Tag Archives: target date funds

On the Radio with Roger Wohlner

  By petillo | January 24, 2012 - 7:06 am | 401k, financial impact factor radio, financial planning, index funds, Mutual Fund Investing, Paul Petillo, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025, target date funds
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As Jeffrey Kluger writes: “We’re suckers for scale. Things that last for a long time impress us more than things that don’t, things that scare us by their sheer size strike us more than things we dwarf. We grow hushed,” he writes in his book Simplexity “at say, a star and we shrug at a guppy. And why not?” he asks. “A guppy is cheap, fungible, eminently disposable, a barely conscious clump of proteins that coalesce, swim about for a few months, and then expire entirely unremarked upon.” He then suggests that “a star roars and burns across the epochs, birthing planets, consuming moons, sending showers of energy to the limits of its galaxy.” Yet, he points out, “the guppy is where the magic lies.” A star is just a furnace whereas a guppy is a symphony of systems. So it is with the world of finance.

And joining us today on the Financial Impact Factor Radio we have Roger Wohlner, Certified Financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Roger also blogs at Chicago Financial Planner and columnist for USNews and World Report. He has been kind enough to join us today to help us sort through the complexity, the scale we are so impressed with.

That scale, that complex mechanism that Roger has agreed to speak about is the target date fund. If you use one, you should listen to this explanation. If you invest, you should tune in as well.

 

Listen to Financial Impact Factor Radio with your hosts:
Paul Petillo of Target2025.com/BlueCollarDollar.com and Dave Kittredge and Dave Ng of FinancialFootprint.com

The show is broadcast daily, online at 6amPST/9amEST.

Your 401(k): The Invention of Lying

  By petillo | June 4, 2011 - 5:29 am | 401k, bonds, financial impact factor radio, financial planning, index funds, Mutual Fund Investing, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025
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Who knew that the format of radio would deliver directly to me so many varied opinions about target date funds. In polite conversation, the kind you hopefully have face-to-face, most people will not tell what they really feel about how they are doing in their retirement journey, whether what they are using is working and/or whether they should take on more risk. While the 401(k) didn’t invent the lie, it has surely enabled our ability to tell tales of success.

With one exception: when everyone failed, as happened just three years ago, it is hard to hide from your mistakes or lie your way out of them. Those who have been around long enough know that if we wait ling enough, the story will begin again. And so it has with target date funds. The darlings of the Pension Protection Act of 2006, this investment came under heavy criticism in the months following the meltdown. In question: why did a fund designed to be suitable for those choosing a retirement date fo 2010 do so poorly?

The idea behind a target date fund is called glide path investing. As you age, the path becomes more conservatively invested until you close in on that target date, when the entire focus of the investment is on protecting your hard-earned money. For instance and this is based on glide path theory, in part because no two target date funds are created equal, the farther away your retirement, the greater your exposure to equities; the closer to retirement, the greater your fixed income exposure.

Fast forward three years and a rather impressive market recovery and we have those 2010 TDFs claiming, quite unabashedly that they too have recovered and are back to the levels before the meltdown. According to Fusion Asset Management, who run a blog suggestively pointing you a target date [retirement] but in the end, suggesting that target date funds do little in the way of capital preservation because they fail to move into cash.

So this group is skewed against target date funds because they feel that a more actively managed approach will provide a better level of protection than the buy-and-hold potential of a target date fund might. Keywords there are actively managed. Target date funds are up to a point a passive investment. The managers at least in theory are rebalancing the portfolio based on some timetable. Done infrequently, they mimic the buy-and-hold strategy except they don’t buy and hold forever. What they buy and hold is also worth scrutiny. Fusion believes that moving into cash when times appear to be bad would have made more sense had TDFs be able to or had done so. They didn’t and they lost.

Trouble with that thinking is they could never have hoped to make gains nor should they have, particularly with a close-to-the-date fund like a 2010. But Fusion is correct in pointing out the underlying problems with the claim of recovery. Once a loss is in place, it can be a pesky event to shake. Remember this: if your portfolio falls 50%, a recovery would need to be 100% to get to even. Even the broadest market index fund has yet to get to even. Close but not quite there.

The problem is two fold. One was the loss is booked. Once that’s done, you can’t calculate what you would have had anymore than you should be calculating what you think you should have at retirement. The variables are many and diverse. Yes, if you lost money as you closed in on retirement, that is not good. Those final years are not the time to tell you that you have assumed too much risk and the potential for a downturn, predicted in such low percentages that everyone was caught unaware, was possible. But those in bonds, not junk or REITs or emerging market securities, did comparatively well will only a fraction of the losses equities sustained.

Two, once the loss is booked, you need to mentally move on. Granted, many investors complained and rightly so to Congress, to the SEC, to FINRA, and not much happened. But doing cocktail napkin calculations about what you could’ve had had you not lost so much does know one any good. (Unless of course you have a new strategy, like Fusion offers and they make no claims of having clients who avoided any loss because of into of moving into cash.)

And yes, inflation takes another bite out of the ‘coulda, woulda, shoulda’ scenario we all should have known about. But few people did what they should have done: taken their medicine and waited. Here’s the the thinking. Once you begin to question your investments, you question your original motives. Was I a trader or an investor? Did I intend to hold for the short-term and get out before everyone else or did I decide to stay in it for the long-term with the understanding that markets fluctuate? Was I exposed to too much risk towards the end hoping for the last profitable portfolio pop or did I follow conventional wisdom and embrace the thinking that I made it, now I need to hold onto it?

So here we are, three years later and target date funds are suggesting that had you stayed, you would have been fine, The damage done is repaired and you are back on the road to retirement. Albeit somewhat poorer for those lost years. You will never get that time or money back. And deep down, you don’t really want to be reminded of the fact.

But you should always recall why: Risk is real and should never be used in the same sentence as reward. Doing so diminishes the true potential of a downside. Calculating a portfolio’s risk and reward should instead be phrased “risk, reward and punishment”.

Markets can be brutal and that brutality can last decades. Consider the Nasdaq. It still hasn’t returned to the glory days of 2000 and probably won’t for some time to come.

Once you reach 55, conventional wisdom is better than all other. These are supposed to be your high earning years. Contribute more and stay conservative. The growth years are behind you. At 55, it is time to accumulate.

Target date funds have not proven their ability to do any of those things. And all tough they didn’t invent lying, they became very good at it in a very short period of time.

 

Target Date Funds: Comfort in Deception?

  By petillo | May 31, 2011 - 5:49 am | 401k, financial planning, index funds, Mutual Fund Investing, personal finance, Profitable Investments, Repercussions: A Retirement Review, Retirement Planning Target 2025
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I have a box and it is blue. By description you can imagine exactly what you need to understand that what I have, although key details about size and shape are left blank and the shade of blue is not fully described. But you get the idea that there is a container and the color is one of the primary ones evoked by light having a spectrum dominated by energy with a wavelength of roughly 440–490 nm.

Suppose I have a target date fund and it suggests I will retire in 20-years. Much like the blue box, most of what you need to know about this mutual fund is essentially portrayed in the name. Unlike other mutual funds, whose name seeks to tell you how the fund manager(s) will invest your hard-earned cash in a confusing jumble of confusing terms, target date funds convey a simple message of here and then. Here is the fund you want to get you to a then you need.

Unlike the blue box, there is far more at stake and because of that, a simple title for the investment is easy to understand but at the same time, so deeply layered and nuanced, that it makes the real investors wary and new investors complacent. Recently, Scott Holsople, president and CEO of Smart 401(k) wished that something as simple as a name could do it all for everyone. he wrote: “At Smart401k, we spend much of our time thinking about how to explain things in a manner that’s relatable to the average participant (i.e., someone who doesn’t live and breathe investing and its terminology).”

Don’t be jealous Scott. I have yet to find a single redeeming quality in TDFs. Cobbled together and containing questionable funds, they are hoisted on the 401(k) public as the be-all-to-end-all investment, making not only the plan sponsor feel a fiduciarially warm and fuzzy but giving the plan participant the impression that they need do nothing more.

Three things wrong with target date funds that folks choose to ignore.
1. The target is often wrong. If you are young, just starting out and auto-enrolled (which is how these things became popular and abundant in the first place), the target date you choose has little to do with your actual retirement date. It still hinges on the seemingly outdated 65 years old-and-done thinking. Which leads me to…
2. Everybody’s target is different. If you are a blue-collar worker for example, the target might be accurate; but not so if you can work beyond. So the glide path, a nice word for “we don’t know what we are doing and it has never been done before so use this imagery to explain it how we’re going to get you from point A to point B”, doesn’t apply. Which leads me to…
3. What these fund managers do, none of whom will stay with the fund until it reaches retirement, none of whom invest in the fund and none of whom can explain exactly where the fund is relative to the benchmark (that doesn’t really exist) is charge more than a similar portfolio of index funds or even a balanced fund and do so without a track record. Give us your underinvested, your newbies and your (by-choice) dumb investors and we will give them the way and the light, they seem to suggest. Suppose twenty years done the road you find yourself with far less than you assume. What then?
Only a few people have the nerve to speak out against these investment because they seem okay on the surface, they do get folks involved and the risks seem low. But they are going to disappoint more people than they help and I’d be willing to wager that in the next 10-years, folks will sour on the notion and realize that investing in the markets needs to be as simple and as low cost as possible and while TDFs seem simple, they are really just dumbed down versions of what could be something far more engaging. TDFs are an excuse for not educating yourself about where your money is going. Which in and of itself is a bit of a shocker.