"Great things are not accomplished by those who yield to trends and fads and popular opinion." - Jack Kerouac
The name suggests all you need to consider. In a target date fund, not only is the number, a figure identifying some far-off distant year when you could retire, it is the suggestion that these funds can somehow, almost by magic, do what you think you are incapable of doing. And in truth, many of us don't do a great job at rebalancing our portfolios, achieving asset allocation and understanding the process enough to get the retirement we desire. Trouble is, target date funds don't do a much better job.
Promises made
When it comes to investing for retirement, we wear our hearts on our sleeves. We approach the topic as if we were fragile and innocent, vulnerable to the forces of the marketplace. We often shun the education available to us and underinvest as a result. But target date funds offer us some hope that we don't need to know everything about investing. That not only will the fund do all of the heavy lifting, a set-it-and-forget-it concept that no one should be comfortable with, but the fund manager will do so with a skill that is often not backed up by statistics or records.
The three most troubling things about target date funds are: Can the do what they say they will do? Can these funds ever be transparent enough to make skeptics comfortable? And the yield, what many near retirees are looking for be what the funds suggest it will be?
The answers to the first two questions are not so clear. I believe that they will never go where you think they will go (a basket of index funds will achieve more over the same period and cost less) and transparency will only be hinted at (many target date funds are a basket of funds that may not have been popular but were given a new lease when they were bundled). The yield question is far easier: no they won't - or to date, at least they haven't.
Yield is the promise of income. So many target date funds are naming their offerings with just such a promise using income as the lure. Yield suggests that in a perfect world, the underlying investment will continue to increase in value and as a result, you will get some income (yield) from those investments. How is this possible in such a low interest rate environment? It isn't.
If income is where you want your investments focused, target date funds are not the answer. In fact, according to target date fund analyst Josh Charlson of Morningstar this "front-of-mind" promise can be better achieved elsewhere.
Elsewhere includes funds that focus on yield. Dividend funds are an excellent place to focus. As a rule, they focus on mature stock offerings that offer dividends in place of stock price volatility. Bond or fixed income funds do the same sort of thing with yields paying the investor. These yields are not without risk - no investment is. But the risk that your target date fund will do as promised is much higher than the risk that funds prompting an investment style with income. You can still do this yourself, at low costs and with a much higher rate of return for the trouble.
