Photo: Flickr / jwotis
If you want to get a room of personal finance experts riled up, just bring up this hotly debated investment vehicle: Target-date funds.TDFs are in the spotlight after funds saw losses up to 4 per cent last year in a year when the S&P 500 was flat, according to Morningstar. They performed even worse with double-digit losses in 2008.
But that hasn’t kept younger investors from hopping on board the TDF train in record numbers.
U.S. News & World Report’s Rachel Koning Beals points out that 7 in 10 401(k) plans included target-date funds at the end of 2010, and investors in their 20s held more than one-third of their investments in target-date funds–up 31 per cent from 2009.
“Across the board, we are finding that target-date allows investors to be more comfortable,” ING Investment Management’s Paul Zemsky told Beals. “Investors tend to stick with their plan. They don’t chase the top and sell at the bottom. They just generally behave like better investors.”
Libertas Wealth Management President Adam Koos cautions newbie investors against the commonly-held belief that whatever hits they take in the stock market while they’re young will bounce back by the time they’re ready to kick back and work on their golf swing.
“For me to say ‘Because we’re young, we should put our money into an aggressive Vanguard target-date fund,’ is a horrible idea,” Koos said.
One of his clients lost $10,000 in less than two weeks in a Vanguard fund. Maybe he’ll gain it back by retirement, maybe not. But 30 years from now that cash could have grown well past the $300,000 mark.
If not a target date fund, then what?
One alternative is working with your retirement plan provider to pick and choose your own investments–a tricky task for anyone who’s just starting out.
Another option is seeking advice from a professional. To save cash, ake Altfest’s advice and look for a fee-only financial advisor.
“There’s no conflict of interest there and you can go in for a few hours, discuss things and have them answer your questions,” he says.
The best part about fee-only advisors is that they won’t be worried about getting commission for selling you on certain funds and they’re more likely to take on clients who are just beginning to build their portfolios.
As a resource, search the National Association of Personal Financial Advisors for ones in your area.