Target date funds, which are supposed to limit portfolio risk as their end date approaches, have...


Target date funds, which are supposed to limit portfolio risk as their end date approaches, have been singled out by the SEC's Mary Schapiro as not sufficiently warning investors about possible downside risks. In 2008, funds dated "2010" lost 24% on average, despite investor assumptions the funds would be heavily invested in bonds so close to their end date.

Comments (4)
  • Michael Hagan
    , contributor
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    Retired broker: Target Date Funds? . I've never liked these. Too many unanswered questions. There are too many variations associated with individual risk/asset/perspective profiles to plug in these cookie cutter solutions.
    19 Jul 2010, 01:17 PM Reply Like
  • Fr33f0rm
    , contributor
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    I think the more troubling part is that even if they describe their asset allocations in terms of fixed income assets and equities, it doesn't truly describe the risk of the fund. Every fund calculates a beta and, though it may not accurately predict return, it does represent the firm's best effort to identify risk. Allocation beta or a proxy (with a value of 1 to 10) would be a better way to communicate risk to the average investor.
    19 Jul 2010, 02:10 PM Reply Like
  • RM13
    , contributor
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    Looking at majority of target date mutual funds in 2008 just raised the hair on my back. It seemed that as stated, even those with close end dates suffered incredible losses. On top of it, they were not as quick to recover bounce back as the market in the ensuing run up - meaning there was limited rebalancing into undervalued assets. I don't like category - unless there is a target date with rebalancing option ETF.
    18 Sep 2012, 10:55 PM Reply Like
  • Fr33f0rm
    , contributor
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    I personally saw investment houses use leveraged bond funds as "safe alternatives" and the fact is that, if there are any failures in repaying bonds, leveraging the bonds can turn out just as catastrophically as levered stocks.

     

    I think this may account for some of the problems in the target-date funds.
    24 Sep 2012, 12:24 AM Reply Like
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