Investing: Did target-date funds miss the target?

Target-date funds have come under fire in recent months, and for good reason, said Andrea Coombes in Marketwatch.com. These “so-called set-it-and-forget-it” retirement vehicles promise to automatically shift to more conservative securities as investors near retirement. But last year some of them “lost investors as much as 40 percent of their savings,” and the five largest 2010-dated funds fell an average of 29 percent between the market’s October 2007 peak and its March 2009 low. Fund managers argue that “focusing on a short-term event” doesn’t do justice to target-date funds, many of which have years to get back on schedule. “But that’s little solace for people planning to retire in 2010, many of whom may be forced to delay their plans.”

To be fair, target-date investors were “hit with a long-odds event” last year, said John Waggoner in USA Today. “A highly improbable financial meltdown” wreaked havoc on investments across the board.” It’s exceedingly rare for all types of investments to sink at once; indeed, most diversification strategies are based on the fact that stocks and bonds normally don’t move in tandem. So the lesson of the meltdown isn’t to “ban” target-date funds from your portfolio based on recent results alone. Rather, it’s to be wary of hitching your retirement to any single fund. Finally, as you near retirement, “build up a cash buffer.” That way if lightning does strike twice, it won’t zap your retirement strategy.

The “tricky part” will be finding any target-date fund that truly suits your particular strategy, said Tara Siegel Bernard in The New York Times. “Before committing to any fund, comb through its particulars and make sure the combination of investments matches your needs and appetite for risk.” Different funds pegged to the exact same retirement target date often have huge variations in their asset allocations. Among funds pegged for 2010, for instance, the percentage of the portfolio in stocks ranges from 9 percent to 65 percent, according to Morningstar. Also make sure the company has expertise managing both stocks and bonds, and look closely at fees, which vary greatly and can eat into your return.

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