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Have you ever bought one of those flex fit hats before? Sometimes they fit great, but other times the first gust of wind blows the thing right off your head. We aren’t big advocates of this one size fits all approach. When it comes to hats we’d rather have something that’s our size precisely or is adjustable. Flex fit hats remind us of target date funds, which are the topic of this week’s Mullooly Asset Management podcast.
We’ll provide a brief summary of how target date funds work. These funds are offered as both ETFs and mutual funds. They take an asset allocation approach to investing and set a target date to attract investors. The target date is supposed to be close to or exactly when you plan to retire or otherwise use the money. Target dates that are far off in the future skew more towards long term growth investments. Target dates that are close skew more towards income investments.
The thing that worries us about these funds is that it’ll be 20 to 30 years before investors can tell us whether they were the right investment or not. It’s really tough to say that a fund created for the average person with a target retirement date of 2040 is going to be appropriate for everybody with that time horizon. Individuals have different needs, desires, and expectations.
It’s also interesting to note that we’ve seen a large number of target date ETFs being closed recently, due to lack of investor interest. You can read about iShares target date ETF closures here: http://www.etftrends.com/2014/08/ishares-will-close-18-etfs/
The vast majority of target date fund investors come from retirement plans though. These funds are offered within a lot of 401k plans. Without looking into what makes up these target date funds, some investors assume the allocation must be appropriate. Like we stated earlier, individuals have different needs, desires, and expectations when it comes to retirement investing. We think that individuals who assume a target date fund must be appropriate might be making a mistake. It’s important to get guidance from an investment advisor when making any decision to buy or sell a security.
Make sure to tune in and hear the entire discussion on this week’s Mullooly Asset Management podcast!