Is your Retire Fund in jeopardy of a Stock Market reversal?

You have recently retired, or will retire in the next few years, but you are still heavily invested in the stock markets because that is where the growth has come from for the past 10 or so years.

Maybe you took a beating in 2008, or maybe you didn't start saving/investing until late in your career, and you feel you need a bit more!

 Maybe it's time you considered "solidifying" the investments you still have.

Paper profits are great, until a sudden reversal in stock prices occurs.  If that happens this year,(and this writer believes it will), then you may be left trying to decide to "stay in" to try and recoup your losses, or cash out with 20-50% less profit. If such an event occurs, it maybe a decade before you recoup those losses.

To this date the Nasdaq has returned, year to date, over 19%  "THAT" my friends is a great return on investment! The SP500 has returned almost as much YTD!  I sincerely do not believe that retirees or those nearing retirement, "will ever see" returns like this again!!!

If you are over 50 or need the money in your portfolio for retirement, if you cannot afford a downturn in stock prices (or bond prices for that matter see: Bonds) then maybe you should consider the wise advice of the foremost investor in modern history, Mr. Warren Buffett, who famously said:

Remember, "Cash" is also a Position and, at this juncture, it may be the best position!

The Death of Long Term Thinking

A "Tongue in Cheek" article by Motley Fool Analyst and contributor, Morgan Housel

 Long-Term Thinking: 1800-2013
By Morgan Housel

Long-Term Thinking died last year. His last true friend, Vanguard founder Jack Bogle, was at his side. He was 213 years old.

Long-Term Thinking lived an illustrious life that began at the start of the Industrial Revolution, when for the first time, people could think about more than their next meal. But poor incentives and the rise of 24/7 media chipped away at his health. The final blow came when a trader on CNBC warned that a 10% market pullback -- which has occurred on average every 11 months over the last century -- could be "devastating" for investors. "That's it," Long-Term Thinking whispered from his hospital bed. "There's no more room for me here." He died shortly thereafter as Bloomberg published its daily tally of how much the net worth of the world's billionaires had changed in the previous 24 hours.

Long-Term Thinking endured the Great Depression, world wars, and spiking interest rates in the 1980s. But the last five years proved too much, as he fought for relevance with cable news, Twitter, and derivatives. He was hospitalized in May 2010 after pundits lost their collective minds over a "flash crash" that made a few stock prices freeze up for 17 minutes. "Computers froze for 17 minutes and they literally think American industry vanished," Long-Term Thinking told his psychiatrist. "These people are insane."

Fifty years ago, the average stock was held for more than eight years, according to LPL Financial. By 2010, the average stock was owned for five days. Fifteen years ago, S&P 500 companies spent more than 40% of available cash flow on capital investments. That fell to just over 25% by 2007, with the difference going mostly to share buybacks, likely to boost option-based compensation. "Our culture has an endemic problem of short-term thinking," Long-Term said in his final speech in November. "Years have become months, months have become days, days have become milliseconds, and milliseconds have become careers. However much you think you're winning in the short run, you're losing in the long run."

Long-Term frequently blamed media. Louis Rukeyser's Wall Street Week went off the air the same year Mad Money, Jim Cramer's daily investment show, debuted. The number of important financial events hasn't changed since Rukeyser could cover a whole week's news in an hour -- just the amount of drivel, gossip, nonsense, and hyperbole. It was too much for Long-Term Thinking to handle. Once the bastion of rational thought, he became the laughingstock of the financial world, repeatedly teased for his indifference to candlestick charts and the 50-day moving average.

Some mourned his passing. Peter Burton, a hedge fund manager from Greenwich, Conn., said, "It's sad to see him go. Everyone in my field knows he was right. With our own money, we think years out in the future. But with clients' money, I have three months to be correct, or I'm out of a job." Shaking his head, he continued: "The dirtiest secret in finance is that few of us are incentivized to do what's right. Your pension fund, your 401(k), and your kids' college funds probably have a time horizon measured in decades. But you pay me based on how I perform against my peers every 90 days. It's such a joke."

In lieu of flowers, his family asks that you turn off CNBC and stop checking your brokerage account.

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.
Vanguard
T Rowe Price
The Fund Library
CNN Money
Morningstar
ETF Data Base
BlackRock
CNBC