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Wednesday, June 19, 2013

Target date funds or Retirefunds are gaining in popularity

Target date funds or Retirefunds, are gaining in popularity among young professionals who have a date already in mind for their retirement, or at least a "year" targeted for retiring.

Essentially, the fund manager(s) use the current age of the investor in relation to their expected retirement date to determine the type of investment(s) that should be in the portfolio from year to year. The younger the investor, the more risk can be assumed in accumulating retirefunds for the future. Of course, as the date approaches, those assets are rolled over into what should be more risk free assets. That is referred to as the "glide path" of these funds.

The idea is not new as it has been practiced in varying forms by retirement funds and managers over the years. What is different now is the actual date of your retirement (or the year at least) is required knowledge to assure you are placed in the right portfolio for your risk tolerance, which is pre-determined by the fund manager(s). Management fees are usually quite high and even though diversification is a hedge against risk, it is not a guarantee.

Unless you have many millions of dollars to invest, you won't have a particular fund managed to mirror your exact date, but you should chose a fund with the closest date to your actual retirement so as to gain maximum benefit.

Among many providers of Retirefunds, Manulife Financial uses this method for their target date funds. They also offer target date fund options managed by Franklin Templeton Investments, Fidelity Investments and BlackRock. These managers have all advanced their target date funds in recent years. In fact, target date funds now represent the second largest allocation of retirement dollars in the United States and Canada after large-cap funds, within individual 401k plans. (RRSPs in Canada) As with any investment plan, their are some risks. A growing risk for these and other retirement funds, is the current bond market.

One good sourceof information for these ETFs is at the ETF Data Base or etfdb.com where you will find a definitive list of funds and their costs. For instance you can buy the S & P 2030 target date ETF for a cost (ER) of only .38% ER Costs of these type of ETFs range from .29% to .65% with an average of .38%
Such a low ER is a large selling feature for these funds. Here is a list of such funds and their ERs. Target dated ETF "Index" funds, are popular for this type of investment as they combine the benefits of Indexing, dollar cost averaging and low cost of service.

As these Retirefunds get closer to the retirement date of the owner, it has been normal over the years to move that money from stocks into bonds as they have traditionally been considered "safe" investments. For the past 30 years bonds "have" been a safe investment! However, this may have lulled many investors into believing that will always be the case but alas, all good things must come to an end, and many economists now see dark clouds over the bond markets.

Interest rates have been near zero in the western world since the financial crisis of 2008 due to quantitative easing first initiated by the United States Federal Reserve Bank (FED) followed by other Western Central Banks in the European Union and Japan. The problem for average investors is that, as interest rates begin to rise again (as they inevitably do) bond rates will dive, driving bonds lower and lower. Some fund managers seem more aware of this creeping monster than others do. Some will stick with this seemingly tried and true method of "winding down" your risk. It may well be that bonds in the medium term may actually up your risk. Some managers are switching this part of the portfolio to large cap stocks that pay dividends, real estate trusts and gold and silver.

Investopedia describes target date funds in this way:
A mutual fund in the hybrid category that automatically resets the asset mix (stocks, bonds, cash equivalents) in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement.

Though many people believe a target date Retirefund is right for them, opposing views do exist such as in this recent article in Forbes.

When selecting Retirefunds for your portfolio, you should also be cognizant of the fact you are selecting the "management" of these funds. Fund allocations differ from manager to manager and you should do some homework in finding the right asset allocations for your comfort level. I like to be comfortable with the management teams approach and I am wary of an future calamity in the bond market.

Here are more sites where you can begin your research into Retirefunds.
T Rowe Price
The Fund Library
CNN Money
ETF Data Base

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