Target Date Funds As Aid In Portfolio Design

Investors in or near retirement should be aware of portfolio design leading fund sponsors suggest as appropriate

Leading target date funds appear to generally have less severe worst drawdowns that a US 60/40 balanced fund

The funds have slightly higher yields than a US 60/40 balanced fund

Target date funds have underperformed a US 60/40 balanced fund in part due to a cash reserve component and non-US stocks

Non-US stocks drag on historical performance could become future boost to performance.

INTENDED AUDIENCE

This article is suitable for investors who are in retirement or nearly so, and who are or will rely heavily on their portfolio to support lifestyle.

It is not suitable for those with many years to retirement, or those with a lot more money in their portfolio than they will need to support their lifestyle.

SHORT-TERM and LONG-TERM

We have been writing about the short-term recently (here and here and here), because we are in a Correction, that may become a severe Correction, and possibly a Bear.

For our clients who fit the profile of being in or near retirement and heavily dependent of their portfolio to support lifestyle in retirement, we have tactically increased cash in the build-up to and within this Correction, as breadth and other technical have deteriorated.

However, we don’t want to lose sight of long-term strategic investment. This article is about asset allocation for investors that fit that retirement, pre-retirement, portfolio dependence profile.

WHERE TO BEGIN ALLOCATION THINKING

We think it is a good idea to begin thinking about allocation by:

reviewing the history of simple risk levels (see our homepage) from very conservative to very aggressive to get a sense of where you would have been comfortable

reviewing what respected teams of professionals at leading fund families believe is appropriate based on years to retirement (they assume generic investor without differentiated circumstances).

This article is about the second of those two important review — basically looking at what are called “target date” funds.

Generally, portfolios should have a long-term strategic core, and may have an additional tactical component. We think some combination of risk level portfolio selection and/or target date portfolio selection can make a suitable portfolio for many investors.

You may or may not want to follow target date allocations, but you would be well advised to be aware of the portfolio models as you develop your own.

In effect, we would suggest using risk level models and target date models as a starting point from which you may decide to build and deviate according to your needs and preferences, but with the assumption that the target date models are based on informed attempts at long-term balance of return and risk appropriate for each stage of financial life.