Stay Away from Target Funds

07/01/2009 10:40 am EST

Focus: FUNDS

Neil George

Editor-in-Chief, Income Publication and Products, Agora Financial

Neil George, editor of By George, says target-date retirement funds haven’t delivered on their promises for people nearing retirement, and he recommends other alternatives.

The basic concept of taking risks when you're younger and easing up with safer investments when you're older has been a cornerstone with the brokerage and financial industries for generations.

For me, though, that's all pretty much bunk.

Investing should never be about how much risk to take—or accept. Building a portfolio should be about buying stocks, funds, and bonds that are backed by solid, stress-tested, cash generating assets.

The important thing is that your portfolio is growing—and doing it month after month and year after year. I insist that when I invest, the investment had better pay and pay really well and very regularly.

But few investment advisors seem to get this concept, let alone put it to work. Instead, they've developed a new marketing scheme to peddle.

Target-date mutual funds have been created and built by marketing departments of fund companies around the world. These funds, [which] number about 236 in the US alone, are supposed to lure in the investors that are beginning to lose their faith in “hold and hope.”

The idea is that you buy into—and pay the nice fees and commissions for—a fund that has the target date for your retirement. They'll supposedly grow their value in the early years by making prudent bets on stocks, and as they move along closer to their target-dated years, they'll ease up and begin to hold less volatile assets.

Sounds like a great deal, right?

Unfortunately, the performance hasn't lived up to the hype.

The real issue is that many of these funds—while losing less when the market goes south—still can cause a lot of havoc with retirement income and portfolios just when those investors need it most.

If you were to look at a host of these funds you'll find losses amounting to 20% to 30% over the last 12 months—and that's for the target-date funds with 2015 on the labels. And for many funds with target dates of next year, you'll see losses of 15% to 30% or more.

This is why the guys up on Capitol Hill are getting angry calls from constituents saying that there ought to have been some regulation of these funds and their marketing pitches. So, testimonies and depositions are getting scheduled with the fund managers and their executives jetting into Washington.

But the fact is that everybody has to take more responsibility for their investments. You can't just go along with the usual stuff of Wall Street.

Buy and hope in the general stock market—or even some massaged general market funds—won't cut it for your retirement. If you were to take a look at some of the longer-haul performances of some of these target dated investment funds, these funds still generate losses that are pretty much in line with the general stock market.

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