Target Date funds are retirement mutual funds that have exploded in recent years. Many of us have seen them – offerings from Fidelity, Vanguard, or a whole host of others. They’re easy to pick and easily marketed – Fidelity Freedom 2010, Fidelity Freedom 2015, etc. According to the Wall Street Journal, these funds had $7 billion in assets in 1999 and over $205 billion in the middle of 2008.
But not all funds with similar target dates have the same investment strategy. Additionally, a specific target date fund may not be right for you dependent upon your individual circumstances.
First, the varying returns of like-dated Target Date funds. We’ll take a look at the 2008 returns of Target Date 2010 funds, or those geared for individuals retiring in or around 2010. According to Morningstar, the best was -3.6% in 2008 while the worst was -41.8%. The difference between them lies in their asset allocation, or combination of stocks, bonds, and cash.
The best was DWS Target Date 2010 (1% cash, 85% bonds, 14% stocks), and though it declined performed 18.9% better than its average peers. Clearly the low allocation to stocks helped this fund. The worst was Oppenheimer Transition 2010 (4% cash, 31% bonds, 65% stocks) which underperformed its average peers by 19.4%. Clearly the high stock allocation hurt this fund.
While this is not an endorsement of DWS or a slam of Oppenheimer, it is a warning that you as an investor need to be aware of what you’re investing in for retirement regardless of what the fund title says. Do your homework. Read the prospectus. Search the Internet. Know what you’re investing in!
Second, remember that your own circumstances might dictate using a fund other than the stated target date fund. Do you have substantial assets available to you? What is your lifestyle like? What is your goal for the money? How comfortable are you with investing in the stock market? Those are all questions that need to be asked before selecting a fund. Certainly there are others and I welcome comments on those circumstances.
In short, make sure you know what you’re investing in regardless of the title. Make sure what you’re investing in is appropriate for your circumstances.