What target-date funds can’t do

Posted by on August 7, 2012 @ 10:56 am in Investing

Well, perusing recent press, it’s clear that target-date funds continue to be one of the financial media’s favorite targets for generalized scorn. Still, I suppose to some extent, you know you’ve arrived when even Jim Cramer is beating up on you.

But rather than continuing to try to “beat the press” on this issue—hey, if you can’t beat ‘em, join ‘em—I present, with tongue planted firmly in cheek:

The Top 10 Things Target-Date Funds Can’t Do

Drum roll, please.

Number 10: Mow your lawn.
Number 9: Pick winning lottery numbers.
Number 8: Ensure that your house only increases in value.
Number 7: Solve the European financial crisis.
Number 6: Prevent scandals in Washington, D.C.
Number 5: Save Social Security.
Number 4: Land a man or woman on Mars.
Number 3: Get you a raise.
Number 2: Cure the common cold.

And the number-one thing target-date funds can’t do:

Provide a risk-free, costless, painless, endless, blissful retirement.

(What’s a target-date fund? In a nutshell, it’s a mutual fund that invests in other funds, gradually shifting its emphasis from more aggressive investments to more conservative ones based on its target date—the approximate year when an investor in the fund would retire. If your planned retirement date is significantly earlier or later, you might want to consider a fund with a different target date—and a different asset mix. Investments in such funds aren’t guaranteed at any time, including on or after their target dates, and they’re subject to the risks of their underlying funds. Vanguard.com has an overview if you’re looking for more information.)

Anyway, in all seriousness, I guess we all have an insatiable appetite for “revealing” punditry that:

1. Starts with the premise that it’s reasonable to expect an investment to deliver any of the magical outcomes on my Top 10 list.

2. Moves on to publicly and repeatedly flog that investment for “failing to deliver on expectations.”

3. Finishes by arguing without evidence that other, alternative approaches would surely be better.

And maybe that hints at the real reason the financial press is so hyperbolic about target-date funds. The popularity of well-diversified, broad-based portfolios makes the shouting and wailing about the dramatic surges and flame-outs we have seen in narrow market segments or with individual firms far less relevant to most people—which is a financial pundit’s worst nightmare.

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