Tuesday, March 16, 2010

Missing the Target; Gaining Praise

Target date funds, those investments that pick a date in the far off future and sell you on the notion that your retirement plan is headed in the right direction continue to lose ground.  But that doesn't stop this default investment for the widely used defined contribution plan - your 401(k) - from receiving inflows in record amounts.

After the 2008 investment season and early into 2009, there were only a handful of investors who could claim to have these elusive skills. As far back as Benjamin Graham, the skill that was needed to be a successful investor was widely believed to be a possession of the few.  It wasn't necessarily the wealthy either.  But a subset of the populace who, for some reason, understood the mechanism better than others.

This led more than few folks to look at target date funds as an investment that might hold the elusive key to investment success. Money poured into these types of funds and continues to this day.  This in large part because of the default option that new hires receive.

While all investors face the same problem, those further along in their careers have an unique problem. Too conservative and there won't be enough money.  Too aggressive and there may be losses that are not welcomed.  But target date funds, while they have gained praise as they continue to underperform, are not the answer.

Paul Petillo is the Managing Editor of Target2025.com

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