I am quoted in the Wall St Journal today, criticizing Target Date Funds as reckless.
The Wall St Journal has 2 articles on Target Date Funds in today’s paper. One is about how regulators are going to “crack down” on target date funds. To that I say well done. The horse has long since left the barn, but I’m sure your posturing will make investors feel better. The other is the article with link above.
Target Date Funds are mutual funds that are designed to act like a portfolio structured to meet the needs of an investor planning to retire in a given year (or tight range of years). They are a collection of mutual funds -all from the same mutual fund company- that then act as a portfolio in a single fund.
In theory the concept has merit because it lets the investor have a supposedly well structured portfolio without having to do any work / analysis. Turns out it’s a bad idea in practice, and I’ve not been a fan of them. Mutual fund companies like them because they allow fund companies to capture 100% of a client’s assets in their own funds.
Fidelity’s family of target date funds is the poster-child for why I don’t like lifecycle/target date funds. Fidelity Freedom 2010 is what you’d have been invested in if you were 60something and within 5 years (or so) of retirement in 2007. If you were, you lost 42% from peak to trough. No one (other than sociopaths) has the stomach for that. Many probably sold in March at the bottom – having watched their life savings annihilated. True: had you held on, you’d have 40% of your loss back by now. But you’re still devastated and are looking at 7-10 more years to get back to where you were. Except now you’re retired and drawing the balance down. You’re life has been monumentally impacted by a single fund and risky overly-simplified philosophy.