I was reading my local paper today and it reminded me of the shenanigans that continues to ensue with respect to “Target Date Funds”. Many investment plans and almost all major mutual fund companies now offer these target date funds that claim to provide the right mix of stocks and bonds (basically, to optimize returns vs. volatility) for investors based on their age. Aside from the fact that everyone’s risk tolerance and actual investment objectives are different, the funds themselves have wildly divergent returns for the same target year. For instance, take a look at this snapshot of various 2040 funds. How can one have a 1Q2013 return of 9.0% while another has a return of 2.9%? That’s insane. I’d be annoyed if I were a 20-something or 30-something that thought I was getting a relatively high performing mix of primarily stocks and yet the fund only returned 2.9%, especially when paying a higher fee (see how bad the fees are on target date funds). Here’s the snapshot:
An additional consideration is that it’s a bit of a misnomer to classify any of the funds as “best” and “worst” as the article portrays. All these returns really indicate is that one fund had a higher mix of stocks than the other. So, in a downturn, that “best” fund would vastly underperform and lose more money as well and end up in the “worst” category instantly.
How to shield yourself from all this nonsense and actually achieve better returns? Buy the lowest cost index funds you can get your hands on instead and balance yourself as you age. These target date funds tend to have much higher expense ratios and don’t accomplish anything you can’t do yourself. Over a decades-long period of time, enjoying lower annual expenses will boost your retirement fund returns much more than trying to pick the right actively manager and target date funds. These are the facts.
Do You Use Target Date Funds?