" people just by looking at the allocation they chose who knows how long ago. A portfolio that I see quite often looks something like...30% company stock, 30% growth fund, 10% int'l fund, and 40% MM fund regardless of the person's age. Granted those aren't exact numbers and not everyone has an allocation like that but its not far off for most.

After doing this quite a few times I've wondered how that allocation came to be in the first place and the usual responses are they wanted to be "safe" in the MM fund, company stock "because we're a good company and it'll go back to where it was" (50% drop in 12 years) and the other funds were typically the best performers the year before they set their allocation.

That being said, not everyone I've encountered is uninformed or not willing to learn but there is, at least to me, a scary amount of people who don't understand investing and don't want to learn even the basics. I think these people especially would be best suited with a target date fund because there's FAR worse they could do with their investments and I've seen some of that.

[kv968]

Aren't all funds tracked against some arbitrary index? Funds love to talk about their performance againt the S&P 500 whether it is a fair comparison or not.

There really can't be an "index" that target funds can be compared to because with making up such an index one would have to assume what the best allocation of funds would be.

For example, a target date "index" could say a 2050 target fund should hold 60% U.S. equity, 30% int'l and 10% bonds. First of all, who's to say that's the right allocation and secondly what if your target fund doesn't feel it should hold those percentages? In such a case your fund may have outperformed the proper individual indexes in domestic, int'l and bonds but because of its overall allocation didn't outperform the target fund "index".

I think the best way, if any, to evaluate a target fund is to deconstruct the components of the fund as Steve did with the Vanguard fund and compare them to the appropriate indexes. For example, say the fund holds 20% in int'l funds, 60% in large cap domestic, 10% in small-cap domestic and 10% in bonds. Take 20% of the return of the MSCI/EAFE index, 60% of the S&P 500, 10% of the Russell 2000 and 10% of the Barclays' Aggregate Bond Index, add them up and compare that to the returns of your fund. It won't be perfect but a good barometer I think. Another way would be to compare it to the same date target fund of another company and/or use Lipper ratings to see how some of their metrics stack up to other funds in the category. Granted, neither is perfect but that's about the best you can do and its much more accurate than just comparing it to the S&P or Russell 3000.

The main thing to keep in mind when choosing a target fund, and I think this is where people tend to get in trouble, is to not totally base your decision on which fund to invest in by the year you're supposed to retire. Look at the allocation different companies use for the same date (they differ quite a bit) and also look at different years to see if one that isn't your "retirement date" better fits your investing profile and risk tolerance.

Actually what I do is reverse it all and occasionlly use a target date fund as an "index" to MY investing. Since I use different funds and allocations for my investing, I find it more accurate to compare my returns to that of an appropriate target fund rather than say the S&P 500 since I don't invest exclusively in domestic equities. It's not a perfect fit but gives me a clearer picture of how I'm doing.

[jpg7n16]

Target-date retirement funds underperform in volatile markets


"in some cases, target-date funds weren't even able to outperform an all-stock, broad-market exchange-traded fund. "

"From July through September, the iShares Russell 3000 exchange-traded fund—which represents about 98 percent of all U.S. stocks—lost 15.1 percent. But during the same quarter, target-date funds held by investors with more than 25 years until retirement (for example, 2040, 2045, or 2050 funds) underperformed the ETF significantly. "

Using the same logic:

"In some cases, stock based funds weren't even able to outperform an all-cash, money market fund."

"From July through September, the iShares Russell 3000 exchange-traded fund—which represents about 98 percent of all U.S. stocks—lost 15.1 percent. But during the same quarter, money-market funds held by investors with more than 25 years until retirement (for example, 2040, 2045, or 2050) outperformed the ETF significantly."

The logic being: based on this hand-picked 3 month timeframe, we should avoid stocks entirely because cash was a better investment.

Are you convinced that we should completely avoid stocks now? Me neither. Nor am I convinced that based on those 3 months, that we should completely avoid target date funds.

"Despite an average stock exposure of only 78 percent, just half of the 14 funds dated 2035 were unable to hurdle the Russell ETF."

Really? "Despite being 50% in stocks, the portfolio was unable to earn more than 100% stock portfolios."

"target-date funds are often invested exclusively in their families' own funds, which can be expensive. Of the 26 fund families that have offered target-date funds for at least four years, more than half have funds with expense ratios exceeding 1 percent, on average."

This problem affects ALL mutual funds, not just target-date ones. But as DS pointed out above, there are always lower cost options.

From: Is Your Mutual Fund Ripping You Off? - CBS News

Average Expense Ratio
Large-cap funds 1.28%
Small- and Mid-cap funds 1.50%
Diversified international funds 1.49%
Corp. Bond funds 0.89%
Gov't Bond funds 0.91%
Money market funds 0.57%

[jpg7n16]

The main thing to keep in mind when choosing a target fund, and I think this is where people tend to get in trouble, is to not totally base your decision on which fund to invest in by the year you're supposed to retire. Look at the allocation different companies use for the same date (they differ quite a bit) and also look at different years to see if one that isn't your "retirement date" better fits your investing profile and risk tolerance.

Agreed. They're set up for a moderate investor. If you're conservative or aggressive, there may be better options, or ways to adjust your portfolio to fit your risk level.

I pretty much agree with the sentiment above that they're not right for everyone, but they seem to get a bad rap a lot of the time because people don't understand them.