One of the big talking points of target date funds (or TDFs) by the companies who manage them is that they eliminate the “guesswork” of asset allocation for investors.
The only problem is that their guesswork too often leaves a lot to be desired.
It doesn’t make sense for most investors to manage their own retirement and investment portfolios. After all, most people don’t have the necessary affinity, aptitude, time or objectivity to do so. So, for many, hiring a financial advisor makes a lot of sense.
But what if you elect not to work with an advisor, and instead choose a TDF from a well-known fund manager like, say, Vanguard?
Well, you could still end up drawing the short end of the stick.
As an example, according to Morningstar, Vanguard’s 2025 target retirement fund – which in 2022 had a 55% allocation to stocks, with 45% allocated to fixed income time – lost 15.5% of its value that year.
How could this happen? Isn’t Vanguard one of the world’s leading professional money managers? Yes, they are. But at a time when interest rates were being raised quickly by central banks around the world in order to tamp down inflation, Vanguard apparently didn’t reduce the “duration” of their bond holdings. In layman’s terms, they didn’t move from intermediate term bonds to short term bonds at a time when interest rates were going up. And since bond prices and interest rates move inversely (that is prices fall when rates go up, and vice versa), this failure to switch to shorter term bonds meant that investors in Vanguard’s TDF saw big losses.
What, then, should one do?
We would argue that the average investor has two realistic options:
One, educate yourself on the science of investing, which includes concepts like asset allocation, diversification, correlation, and asset location. If you can get comfortable with the academic research that underpins successful long-term investing strategies, you can almost certainly manage your own portfolio.
Or, you can hire an independent, fee-only financial advisor who has the education and experience to take care of the portfolio management for you. Think of this as outsourcing the responsibility for the prudent and professional management of your financial resources. Yes, there will be a fee for this, as there is for any professional service you desire – accountant, physician, attorney, or plumber, to name a few. But you’ll have freed up your time for pursuits for which you have a greater aptitude or affinity.
In either case, you hopefully won’t get caught flat-footed when the markets change, as Vanguard apparently did a few years ago.
Contact us today with any questions about saving and investing for a secure and comfortable retirement.
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