Family Finances: Pros And Cons Of Target Funds
- Alan Lavine and Gail Liberman
Think carefully about investing in the new style target investment type mutual funds.
You've probably heard the television commercials for these over and over lately. Make one investment, choose your retirement date and your investment company takes care of the rest. Your family's retirement investing goes on automatic pilot.
You needn't worry any more. You put money into a mutual fund that invests in the fund group's other stock and bond mutual funds. The investment company adjusts the percentages you have invested in stock and bonds, based on your retirement age or another objective.
Typically, they figure that younger investors, who have more time to make up potential losses, should put more in riskier stocks and less in bonds. As they get older, the fund generally puts more in bonds and less in stocks to reduce the risk of losing money as you near retirement.
Target funds are designed to make investing easy for the long haul. Nevertheless, they're not for everyone, says Greg Kasten, Ph.D., founder of Unified Trust, a Lexington Ky.-based money management firm.
The reasons, he says:
- Target funds merely are a collection of other mutual funds. The expense ratio is calculated as a weighted average of costs. But, many companies, such as Putnam and Fidelity, tack on an extra management fee of up to one percent, cashing in on millions of dollars in extra fees. Sound familiar?
- A target fund typically consists of only the issuing companies' mutual funds. Investors often are advised not to invest solely in one fund company. No mutual fund company has a monopoly on all the best funds and fund managers--regardless of what the broker might tell you.
- Not all target funds are created equal. Each varies in their investment mixes, with some more aggressive and others more conservative. One target date might not suit your risk tolerance or might sacrifice return in certain years.
"We tend to be more aggressive in the asset-allocation both before and after retirement, and we continue to manage the asset allocation throughout retirement," said T. Rowe Price spokesman Steve Norwitz. "Our funds enter retirement with 55 percent in stocks, which gradually goes down to 20 percent after 30 years. Competitive funds (Vanguard and Fidelity) start retirement with only 20 percent in stocks and stay there.
"We have a very good analysis showing that the more aggressive approach does better over most long-time periods."
Financial advisers complain that these target funds lack a track record and fail to take advantage of market conditions. For example, if interest rates rise, you may wish to have less money in bonds than a target fund allots.
Also: These funds are designed to hold all your investments so that you don't have to work. Yet, too many people are holding other stock investments--killing the whole purpose of these funds.
There are other alternatives to make investing easy. You can set up your own target type funds. As a rule of thumb you don't need more than six funds in your investment account. You can diversify among:
Want an even simpler solution? Invest in a balanced fund that owns 60 percent stocks and 40 percent bonds. Invest monthly in the fund for 10 to 25 years. You will do just fine. Historically, balanced funds have grown at around an 8 percent annual rate since 1926.
Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).
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