23 March 2006

Carefully research Target Date Funds

Earlier this week, I mentioned target retirement date mutual funds in a post about money managers. I mentioned that the funds are often too conservative, but I didn't go into great detail.

Luckily, the Washington Post saved me a long post by explaning this exact phenonoma in a recent article. The Vanguard funds are far too conservative. A portfolio aimed at a 45 year old, still 20 or more years from retirement, has only 57% of its assets in equities. A 45 year old should have more than 80% of their assets in stocks because they are far enough from retirement to ride out any short term ups and downs. During retirement, the Vanguard fund will drop to 30% stocks. Again, this is far too low to benefit from the long term trend of higher returns on stocks.

People will be using their retirement funds for 15 years on average and they may run out of money using such a conservative allocation. Fidelity does a little better job with 73% and 45% for their version of the same funds. T. Rowe Price does the best to take advantage of stock returns with 82% and 55% in their funds at the same timeframe.

T. Rowe Price has the highest cost, however, at 0.82% which still lower than most actively managed funds. And all of the funds are simply a "fund of funds" apporach that invests in other funds managed by the three companies, so you still need to look at the underlying funds to make sure that it fits in with your overall portfolio.

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