Posted on August 31, 2008

“Targeted Maturity” Funds: An Ideal Retirement Investment Vehicle?

Targeted investing

Many future retirees want to save for retirement, but don’t want to spend hours poring over charts, stock quotes, and investment guides figuring out where their money should be invested.

Mutual funds relieve individual investors of the task of picking individual stocks. All you have to do is decide what kind of investment you want (growth stocks, bonds, a mix of stocks that tracks the indexes, health care stocks, or whatever), and pick the appropriate fund.

But you’re still stuck with the problem of asset allocation. How much should be in stocks, how much in bonds? What kind of stocks, what kind of bonds? And on and on. Besides, you know that your asset allocation should change over time. Generally, the closer you get to when you’ll need the money (usually when you retire), the more you’ll shy away from stocks and lean toward bonds.

What if somebody took all of this into account, and set up a professionally managed fund for everyone who knows they’re going to need the money, say, in 12 years, in 2020. Then all you would have to do is invest regularly in the fund. You’d know that an expert was taking care of all the issues mentioned above, and your money will be ready for you when you need it.

This, exactly, is the thinking behind so-called “targeted maturity” or “target date” funds, and they already exist. Several mutual fund families, among them Vanguard, Fidelity, and T. Rowe Price have created such funds. Do they make sense? Do they really eliminate the need for all the research (and guesswork), and make saving for retirement as easy as writing a check?

Well, yes and no. Here are the main pros and cons.

Advantages of targeted maturity funds

  • The funds do basically do what they promise. And it’s done by professionals. This is certainly more efficient than having every investor “reinvent the wheel” of asset allocation.
  • They help investors avoid the temptation to second-guess the methodology and sell when they subjectively think stocks are “high” and buy when they’re “low.” Such guesses are wrong more often than right.
  • They enable those with little investment savvy to set up a well-balanced retirement savings program with little effort.

Disadvantages of targeted maturity funds

  • One size doesn’t fit all. Just because you’re aiming for a certain date doesn’t mean that your tolerance for risk, or your schedule for how long you will need to withdraw from the fund, is the same as everybody else’s.
  • If you use a fund like this and then invest in other funds as well, you’re skewing the asset allocation and defeating the whole purpose. But do you really want to put all your eggs in one basket?
  • If you’re not happy with the performance of the fund, you’ll end up analyzing it and perhaps redeploying assets. Then the advantage of “set it and forget it” goes out the window, and you’re back to managing your own money anyway.

Our conclusion

The basic theory of targeted maturity funds makes sense, but they do have the drawbacks listed above. This makes them good, but not great investments.

We therefore recommend them for relatively inexperienced investors. If you can, acquire enough knowledge to make informed retirement investment decisions based on your own personal situation, and then allocate your money yourself among the appropriate mutual funds.

If, however, learning about investments just isn’t your thing, go ahead and use a targeted maturity fund. But don’t try to second guess it later. Remember that you’ve decided to trust a pro’s expertise for the very reason that you are not a pro.

And don’t be tempted to try to squeeze that last extra percent or two of returns out of your portfolio by tinkering with your portfolio, and pretending you know more than you don’t. As legendary investor J. P. Morgan once put it, “Bulls make money and bears make money. But pigs get slaughtered.”

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