One of the most popular types of mutual funds in the world today is also my least favorite.
These funds are taking over Wall Street. At the end of last year, individual investors had pumped more than $1.1 trillion into these funds.
That’s more than seven times the assets they had just nine years ago.
All this is happening even though other types of actively managed mutual funds are losing share to “passive” investment vehicles, like low-cost index funds and exchange-traded funds.
Just what kind of fund am I talking about? Target-date funds.
If you’re not familiar, a target-date fund is a mutual fund with a mix of assets – typically stocks and bonds – that is managed to become less risky as investors get closer to retirement age.
For example, a target-date fund structured for an investor retiring in 2050 will be more aggressive and generally have a higher allocation to equities than a fund with a 2025 target date.
On the surface, that sounds pretty good, right?
You don’t have to worry about asset allocation. The fund does the work for you. It’s an easy way to “set it and forget it” with respect to your investments.
So why do I hate target-date funds? The strategy is misleading. And for most folks, it’s simply the wrong investment vehicle.
Target-date funds go against what I believe should be the single-most important tenet for every investor…
This type of fund masquerades as a customized product, tailored for you as you get older. In reality, this idea is a generic, one-size-fits-all solution. Investors who put all their capital in these funds are giving away control of their own investment destiny.
You may wonder if this really matters. After all, if the goal is to accumulate as much money as possible by the time you’re ready to retire, how much nuance really matters?
Just consider what happened during the financial crisis…
According to research firm Target Date Analytics, the average 2010 target-date fund was more than 45% invested in stocks in 2008. Some, like AllianceBernstein’s (AB) 2010 portfolio (LTDAX), were more than 55% invested in stocks that year before the downturn.
Remember, back in 2008, that 2010 fund was intended for folks who were about to retire in just two years. Those investors must have assumed their nest eggs were safe and secure.
But when the market sold off, these funds got hammered nearly as badly as the stock markets… LTDAX lost 33% of its value in 2008, almost as bad as the S&P 500 Index’s 37% fall.
This one-size-fits-all solution takes away your control in other ways, too. Ask yourself one question:
Why should two individuals with different levels of risk tolerance, income, net worth, and living expenses be invested in identical strategies… simply because they’re the same age?
Of course they shouldn’t.
That’s my biggest concern. These products are easy to use… But the people who manage them know absolutely nothing about your investment goals. So why should you blindly put your money with them?
You should be in control of your investment destiny. Full stop, without equivocation.
It is, of course, OK to ask others for guidance. I encourage it.
Maybe you see a trusted financial planner (someone you’ve carefully researched). Or maybe you subscribe to one or more of our services. This type of investment research assistance is really what all the folks at Stansberry Research are here for.
But to use our team and research most effectively, you must first know your investment goals.
Are you looking to preserve your wealth and focus on low-risk investments with high margins of safety? Do you want to strive for higher long-term capital appreciation? Or perhaps you want to begin harvesting some of your assets, so you can use them to generate more current and future income.
The choice is yours. You control your investment destiny. Once you identify your goals, you’ll know the right questions to ask yourself and others… And you’ll be able to choose the investing approach that’s right for you.
Most important, you won’t be left less than two years from retirement with half your retirement savings unknowingly (and against your better judgment) invested in risky stocks.
Good investing,
Austin Root
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Source: Daily Wealth