Your Black World: Retirement Investing and 401ks

7 Aug

Some people think target-date funds are too conservative, but lousy investors might need to be saved from themselves.

Question: I’m 28 and I struggle with how to allocate my 401(k) contributions among different types of investments. The target-date retirement funds in my plan would have someone my age invest 10% of their portfolio in bonds and the rest in various large- and small-cap index funds. But I think someone my age is better off focusing mostly on growth funds as well as foreign and emerging market funds. Seems to me that if I take the target-fund approach, I’ll be giving up a lot of potential return and money. What do you think? —Raymond Longshore, Gainesville, Florida

Answer: I think you’re a perfect example of someone who’s a lousy candidate for a target-date retirement fund and who ought to invest on his own.

Wait a minute. On second thought, you may be a perfect example of someone who really should be using a target-date fund instead of creating your own investment strategy.

I understand that on the face of it, that assessment sounds absurd. After all, you can’t be two diametrically opposed things at once. So let me explain my reasoning, starting with why I think you’re a lousy candidate for a target-date fund.

One of the big advantages of a target fund is that it frees you from having to make investment decisions on your own. You select a target fund with a date that roughly corresponds to the year you plan to retire – 2010, 2020, 2030, whatever – and you get a completely diversified portfolio of stocks and bonds. It’s a no-brainer way to invest. In order to provide that simplicity, the fund sets a stocks-bond allocation that it deems appropriate for someone of a given age.

Although not all target funds give you the same mix of stocks and bonds, most target funds designed for someone of your tender age would have a portfolio of roughly 85% to 90% in stocks and the rest in bonds. As you get older, that mix would gradually shift more toward bonds.


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