Anatomy of a Risky Target-Date Fund
Ever since target-date funds took on sharp losses during the downturn, critics have been wondering aloud whether these products, which are marketed to hands-off investors, have taken on too much risk.
The appeal of target-date funds has been that they offer a "set it and forget it" promise to investors. In other words, investors just need to decide approximately when they'll retire and pick a fund associated with that date. A fund with 2020 in its name, for instance, is meant for investors who plan on retiring 10 years from now. After picking the fund, the investor can leave the often-stressful process of asset allocation up to the provider.
Investors who put their portfolios on autopilot, however, got a rude awakening during the downturn. In 2008, the average target-date 2010 fund, which in theory should have been quite conservative, lost 24 percent, according to the
So what exactly does a risky target-date fund look like? In a recent report, Standard and Poor's highlighted Oppenheimer's Transition 2020 Fund as an example of a product that's far more aggressive than its peers. As of earlier this year, the Oppenheimer fund had 87 percent of its portfolio in stocks, according to
"To us, more equity and less fixed income is an added element of risk. It can theoretically lead to rewards ... but right now it looks risky,"
While the Oppenheimer fund stands out now, by 2020 its portfolio will look a lot those of its peers. At that time, it will have 50 percent of its portfolio in stocks. By 2030, it will have just 20 percent in equities. The Oppenheimer fund's glide path demonstrates two important aspects of target-date funds. First, funds often won't reach their most conservative positions until years after their "target dates" have passed. And second, while all target-date funds will eventually look quite similar in terms of allocations, their paths toward their final mixes can differ radically.
With that in mind, the
Rosenbluth says that it's important that investors know the relative risks of their target-date funds. For some, aggressive portfolios may even be appealing. "We're not suggesting that people sell the [Oppenheimer] fund," he says. "We're more suggesting that they be conscious of the risk that is associated with the fund."
But without doing some side-by-side comparisons, it can be hard for investors to get a sense of what is normal.
"People on their own may not know what 87 percent means," he says, referring to the Oppenheimer fund's stock allocations. "Eighty-seven for us is high because we're comparing it to funds that have 61."
Available at Amazon.com:
- Is Your Portfolio Ready for A Double-Dip Recession?
- Anatomy of a Risky Target-Date Fund
- When is the Best Time to Buy An Immediate Annuity
- 5 Tips For the Average Investor
- Why Emerging Markets Belong in Your Portfolio
- What China's Currency Reform Means For Investors
- Financial Reform For the Retail Investor
- Target-Date Funds Are Not A 'Sure Bet'
- ETFs Can Be Volatile Too
- Chinese Growth Expected to Boost Asian Markets Long-Term
- 3 Mutual Funds to Steer Clear Of
- Mutual Fund Buzz: Alternatives On The Rise?
- Mutual Fund Buzz: The Tax Man Eyes The Fund Manager
- Mutual Fund Buzz: Bond Bubble?
- Ease Back Into Stocks With These Mutual Funds
- Value and Growth: Why Investors Need Both
- Investing Your Social Security Check? Consider These Factors
- New Efficiencies Should Help Alcoa as Recession Lifts
- Mutual Fund Fees: How Much is Too Much to Pay
- In Gold's Shadow: How Other Metals Fit Into Portfolios
- Should Investors Sit This One Out?
- There's No 'Perfect Time' to Dive Into Investing
- How to Keep Your Cool in a Turbulent Market
- How to Repair Your Damaged Portfolio
- Keep Bond Portfolio Broadly Diversified
- Why Not All Target-Date Funds Are Created Equal
- Five Tips to Avoid Confirmation Bias
- Financial Reform Legislation Gives Shareholders More Say
- Fiduciary Provision May Be Most Important Part of Financial Reform Bill
- What Gold Can and Cannot Do For You
- Why Your Portfolio Needs More Risk
- Read Mutual Fund Ads Critically
- Keep the Right Bonds in Your Portfolio
- European Debt Crisis Affects Investments
- 7 Valuable Lessons For Investors
- The Reality of Mutual Fund Returns
- Mutual Funds and a Changing Landscape
- Assembling a Sturdy Retirement Portfolio
- Funds for Recent College Grads
- Many 'Wide Moat' Companies Losing Competitive Advantage
- Who Got Hit Worst in the Market Crash
- Utility Stocks: Trade Flash for Dependable Payouts
- Formulate Strategy Before Diving Into Higher Risk Mutual Funds
- Contrarian Investors Target Promising Out-of-Favor Stocks
- Income Investors Face Challenges as Economy Shifts
- Can SEC Beat Goldman Sachs?
- Business Schools' Great Ethics Debate
- Investing for Retirement A Balancing Act
- Fees Can Take Big Bite Out of Retirement Fund Contributions
- Small-Cap Stocks Poised For Big Comeback
- John C. Bogle's Old-fashioned Investing Advice Still Applies
- 10 Great Mutual Funds You've Never Heard of
- Mutual Funds Fees & Expenses Only One Factor
- Why Investors Are Flocking to Index Funds
- Trend Setting Companies Target Hip Young Consumers
- Weakening European Stocks Offer Some Bargains for U.S. Investors
- Investing: What to Do About Inflation and What Not to Do
- Kick-Start a Portfolio With Just a Little Cash
- Exchange Traded Funds Offer Low-Cost Diversification
- Fresh Look at Socially Responsible Mutual Funds
- Technology Opens Doors for Investors
- Make the Most of Your Mutual Fund Money
- Fiduciary Standard for Giving Investment Advice
- 'Investment Rewards' Credit Cards Well Worth A Look
Investing - Anatomy of a Risky Target-Date Fund | Successful Investing
(c) 2010 U.S. News & World Report