Objective information about retirement, financial planning and investments


Investing: 7 Steps to Spring Clean Your Portfolio

Some beautiful flowers in the sun.

Spring time is traditionally the time to clean the garage and to get the yard in shape.  It’s also a great time to clean up your investment portfolio.  Here are 7 steps to a cleaner, more efficient portfolio.

Think of your investments as a portfolio

This is the first key step.  Many investors focus on each holding and fail to look at the sum of the parts.  Nobody is saying that investing in quality mutual fundsETFs, stocks, etc. is not important.  Start with your overall portfolio and determine if you are properly allocated in line with your financial goals and risk tolerance.  Ideally this would all be an extension of your financial plan.  Even younger investors starting out should think in terms of their overall portfolio, even if this is only a few holdings at this point. 

Find your most recent statements and organize your records 

Make sure that you receive and review statements from ALL investment accounts every time one is issued.  This might be monthly or quarterly depending upon your custodian and the type of account.  Keep them all in a file (paper and/or electronic) and more importantly find a way to take a consolidated, overall view of your holdings as a portfolio.  I enter all client accounts and holdings into a spreadsheet. I suggest categorizing your portfolio by account and by asset class (large cap, small cap, etc.).  At a minimum, this will show you how well you are diversified across different asset classes.  You might also be amazed at the number of individual holdings across all of these accounts, I call this financial clutter.  This is common among folks who might have a number of old 401(k) accounts at their former employers.  I had a client with almost 50 distinct holdings across multiple accounts when we started working together.  This is hard for anyone to track and monitor efficiently. 

Consolidate your accounts

To the extent possible, consolidate your accounts.  Unless there is a compelling reason to leave an old 401(k) with a former employer, monitoring your portfolio will be much easier if you roll these accounts into a consolidated IRA or even into your current employer’s 401(k) if allowed and the plan is a good one.  This also holds true if you have several IRA accounts with various custodians as well as for taxable accounts, annuities, etc.  

Review your asset allocation plan (or develop one)

This should happen before reviewing your individual investments so you aren’t influenced by your current allocation. As I’ve advocated here many times you need to have a financial plan in place before you decide upon an asset allocation strategy.  The financial plan should drive your investing activities, your allocation, and your choice of investments.  A well-constructed financial plan will help you focus on your risk-tolerance and your goals for the money you save and invest.

Review your current investment holdings

Have your stocks hit their sell targets? How do your mutual funds compare to their peers? It is important to establish a monitoring process for your individual holdings, and to review your holdings against appropriate benchmarks on a regular basis. If needed, make changes to your holdings if they no longer fit. 

Rebalance your portfolio 

You may need to buy and sell holdings or perhaps you can allocate new investment dollars to do this. Once you have determined that this is needed, you should get your allocation back in line as soon as possible to ensure that your allocation is consistent with the risk and return targets in your financial plan.  Remember your allocation should be reviewed across all of your various accounts.

Establish a regular process to review and monitor your portfolio 

Getting your portfolio in shape once does no good if you don’t establish a process to review your portfolio and your holdings on a regular basis.  This doesn’t mean looking at your investments daily or even weekly.  Depending upon your needs and your interest in doing this quarterly or semi-annually is sufficient for most.  At least annually this should be incorporated with a review of your financial plan to ensure that everything is in synch.

Please feel free to contact me with your financial planning and investing questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

For you do-it-yourselfers, check out Morningstar.com to analyze your investment holdings and your portfolio. Please click on the link to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you. 

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ETFs or Mutual Funds? – Why Not Both?


ETFs or Mutual Funds

Over the past several months I’ve read a number of articles along the lines of “ETFs vs. Mutual Funds.”  In most cases these articles take an either or position which is generally in favor of ETFs.  While I am a fan of ETFs and use them extensively in client portfolios, my question is why do we need to choose between ETFs and mutual funds?  Why not use both?

Looking over the portfolios of my individual clients I could not find one that did not include both ETFs and mutual funds.  In addition some include closed-end mutual funds as well as individual stocks.

Advantages of ETFs  

Originally ETFs were introduced as a way to trade various stock market indexes.  The S&P 500 SPDR (ticker SPY) just turned 20 and is generally at or near the top of the list in terms of ETF trading volume.  The availability of low cost ETFs across a variety of equity and fixed income indexes has mushroomed over the years.  As a financial advisor I use them extensively for their style consistency, low cost, and in many cases their consistently above average performance within their style peer groups.

Especially after the 2008-09 financial crisis the number of ETFs offered has mushroomed and so has the variety of offerings.  Actively managed ETFs are growing and the success of PIMco’s ETF version (ticker BOND) of its popular PIMco Total Return (ticker PTTRX) mutual fund will undoubtedly spur further growth here.

Why bother with Mutual Funds?

In looking at mutual funds you have to divide them into actively managed funds and passive (index) funds.

If you are indexing all or part of your portfolio you want to look at various factors in making your decision as to whether to go with a mutual fund or an ETF.  These include:

  • The size of your account/portfolio.  Even in the world of index mutual funds there are some lower cost versions available to investors who can meet higher minimum investment thresholds.  Vanguard is a good example here.
  • Cost to own.  The expense ratio should be the main factor, but transaction costs can come into play.  While the availability of no-transaction fee ETFs is growing, the ETF you want to buy may not be on this menu at a given custodian.  Likewise some mutual fund families might incur a transaction fee at certain custodians.
  • How will you invest?  If you are dollar cost averaging into a fund/ETF at say $250 per month you’ll want to look for options with no transaction costs.

While actively managed mutual funds get a bad rap in the press, there are still a number of well-managed reasonably priced funds across equity and fixed income styles.  A Schwab study a number of years ago touted a “core and explore” approach to investing.  This meant that the core of the portfolio would be index funds, with the use of actively managed funds in certain asset classes where good index products were not available.

Given the expansion of indexing to a wide range of assets classes in both the ETF and mutual fund format this approach in its original form may be passé.  However I still use a number of actively managed funds across both individual and institutional portfolios.

In choosing an active fund I’m looking for some or all of the following:

  • Long-term outperformance.
  • Superior risk-adjusted performance.
  • Consistency of management.
  • Something that I can’t find in an index product that adds to the overall quality of the portfolio.

Certainly there are a lot of mutual funds that don’t belong in your portfolio.  Loaded funds, proprietary funds from various brokerage houses and other high fee alternatives put a lot of money into your broker/registered rep’s pockets.  Go with no load funds and always shop for the most competitive share class available to you in terms of expense ratio.

Why exclude either ETFs or Mutual Funds?

My point here is not to argue the merits of either mutual funds or ETFs, or for that matter active management vs. passive.  Certainly I’ve seen some excellent examples of portfolios that are all ETF and/or all index products.

However why limit yourself and feel that you need to avoid funds or ETFs?  There are so many choices out there, I feel that I owe to my clients to look at the whole universe of ETFS, mutual funds, and other products that might enhance their portfolio and help them to achieve their investment goals.  In building a portfolio I suggest that you take the approach of picking the best investing vehicles for the various allocation “buckets” in your portfolio whether they be ETFs, mutual funds, actively managed, or passive index products.

Please feel free to contact me with your questions. 

Check out an online service like Personal Capital to manage all of your accounts all in one place.  Please check out our Resources page for more tools and services that you might find useful.

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Investment Diversification – A Look at the Basics


Investment Diversification is one of the basic tools  of building a sound investment portfolio. Diversification is the fancy name for  the advice your mother might have given you:  Don’t put all of your eggs in one basket. This is the basic tenant behind asset allocation, a key diversification tool.

Market Jitters...

My fellow finance blogger Ken Faulkenberry defines investment diversification as follows:

“Investment portfolio diversification is a portfolio strategy combining a variety of assets to reduce the overall risk of an investment portfolio. “  

A basic look at diversification 

Based on Ken’s definition you could use stocks, bonds, mutual funds, ETFs, private equity and a whole host of assets and asset types in building a diversified portfolio.  In the examples that will follow I am going to limit this to mutual funds investing in stocks and bonds.  Please note that nothing that follows should be construed as advice or a recommendation of any kind.  The mutual funds and allocation percentages used are for example only. 

Let’s start with an investor with $100,000 to invest.  Let’s go back in time to January 1, 2000.  One thought would be to pick a fund that invests in a variety of stocks.  Perhaps the Vanguard 500 Index Fund (VFINX) is a good choice.  How much would an investment of $100,000 have grown to by December 31, 2009, the end of the press has deemed the lost decade?  The answer is that your $100,000 investment would have shrunk to $90,165 for an average annual loss of 1.03%.  Truly a lost decade for this investor.

Let’s say this investor added the following funds to his portfolio:

  • Vanguard Small Cap Index (NAESX)
  • Vanguard Mid Cap Index (VIMSX)
  • Vanguard Total International Stock Index (VGTSX)

How much would an investment of $100,000 invested equally in each of these four funds have grown to by December 31, 2009?  (We are assuming no taxes or rebalancing in this and all examples in this article)  The answer is $137,511.  This is $47,346 or about 52% more than an investment of our investor’s cash only in the Vanguard 500 Index.  Let’s look at the average annual investment returns for each of these funds for the period 1/1/2000 – 12/31/2009:

Vanguard 500 Index -1.03%
Vanguard Small Cap Index  4.36%
Vanguard Mid Cap Index  6.13%
Vanguard Total International Stock Index 2.29%


While the average annualized return of 3.23% over the course of the decade is nothing to write home about, it does illustrate the potential benefits of diversification.

Let’s add some bonds 

Some say building a portfolio is much like cooking, which is one of my favorite pastimes.  My motto in the kitchen is “… when in doubt add more wine…”  Sadly wine and investing are not a good mix.

What if we added some bond funds to the mix?  In this case let’s add the following funds:

  • PIMco Total Return (PTTRX)
  • T. Rowe Price Short-Term Bond (PRWBX)
  • American Century Inflation Adjusted Bond (ACITX)
  • Templeton Global Bond (TPINX)

If we now divide the investor’s $100,000 investment equally among the four equity funds from the prior example and among these four bond funds, by 12/31/2009 the $100,000 investment has grown to $174,506 or almost double what an investment of $100,000 in the Vanguard 500 Index Fund alone would have yielded.  The portfolio’s average annual return was 5.72% for the decade.

Looking at the average annual investment returns for each of the bond funds for the period 1/1/2000 – 12/31/2009:

PIMco Total Return 7.65%
T. Rowe Price Short-Term Bond 4.89%
American Century Inflation Adjusted Bond  7.20%
Templeton Global Bond 10.66


The impact of diversification

Again this example was based on eight funds weighted equally with no rebalancing and the reinvestment of all distributions.  This was an unusual decade in that bonds largely held their own or outperformed equities.  It is likely that if we performed this same analysis for the ten years ended December 31, 2019 the results would look different.  None the less there are a few things we can take away from this analysis:

  • The decade 2000-2009 was a poor one for large cap stocks as illustrated by the use of the S&P 500 index fund.
  • Small, mid cap, and international equities outperformed domestic large cap stocks.
  • Diversifying the equity holdings in this example boosted overall portfolio return.
  • Bonds were aided by generally declining interest rates and lower volatility than equities.  Both of these factors helped their overall return for the decade and really boosted our hypothetical portfolio.  Bonds in general have a relatively low correlation to equities which assisted in mitigating the volatility of our portfolio and enhanced returns.
  • Even in this “lost decade” asset allocation helped enhance return.

What does this mean for the future? 

Clearly the period used in the analysis was unique one, a decade that contained market declines (as measured by the S&P 500 Index) of 49% from March of 2000 through October of 2002 and 57% from October of 2007 through early March of 2009.  However it seems that market volatility has become the norm rather than the exception so the current decade will likely be an interesting one as well.  A few lessons we can take forward:

  • Diversification reduces risk.
  • Diversification among assets with low correlations to one another further reduces risk.
  • Diversification is important because we have no way of knowing which investments or asset classes will perform well or poorly or when.


Note that all data used in this article was generated via Morningstar’s Advisor Workstation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.

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Dow 14,000 – Big Deal or Just a Number?


On Friday February 1, 2013 the Dow Jones Industrial Average closed 14,010.  This is the first close above 14,000 for the index since October of 2007.  The news media is, of course, making a huge deal about this.  It’s newsworthy and captivates the public’s interest.

In reality 14,000 or any number on the Dow is pretty meaningless.  For example the Dow sustained a triple digit loss today.  I discussed this in my recent US News Smarter Investor contribution (as picked up by Business Insider) I Couldn’t Care Less How Well The Stock Market Is Doing Right Now And Neither Should You.  As I said in the article “I have no idea what the stock market will do over the next year let alone the next week. Frankly I really don’t care. My opinion is that your financial plan, your tolerance for risk, and your financial goals should drive your investment allocation. Any buying or selling of stocks or any other type of investment should be driven by keeping your asset allocation in line with your financial plan.

In fact the Dow is a pretty narrowly focused index of 30 stocks of very large companies.  While this index is influential and widely followed it is not really a good indicator of much of anything.

A look at the S&P 500 

Let’s take a look at “the market” as depicted by another widely followed index, the S&P 500, an index of the 500 largest U.S. stocks.  Not only is the S&P 500 a broader large cap index than the Dow, it also tends to be a benchmark for many investment managers.

As I write this the S&P 500 is straddling the 1,500 mark, about 4% below its all time high of 1565 set in October of 2007.  As you can see from the chart the current market rally off of the March 2009 lows is some 46 months along now.  According to data from S&P the average length of nine Bull Markets off of market low points since 1946 is 68 months, with a range in length from 26 months to 148 months.

What does this all mean? 

In this writer’s opinion all of this hype and hoopla surrounding the Dow hitting 14,000 and the S&P hitting 1,500 is pretty meaningless.  Investors need to diversify among various asset classes and types of holdings such as stocks and bonds (funds or individual holdings) both domestic and international.  The chart below from JP Morgan below does a nice job of showing the benefits of a diversified portfolio over time.  Various benchmarks and asset classes are depicted across equities, fixed income, real estate, and alternatives.  This chart also does a nice job of showing the ups and downs of the returns of the various asset classes both on a relative and an absolute basis from year to year.  Note the Asset Allocation portfolio depicted by the graph points in the middle of the chart.  While this is a sample portfolio compiled by JP Morgan, it does demonstrate the benefits of diversification.

What to do now 

This is a great time to ignore the market hype and stick to your financial plan if you have one in place, or to get one done if you don’t.  Investing isn’t different in 2013 no matter what the talking suits on CNBC and elsewhere might tell you.  If anything the investing landscape becomes more treacherous as the market increases.  Don’t panic, but don’t let yourself get caught up in the hype either. 

Please feel free to contact me with your financial planning and investing questions at any time.  

Check out our Resources page for links to some services and tools that you might find beneficial.

The charts are courtesy of JP Morgan Asset Management.

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Mutual Funds – The First Shall be Last and So On


Well another year is in the books and there is no shortage of articles about what worked well and what didn’t in terms of investing.  For those of us who use and follow mutual funds it’s always instructive and interesting to take a look back as we move forward.  Here are some observations and examples from 2012 and some lessons that we can take into the future.

Artisan Mid Cap Value ARTQX 

The managers of this fund were named as Morningstar’s Domestic Manager of the Year for 2011.  So how’d they do in 2012?  The fund gained a respectable 11.39% for the year, but that only ranked the fund in the 86th percentile (bottom 14%) of its category.  Did the award go to their heads?  I doubt it.  I’ve written about this closed fund here before and it is one of my favorite mutual funds.  This fund is included in the menu of several 401(k) plans for whom I provide advice as well as in the portfolios of many of my individual clients.  The fund’s track record since its inception has been exemplary and in fact the fund ranks in the top 1% of all funds in its category for the ten years ending 12/31/12.  Artisan is a solid fund company who regularly closes funds that have become too large, including this fund.  While we can’t predict the future, the fund’s relatively poor 2012 performance is a non-issue in my mind at this point.

American Funds Growth AGTHX

My October post on this multi-share class fund asked if it was a fallen star.  Using data from the A shares, the fund had a banner 2012 returning 20.54% and placing in the 7th percentile of its category.  This comes after finishing in the 64th percentile or below in three of the five prior calendar years.   This still leaves the fund in the 53rd percentile of its category for the five years ended 12/31/12; though the fund is in the 22nd percentile for the trailing ten years.  As I discussed in the post, the fund was a top performer year in and year out until 2007.  As one industry publication pointed out, the fund has become somewhat of a “closet indexer” with its increasing correlation to the S&P 500 Index.  In fact the Vanguard Large Growth Index Fund is a far less expensive alternative that has outperformed Growth Fund by almost 300 basis points annually for the past three years and has gained almost three times as much annually for the past five years ending 12/31/12.  While I have tremendous respect for the American Funds as a group, this fund’s 2012 performance does nothing to change my view of the fund as an investment vehicle for my clients.

On a more macro level, 2012 saw the rebound of both developed and emerging markets international funds as a group after a dismal year in 2011.

What does all of this tell us, frankly not much as far as how to invest into the future

 An investment process is critical

Here are some of the factors that we usually look at when evaluating mutual funds and ETFs (from Fi360 and our Investment Policy Statements):

  • Does the fund have at least a three year track record?
  • Does the fund manager have at least a two year track record with the fund?
  • Does the fund have at least $75 million in assets?
  • Do the fund’s composition (its holdings) and its Morningstar style look like other funds in its investment category?
  • The fund’s expense ratio should be in the category’s 75th percentile.  (In reality we like to see this number much lower than that).
  • The fund’s risk-adjusted returns (Sharpe and Alpha) in the top 50% of its peer group of funds.
  • Trailing 1, 3, and 5 year returns at least in the top half of its peer group of funds.
  • Has the fund experienced a significant gain or loss in assets?
  • Has ownership of the fund changed?
  • Has there been turnover in the fund’s management?

While some investors may disagree, we believe in asset allocation and portfolio rebalancing.  We use both active and passive mutual funds and ETFs to fill the allocation slots in the portfolio, and we monitor those holdings on a regular basis.

As discussed above, there will always be fluctuations in the performance of various investments whether they are individual stocks or bonds or managed products such as mutual funds and ETFs.  Certain asset classes will underperform at various times (such as Foreign Stocks in 2011).  The point is to have an investment process in place that uses a disciplined methodology to make investment decisions.  In my experience, this is a key element in long-term investment success.

Feel free to contact me with questions about your investments.

For you do-it-yourselfers, check out Morningstar.com to analyze your investments and to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

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Mutual Funds – Are “Family Values” Important?


My Investments from the last year or so

Over the years I’ve been asked whether there is a mutual fund family (or families) that I prefer.  My answer is generally along the lines that I choose mutual funds and ETFs based on screening and their fit in a particular client portfolio.  This is absolutely true but there are families that I do tend to use more than others.

For example, for the individual client assets which I custody at Schwab (which is the bulk of them):

  • Vanguard mutual funds and ETFs comprise about 22% of these assets.
  • PIMco mutual funds, ETFs, and closed end funds make up just over 10%.

In addition to Schwab I have individual clients with a smattering of assets at other custodians, including Vanguard.

A significant portion of my practice involves providing advice to several 401(k) plans, as well as a couple good-sized pension plans and foundations.  Both Vanguard and PIMco are well-represented, along with Fidelity.  In the case of Fidelity two of the larger 401(k) plans are administered by Fidelity and we do have a number of Fidelity funds in both plans (along with a number of non-Fidelity funds).

In the case of Vanguard I am drawn to their low cost index products, I rarely use their actively managed funds.  In the case of PIMco the bulk of the assets are in three of their funds. Their fixed income expertise and their research orientation are impressive.

A Sample 401(k) Menu

Beyond this a look at the funds and ETFs that I use would reveal no particular loyalty to any family or fund provider.  I am typically looking for something in a particular fund in a given asset class and I don’t really care which fund family they are affiliated with, unless I uncover some negative aspect about the fund company.  As an example, here are the fund families represented in one of the 401(k) plans for which I serve as advisor:

  • Vanguard (4 index funds plus their Target Date Funds)
  • American Funds
  • American Beacon
  • Artisan
  • BMO Funds
  • Northern Funds
  • Dodge and Cox
  • Oakmark

Red Flags to Look For

While I am fund family agnostic, there are however, some fund family red flags that might give you pause when considering an investment.  Here are three:

  • A sense of general turmoil.  Janus is a prime example of firm where this concern is prevalent to me.  The company is on its 5th CEO since 2003 and they have experienced a noticeable amount of manger turnover.
  • Refusal to close popular funds.  One of the things that I really like about Artisan (a relatively small fund firm in Milwaukee) is that they routinely close funds when they take on too much money for the managers to effectively manage.  Perhaps the “poster child” here is Sequoia who had reopened their lone fund in 2008 after being closed to new investment for over 20 years, feeling comfortable for the first time that they could effectively manage new money.  They just re-closed the fund once again in the past year.  It seems to be a rule that money follows performance.  A fund that has a couple of really good years will attract waves of new investors.  In my opinion it is irresponsible for the fund company to keep the fund open if they don’t feel they can effectively manage these inflows.  In my opinion this is the definition of greed overruling shareholder interests.
  • A commissioned or fee-based rep who pushes a particular fund family, especially if that family is also his/her employer.  A recent example involves a lawsuit against JP Morgan Chase alleging that their reps pushed the company’s proprietary funds over those from other families.  I suggest asking many questions of this rep if you like them, or better terminating the meeting on the spot if you are a prospective client.

As an individual investor I would caution you against loyalty to any fund family.  Rather start out with the overall portfolio allocation that you are shooting for and then pick the best funds/ETFs to fill those “buckets.”  Ideally this is an outgrowth of your financial plan.  As a practical matter you might be unable to buy some funds due to investment minimums and other factors.  However there are many custodians that offer access to a wide array of funds across many families.  I would generally suggest going that route vs. limiting yourself to a situation where you only have access to a single family or a very small number of fund families.

As is always the case, nothing published on this blog constitutes investment advice nor should you take it as such.  Please see the Disclaimer page for more.

Please feel free to contact me with your questions, comments or suggestions regarding the site.

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Vanguard Target Date Funds – A Look Under The Hood


I’ve written several posts on Target Date Funds for this blog.  I have mixed feelings about them.  On the one hand TDFs do


provide investors with a professionally managed all-in-one investment solution.  Ideally you invest in the fund with a target date closest to your anticipated retirement date and the fund does the rest.  The manager typically lightens up on equities over time until the fund reaches its Glide Path into retirement, which is a point where the equity allocation levels off and you “glide” into retirement.

This is great in theory, but the reality is that across various fund families TDFs with the same target date can vary widely in their allocations and as to when the Glide Path starts.  Personally I like TDFs more for younger investors versus those who are within say 15 years or so of retirement.  Target Date Funds have become a staple in 401(k) plans due to the safe harbor given to plan sponsors who use them as the default investment choice for those plan participants who do not make an election of their own.

Fidelity, T. Rowe Price, and Vanguard control about 80% of the TDFs assets.  Let’s take a look under the hood at the Vanguard Target Retirement funds.

Vanguard offers funds with target dates beginning in 2010 and going out to 2060 in five year increments.  Additionally they offer an Income version of the fund for those already in retirement.

Low Cost and Simple

Vanguard’s approach is both simple and low cost.  The underlying funds consist mostly of Vanguard’s low cost index funds.  The overall expense ratio of the funds is a weighted rollup of the underlying funds and currently ranges from 0.17% to 0.19%.  This is far less expensive than either Fidelity or T. Rowe Price and each of the Vanguard funds ranks in the top (lowest expense) percentile of their respective peer categories.

Solid Performance

  • Each of the funds from the 2010 through the 2050 fund received a top ranking from Fi 360 a mutual fund and ETF ranking service that I utilize in their most recent rankings through the quarter ended September 30, 2012.
  • The Retirement Income fund received a score of 6 from Fi 360 meaning that it ranked in the top 6% of the 211 funds in its category based upon the 11 ranking criteria used by the service.
  • The 2055 and 2060 funds do not have enough history to receive a ranking.

Glide Path and Asset Classes

Vanguard uses 7 asset classes in its TDFs; Fidelity uses 11; T. Rowe Price uses 12.  This is not good or bad, but does reflect Vanguard’s more basic approach.

Vanguard’s Glide Path levels off at age 72; Fidelity’s at age 80; T. Rowe Price’s at age 95.  The Glide Path assumes that the investor will hold the fund until death; this may or may not be the case in reality.

Are Target Date Funds the Right Answer? 

As mentioned above, I have mixed feelings.  On the one hand TDFs are often a better solution than simply letting one’s retirement plan assets languish in a money market account.  On the other hand I am convinced that investors who are either comfortable doing their own allocation or who utilize an advisor are generally better served by tailoring an allocation from among the menu of investment choices offered in their 401(k) plan.

As far as Target Date Funds go, I generally like the Vanguard version for their basic, easy to understand approach and their low cost.

Check out Morningstar to look under the hood of Vanguard’s Target Date Funds and to compare them against other alternatives that you might be considering.  Get a  free trial for their premium services.

Please feel free to contact me with questions regarding your investments and your retirement planning issue.

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Target Date Funds – A Look under the Hood


Asset Allocation on Wikibook

The Pension Protection Act of 2006 made Target Date Funds the default investment option of choice in many 401(k)

plans.  As of March, nearly 25% of all 401(k) participants invest solely in TDFs representing a 6 fold increase in six years according to Vanguard via research for plans they manage.  Vanguard goes on to say that 64% of new plan participants entering a plan for the first time contributed 100% to a single TDF.

When you invest in a Target Date Fund, where is your money going?  Here is a comparison of the TDF series offered by the “Big 3” Vanguard, Fidelity, and T. Rowe Price who control about 80% of the Target Date Fund assets.

Fund Basics


T. Rowe Price


Number of underlying mutual funds




Glide Path end age




Active/passive focus

Active (89%)

Active (85%)

Passive (97%)

Expense ratio-avg.




Information via Lipper and Morningstar

Looking at some of the basics from the chart above:

  • All three families are funds of funds comprised exclusively of their own mutual funds.
    • Fidelity and T. Rowe Price both use a higher number of undying funds as compared to Vanguard.
    • Vanguard’s funds are lower cost due to their focus on passively managed index funds.
  • Vanguard and T. Rowe Price use the same underlying funds that are generally available to investors.  Fidelity has moved in large part to the use of their Series funds, a group of institutionally managed funds designed for use only in their Target Date Funds.
  • Glide path refers to the leveling out of the allocation to equities in the funds as shareholders move into retirement.  All three funds are “through” retirement rather than ‘to” retirement.  In the latter case the glide path would level off around age 65.
  • T. Rowe Price has among the longest glide paths of all TDF families.  As you can see above, Fidelity and Vanguard level off a bit earlier.  A point about the glide path.  The fund companies assume that you will hold the TDFs through retirement and perhaps until death.  You might or might not do this, if you don’t the glide path does not make as much difference.

A look at the asset classes used by each TDF family shows some additional differences

Asset Class Summary


T. Rowe Price


U.S. Large Cap




U. S. Mid Cap




U.S. Small Cap




International Equity




Emerging Markets Equity




U.S. Fixed Income








High Yield Fixed Inc.



International Fixed Income


Emerging Mkts Debt









Source:  Lipper 

As you can see from the chart above, Fidelity and T. Rowe Price have ventured into a number of non-core asset classes.  The allocations to any of these asset classes of course vary based on the allocation of the particular TDF.

Vanguard has chosen to take the approach of building their asset allocation models across the various target dates using a simpler approach with just five funds across seven asset classes.

According to Morningstar both T. Rowe Price and Vanguard are ranked “Top.”  Morningstar uses a five rank system.  Fidelity’s Freedom Funds are ranked as “Average” the middle ranking.  This is as of June 30, 2012.

Target Date Funds are a staple in 401(k) and similar retirement plans.  As mentioned above they are frequently used as the default option for participants who don’t specify an investment choice.

As far as choosing which family of TDFs to use, you generally won’t have a choice in your 401(k).  Understand, however, that TDFs can generally be used outside of retirement plans.  For example all of the “Big 3” actively court rollovers from the retirement plans they manage for participants who are leaving the plan for whatever reason.

Besides the fund of proprietary funds approach used by these three families, there are Target Date Funds out there using ETFs and other vehicles as the underlying investments.

Should you go the Target Date route?  Here are a few factors to consider:

  • Are you comfortable allocating your retirement account from among the other options available in the plan?
  • Are there advice options available to you via your retirement plan?  These might include online options; in-person individualized sessions; or managed account options.
  • Do you work with a financial advisor on your accounts outside of the plan?  If so the advisor might be in a position to provide advice on your 401(k) account.  In any event these assets should be considered by your advisor in the course of the advice they provide to you.

If you decide that the Target Date Fund route is the best route for your situation, here are a few things to consider:

  • Pick the fund that best fits your unique situation; this may or may not be the fund with the target date closest to your anticipated retirement date.
  • Target Date Funds are not a “set it and forget it” option.  There, in my opinion, is no such investing option for your 401(k) or any other account.  You need to monitor your TDF choice and understand how your money is being invested.  Fund companies can change managers, investment philosophies, etc.  You are responsible for your retirement and need to stay on top of it.
  • The use of a TDF does not guarantee retirement savings success.  The biggest determinant here is the amount saved during your working life.  Make sure that you are maximizing the amount you are able to contribute to your plan.
  • TDFs do not lower investment risk; this is a function of how the fund is allocated and the skill of the investment manager.  Just ask holders of many 2010 dated funds back in 2008.
  • You need to understand how the allocation of the TDF you choose will fit with your other investments, whether other funds in the 401(k) or your outside accounts such as IRAs and taxable brokerage accounts.

While I’m not a huge fan of Target Date Funds, they can be a sound alternative for many 401(k) investors.  Make sure you have researched this and all options available via your 401(k) plan to determine if this is truly the best option for you.  Check out morningstar.com to analyze your Target Date Fund choices and all of your 401(k) options, and to get a free trial for their premium services.

If you have a choice of Target Date Fund families remember to look “under the hood” of each because there are differences in approach, the types of underlying investments, and costs.  There are also differences in the allocation and risk of funds from difference families with the same target date.

Please feel free to contact me with any questions you may have about your 401(k) plan or with regard to your overall financial planning needs.

Please check out our Resources page for tools and services that you might find useful. 

Photo credit:  Wikipedia

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Balanced Funds – The Right Balance for You?

Common Sense on Mutual Funds: New Imperatives ...

The stock market volatility of the past several weeks, along with two substantial market declines over the past 10 years, has really brought investment diversification and balance into the spotlight.

As an investment advisor I have always practiced balance and diversification in the asset allocation strategies that I suggest for my clients.

Some investors might like the prospect of investing into a mutual fund that does this for you all in one package. Balanced mutual funds have been around for many years however they do come in many “flavors.”

Morningstar does not list a category entitled “Balanced Funds.” Rather there are several that encompass balanced funds:

• Conservative Allocation
• Moderate Allocation
• Aggressive Allocation

Additionally, depending upon your definition of a balanced fund, one could include the nine categories for Target Date funds as well.

This raises a key point, picking a balanced fund is not an easy task. Just like any mutual fund, investors need to review the fund’s objectives, understand the allocation and types of investment vehicles the fund will use, review the expense ratio, etc.

Morningstar’s Moderate Allocation category consists of funds that generally invest from 50% – 70% into equities, with the rest in bonds and cash. This is closest to the traditional 60/40 allocation I generally associate with a balanced fund. In this category, Morningstar has six Analyst Picks. A few collective observations regarding these six funds:

• Returns for calendar 2008 ranged from -18.41% to -33.57%. The S&P; 500 index lost 37% that year.

• Returns for the past four weeks (ending August 12, 2011) have ranged from -4.89% to -9.46%. The S&P; 500 lost 10.11% over the same period. Note the same funds were at the high and low ends of this range over both time periods.

• Based upon the most recent data (as of June 30, 2011) from Morningstar, the allocation to equities ranged from 46.45% to 73.29%. Again the fund with the lowest loss over both periods above had the lowest equity allocation and the fund with the worst loss the highest.

• Over the 10 year period ending July 31, 2011, the six funds had average annual returns ranging from 5.08% to 9.27%. This compares the S&P; 500 which had an average annual return of 2.61% over this time period.

What does this mean to you as an investor? It means that balanced funds require review and analysis before purchasing and monitoring and evaluation while you own them.

One key point, assuming that a balanced fund is not your only investment, it is critical to look at the fund’s allocation to see how it fits with the rest of your holdings. Would the addition of a balanced fund cause your portfolio to be under or over weighted in stocks or fixed income? Is there undo overlap in the underlying holdings?

As with any mutual fund you want to look at who is in charge. Are they the folks who have accounted for the fund’s track record over a number of years? In short, this is no different than the selection of any other mutual fund or investment holding.

Regardless of whether you go the balanced fund route or create a balanced, diversified allocation from the individual holdings in your portfolio, the results noted above over the past 10 years at least speak to the benefits of diversification. While a balanced approach certainly will not always provide a better return than equities, you will generally find the road to be a bit less bumpy in terms of portfolio volatility.

Please feel free to contact me if I can be of help in reviewing your portfolio. 

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