What the alternative is to ill-conceived Target Date Funds

target date funds “may” not find a place to hide during the next downturn is your reason for not using them? Is a participant suppose to be able to actively adjust their asset allocation based on prevailing market conditions themselves? Everyone should use target date funds. Risk-based funds/allocation funds are fine, but very few participants will change to a more conservative allocation fund when the time comes and will be taking on too much market risk. Targets are the way to go..and there are some decent options out there if out in some time to find them.

Seriously? Do you sell Target Date Funds? I only ask that because your innate ability to ignore mathematics is confusing. By design, one would assume, you have a more than passing understanding of the mathematics of modern portfolio theory and portfolio construction, hence your admonition to use target date funds. That being said, it’s surprising as previously noted that you’d understand the math and so stridently make the comment. Perhaps what you meant to say is “targets are the way to go…..broke!” and you left off the last word.

Sans the fact that most of the academic research in the modern era seems to have missed your laptop, desktop, .pdf, clay tablet or other reading platform and since the conceptual framework of target date funds as to be either [a] investors needs/ risk tolerance or [b] ease of implementation or© strategy, let’s consider each briefly.

1. Needs: So if I’m 70 and your 70 and have a $4,000 a month pension and you don’t we should have the same investment portfolio? Seriously?
2. Risk tolerance: See returns for the 2007-2008. Seriously?
3. Ease of implementation: Got me there, those things that don’t require any work are infinitely easier than those that do. If you believe that this represents a global metric for all individuals I’d suggest you quit your job tomorrow and see how long you can live on your target date fund, afterall since easy is always best, I think we can agree it’d be easier to not work than work, not try than try and for you, not do any research into an answer before posting it
4. Strategy: Seriously? So no matter what the economic environment is, it’s ALWAYS going to be better to have more of your retirement/education funding/goal based funds less aggressive investments as you near your goal? Seriously? Wow, that’s the first ALWAYS I think that the world of investing and personal finance has seen. I think even Markowitz and Sharpe allowed a crack under the door that their theories (notable for their awards as they may have been) could be open to interpretation and tweaking, but nope, not yours!! Given that, here’s a strategy too, put all your money in cash because that NEVER will be worth less than a dollar (yeah I know unless we factor in purchasing power risk but you didn’t do that so why should I0 and it will ALWAYS be just an ATM away. Seems to me like ALWAYS and NEVER should trump just a plain old ALWAYS.

As for a place to hide during retirement downturns, good news is you don’t need one, you’ve already got yours it’s called the fantasy world of your investment theory.

Check out a DALBAR study that shows what kind of returns the average particant earns when they try to play asset allocator. As for your assumption that all target date funds become more conservative (i.e., less equity exposure) as the target date nears, is exactly that an assumption. There are many providers that can operate in a wide range. I know of some target date funds that had less exposure to equities in 2000 then 2009, which is in contrast to the assumption. Everyone is over confident, ask 100 people if they are in the top 30% of drivers and 90 of this will say yes. Most should not try to manage their portfolio themselves, thats the bottom line. Multiple asset class funds are not perfect, but its the best option for most participants.