Objective information about retirement, financial planning and investments


3 Financial Products to Consider Avoiding


Red and white sign to avoid construction zone

Before buying ANY financial product make sure that this product is right for you in terms of your unique, personal financial situation.  Financial products are tools and just like your projects around the house you should use the right tool for the job, not the tool that the financial rep wants to sell to you.

Here are three financial products that you should consider avoiding.

Equity-Indexed Annuities 

Equity-Indexed Annuities are an insurance-based product where the returns are tied to some portion of the performance of an underlying market index such as the S&P 500.  They are also called fixed-index insurance products and indexed annuities. Your gains are limited to a portion of what the index gains and there is generally some sort of minimum return to limit (or eliminate) your risk of loss.  As you can imagine these were pitched heavily to Baby Boomers and retirees after the last market downturn and are still being sold based upon fear today.

Two problems here are generally high internal expenses and surrender charges that keep you locked in the product for years. Worse yet, these internal expenses can be hard to isolate. If you decide to go ahead with the purchase of an Equity-Indexed Annuity be sure that you understand all of the details including the level of index participation, expenses, surrender charges, and the health of the underlying insurance company. Check out FINRA’s Investor Alert regarding Equity-Indexed Annuities for more cautionary information.

Proprietary Mutual Funds

It is not uncommon for registered reps and brokers to suggest mutual funds from the family run by their employer. In many cases they are incentivized or even required to do so. While some of these funds are perfectly fine, all too often in my experience they are not.  Whether via high fees and/or low performance these are often investments to be avoided.

A lawsuit against Ameriprise Financial brought by a group of participants in the company’s retirement plan alleged the company breached its Fiduciary duty by offering a number of the firm’s own funds in the plan and that these funds then paid fees back to Ameriprise and some of its subsidiaries as revenue sharing. The suit was ultimately settled.

JP Morgan also settled a suit by some retail investors over the bank steering clients into their more expensive proprietary funds over those of other families.

Load Mutual Funds

It is important that you understand the ABCs of mutual fund share classes.  In the commissioned/fee-based world reps often sell mutual funds that offer compensation to them and to their broker-dealers.  A shares charge an up-front commission plus a trailing fee (often a 12b-1) of somewhere in the neighborhood of 0.25% or more.

B shares charge no up-front commissions, but carry an additional back-end load as part of the ongoing expense ratio.  This can amount to an addition 0.75% or more added to the fund’s annual expenses.  In addition these shares also contain a surrender charge that typically starts at 5% if your sell the fund before the end of the surrender period.  B shares have been largely phased out by most fund providers.

C shares typically have a permanent 1% level load added to the fund’s expense ratio and carry a one year surrender period.

These sales loads ultimately reduce the amount of your investment and are an expensive form of advice. Nobody expects financial advisors or any other professional to provide financial advice for free. Unless the person to whom you are paying these pricey loads is providing extraordinary advice, this is a very expensive way to go.

The DOL fiduciary rules

The fiduciary rules introduced by the DOL (Department of Labor) in April of 2016 impose a far greater level  of disclosure on financial advisors. The rules require financial advisors to act as fiduciaries when providing advice to clients on their retirement accounts such as IRAs.

The fiduciary rules require advisors to have their client sign a disclosure document for many financial products with sales charges and trailing commissions if used in a retirement account. Load mutual funds and proprietary mutual funds will most likely require a BICE (Best Interest Contract Exemption) disclosure. Additionally Equity-Indexed Annuities were not exempted from these disclosures in the final draft of the rules as they had been in earlier drafts.

It will remain to be seen how the fiduciary rules will impact these three products, both within retirement accounts and overall. As an example, broker Edward Jones recently announced that mutual funds and ETFs will no longer be offered to clients in retirement accounts where commissions are charged.

Before making any financial or investment decision review your specific situation. Consult a fee-only financial advisor if you feel that you need financial advice.

Approaching retirement and want another opinion on where you stand? Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

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Do I Own Too Many Mutual Funds?


In one form or another I’ve been asked by several readers “… do I own too many mutual funds?”  In several cases the question was prompted by the number of mutual fund holdings in brokerage accounts with major brokerage firms including brokerage wrap accounts.  One reader cited an account with $1.5 million and 35 mutual funds.

So how many mutual funds are too many?  There is not a single right answer but let’s try to help you determine the best answer for your situation.

The 3 mutual fund portfolio 

I would contend that a portfolio consisting of three mutual funds or ETFs could be well-diversified.  For example a portfolio consisting of the Vanguard Total Stock Market Index (VTSMX), the Vanguard Total International Stock Index (VGTSX) and the Vanguard Total Bond Index (VBMFX) would provide an investor with exposure to the U.S. stock and bond markets as well as non-U.S. developed and emerging markets equities.

As index funds the expenses are low and each fund will stay true to its investment style.  This portfolio could be replicated with lower cost share classes at Vanguard or Fidelity if you meet the minimum investment levels.  A very similar portfolio could also be constructed with ETFs as well.

This isn’t to say that three index funds or ETFs is the right number.  There may be some additional asset classes that are appropriate for your situation and certainly well-chosen actively managed mutual funds can be a fit as well.

19 mutual funds and little diversification 

A number of years ago a client engaged my services to review their portfolio.  The client was certain that their portfolio was well-diversified as he held several individual stocks and 19 mutual funds.

After the review, I pointed out that there were several stocks that were among the top five holdings in all 19 funds and the level of stock overlap was quite heavy.  These 19 mutual funds all held similar stocks and had the same investment objective.  While this client held a number of different mutual funds he certainly was not diversified.  This one-time engagement ended just prior to the Dot Com market decline that began in 2000, assuming that his portfolio stayed as it was I suspect he suffered substantial losses during that market decline.

How many mutual funds can you monitor? 

Can you effectively monitor 20, 30 or more mutual fund holdings?  Frankly this is a chore for financial professionals with all of the right tools.  As an individual investor is this something that you want to tackle?  Is this a good use of your time?  Will all of these extra funds add any value to your portfolio?

What is the motivation for your broker? 

If you are investing via a brokerage firm or any financial advisor who suggests what seems like an excessive number of mutual funds for your account you should ask them what is behind these recommendations.  Do they earn compensation via the mutual funds they suggest for your portfolio? Their firm might have a revenue-generating agreement with certain fund companies.  Additionally the rep might be required to use many of the proprietary mutual funds offered by his or her employer.

Circumstances will vary 

If you have an IRA, a taxable brokerage account and a 401(k) it’s easy to accumulate a sizable collection of mutual funds.  Add in additional accounts for your spouse and the number of mutual funds can get even larger.

The point here is to keep the number of funds reasonable and manageable.  Your choices in your employer’s retirement plan are beyond your control and you may not be able to sync them up with your core portfolio held outside of the plan.

Additionally this is a good reason to stay on top of old 401(k) plans and consolidate them into an IRA or a new employer’s plan when possible.

The Bottom Line 

Mutual funds remain the investment of choice for many investors.  It is possible to construct a diversified portfolio using just a few mutual funds or ETFs.

Holding too many mutual funds can make it difficult to monitor and evaluate your funds as well as your overall portfolio.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Concerned about stock market volatility? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Target Date Funds: Does the Glide Path Matter?


Most Target Date Funds are funds of the mutual funds of the fund family offering the TDF.  The pitch is to invest in the fund with a target date closest to your projected retirement date and “… we’ll do the rest….”  A key element of Target Date Funds is their Glide Path into retirement.  Stated another way the Glide Path is the gradual decline in the allocation to equities into and during retirement.  Should the fund’s Glide Path matter to you as an investor?

Glide PathTarget Date Funds have become a big part of the 401(k) landscape with many plans offering TDFs as an option for participants who don’t want to make their own investment choices.  Target Date Funds have also grown in popularity since the Pension Protection Act of 2006 included TDFs as a safe harbor option for plan sponsors to use for participants who do not make an investment election for their salary deferrals and/or any company match.

These funds are big business for the likes of Vanguard, Fidelity, and T. Rowe Price who control somewhere around 70% of the assets in these funds.  Major fund families such as Blackrock, JP Morgan Funds, and the American Funds also offer a full menu of these funds.  Ideally for the fund company you will leave you money in a TDF with them when you retire or leave your employer, either in the plan or via a rollover to an IRA.

What is a Glide Path?

The allocation of the fund to equities will gradually decrease over time.  For example Vanguard’s 2060 Target Date Fund had an equity allocation of almost 88% at the end of 2013.  By contrast the 2015 fund had an equity allocation of approximately 52%.

This gradual decrease continues through retirement for many TDF families including the “Big 3” until the equity allocation levels out conceivably until the shareholder’s death.  T. Rowe Price has traditionally had one of the longest Glide Paths with equities not leveling out until the investor is past 80.  The Fidelity and Vanguard funds level out earlier, though past age 65.

There are some TDF families where the glide path levels out at retirement and there is some debate in the industry whether “To” or “Through” retirement is the better strategy for a fund’s Glide Path.

Should you care about the Glide Path? 

The fund families offering Target Date Funds put a lot of research into their Glide Paths and make it a selling point for the funds.  The slope of the Glide Path influences the asset allocation throughout the target date years of an investor’s retirement accumulation years.  The real issue is whether the post-retirement Glide Path is right for you as an investor.

On the one hand if you might be inclined to use your Target Date Fund as an investment vehicle into retirement, as the mutual fund companies hope, then this is a critical issue for you.

On the other hand if you would be inclined to roll your 401(k) account over to either an IRA or a new employer’s retirement plan upon leaving your company then the Glide Path really doesn’t make a whole lot of difference to you as an investor in my opinion.

In either case investing in a Target Date Fund whether you are a 401(k) participant saving for retirement or a retiree is the ultimate “one size fits all” investment.  In the case of the Glide Path this is completely true.  If you feel that the Glide Path of a given Target Date Fund is in synch with your investment needs and risk tolerance into retirement then it might be the way to go for you.

Conversely many people have a number of investment accounts and vehicles as they head into retirement.  Besides their 401(k) there might be a spouse’s 401(k), other retirement accounts including IRAs, taxable investments, annuities, an interest in a business, real estate, and others.

In short, Target Date Funds are a growing part of the 401(k) landscape and I’m guessing a profitable way for mutual fund companies to gather assets.  They also represent a potentially sound alternative for investors looking for a professionally managed investment vehicle.  The Glide Path is a key element in the efforts to keep these investors in the Target Date Fund potentially for life.  Before going this route make sure you understand how the TDF invests, the length and slope of the Glide Path, the fund’s underlying expenses, and overall how the fund’s investments fit with everything else you may doing to plan for and manage a comfortable retirement.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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ETF Price Wars: A Good Thing or Just More Hype?


Fidelity has fired another salvo in the ongoing ETF price wars with the introduction of a number low cost sector ETFs.   Schwab, TD, Blackrock, Vanguard, and others have also participated in this price war in one form or another over the past couple of years.  Low ETF expenses and low or no transaction fees are a good thing, but should they be the deciding factor in your decision where to invest?

ETF Price Wars:  A Good Thing or Just More Hype?

Understand what you are buying 

As we’ve learned from the PBS Frontline special The Retirement Gamble among other sources, low investment costs are a key determinant accumulating a sufficient retirement nest egg.  The first and most important factor in choosing an ETF to include in your portfolio is to understand what the ETF invests in.

An ETF that tracks an index such as the S&P 500 is pretty simple.  However ETF providers are introducing new products seemingly every day.  According to Chuck Jaffe in a MarketWatch article, a Vanguard report found that “1,400 U.S. listed ETFs track more than 1,000 different indexes. But more than half of these benchmarks had existed for less than six months before an ETF came along to track it.”

Beyond commissions and expense ratios 

Fidelity recently published an excellent piece on its site, Beyond Commissions: An ETF’s Price Matters.  According to the article:

“Commissions aren’t the only cost to consider when buying an ETF. Most investors compare expense ratios, but a less appreciated—yet important factor—is the bid-ask spread, which is the difference between the highest price a buyer is willing to pay for an asset (bid) and the lowest price at which a seller is willing to sell (ask). While investors should consider the Net Asset Value (NAV) of an ETF, the price you pay is a seller’s ask price, which can be at a discount or premium to the NAV.

“It’s important to remember that not all ETFs are created equal,” says Ram Subramanium, president of Fidelity brokerage services. “So, investors may want to look for ETFs with established track records and low bid-ask spreads relative to their peers.”

As an interesting aside here, one of the low cost sector ETFs that Fidelity recently introduced was its materials ETF Fidelity MSCI Materials ETF (FMAT).  This ETF competes directly with the Vanguard Materials ETF (VAW) and has an expense ratio of 0.12% vs. 0.14% for the Vanguard ETF.  However the recent bid/ask spread for the Fidelity ETF was 11.68% vs. 1.57% for the Vanguard ETF (according to Morningstar).  The passage above from the Fidelity article might indicate that the older, more established Vanguard ETF is a better choice here.

Other factors to consider

  • Unless you are a frequent trader or you are purchasing ETFs in small dollar amounts trading commissions really shouldn’t be a major factor in your ETF investing decisions.
  • Consider the full breadth of the investment products available to you as well as your investing objectives when choosing an investment custodian.  ETF price wars are much like loss leaders in retailing.  Major custodians such as Fidelity are using low cost ETFs to get you in the door and to hopefully entice you to use their services to invest in mutual funds, stocks, and other investment products via Fidelity.
  • Are the commission-free ETFs the right ones for your portfolio?  For example a number of the ETFs offered on Schwab’s commission-free platform are not ones that I would generally choose for my client’s portfolios.
  • How cheap is cheap?  I doubt that selling one ETF and buying another to save say 0.02% on the expense ratio makes sense, especially if there are transaction costs or capital gains to consider when selling.
  • How well does the ETF track it’s benchmark index?  I’m often surprised by the variations when comparing two ETFs that I would assume to be identical other than the name of the ETF provider.


Are ETF price wars a good thing for investors?  Yes.  Are ETF price wars being used by major custodians and ETF providers to create hype in the financial press in order to lure investors?  Again yes.  The bottom line here is that your financial plan and investment strategy should guide your choice of ETFs, mutual funds, or any investment vehicle, not a slightly lower cost or the lure of free trades.

Please contact me with your investing and financial planning questions. Check out an online service like Personal Capital to manage all of your accounts all in one place or purchase the latest version of Quicken. Check out our Resources page for more tools and services.

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Target Date Funds Don’t Guarantee Retirement Success


A recent article in the Wall Street Journal professional edition was entitled “Target” Funds Still Missing the Mark. The premise of the article was that Target Date Funds were falling short in their investment returns and were doing nothing to help 401(k) participants regain some of the ground they had lost during the 2008-09 stock market decline.  Another Wall Street Journal Article in early 2011 cited an Alliance Bernstein survey of 1,000 workers which over half “mistakenly believed that using target-date funds would guarantee that their retirement income needs will be met.”

As both a financial planner working with individual investors and as an advisor to several 401(k) plan sponsors I find this survey result appalling and disturbing.  Moreover, it reinforces my concerns that 401(k) participants as well as some plan sponsors really don’t understand the pros and cons of Target Date Funds.

The fund companies offering them would be the first to tell you that there is nothing guaranteed about TDFs. There is a growing movement within the retirement plan space to add guaranteed-income products to Target Date Funds, but this won’t guarantee retirement success either.

Is a Target Date Fund the right choice for you?

The key to determining if a Target Date Fund is the right choice for your retirement savings is to understand them.  If you are considering a TDF for all or part of your 401(k) account or as an investment in general, here are two things to consider:

  • Target Date Funds from various providers with the same target date may vary widely as to their asset allocation and investment approach. There is no requirement that a TDF with a given target date have any particular allocation to equities, fixed income, etc.  The fund with the target date closest to your intended retirement might not be the best fund for your needs. As with any investment, you need to look at the fund’s investment allocation in light of your financial goals, risk tolerance, etc. You should also look at the fund as a part of your overall portfolio if you have investments outside of your retirement plan, such as IRAs, taxable accounts, a spouse’s retirement plan, and the like.
  • Many Target Date Funds are funds of the mutual fund company’s funds. This is the case for Vanguard, Fidelity, and T. Rowe Price, which collectively have about 80 percent of the TDF assets. This is not good or bad, but you should take a look at the funds that make up the TDF that you are considering. In some cases, I’ve seen fund companies use funds other than what I consider to be their top funds; perhaps they are looking to add assets to these funds.

Target Date Funds gather a huge amount of assets for the fund companies offering them, both as a component in many 401(k) plans and as a rollover vehicle when participants leave their employer.  Remember your investment choices should be all about you and what’s right for your situation.

Most of all, remember that the biggest single determinant in retirement success is the amount saved. If you start early, save as much as you can, have a financial plan in place, and make good investment choices, you will give yourself a good shot at accumulating enough to fund your retirement.  There are no guarantees of course.

Please feel free to contact me with questions about 401(k) plan and about your retirement planning needs.

Check out our Resources page for links to a variety of tools and services that might be beneficial to you.

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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. 

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Evaluating Mutual Funds, Numbers Can Be Deceiving


When evaluating a mutual fund looking only at the trailing numbers may not tell you the whole story. Let’s look at a couple of examples.

Fidelity Balanced Fund (FBALX) has a solid trailing track record. The fund ranked in the top 7% of all funds in its category for the 10 years ended 12/31/09 and in the top 14% for the trailing 15 years. The fund ranked in the top half of its category in 9 of the 10 years of the decade 2000-2009.

However, the fund laid a real “egg” in 2008 losing 31.33% and ranking in the bottom 24% of the funds in its category. This is a balanced fund (its Morningstar category is Moderate Target Risk). This type of fund is balanced between stocks and bonds and should be a somewhat stable component of one’s portfolio.

In November of 2008, Fidelity revamped the fund, placing it in the hands of multiple managers for different parts of the fund’s portfolio. The new lead manager is Robert Stansky, a former manager of giant Fidelity Magellan. Essentially, the group that compiled the fund’s mostly solid track record has been replaced.

The new group did a credible job in 2009 earning a return of 28.05% for 2009, the fund ranked in the top 24% of its category.

Should you buy this fund? Difficult to say. The fund’s trailing track record is pretty meaningless with the new fund management team in place. The “new guys” did well in ’09 an outstanding year for both the equity and fixed income markets. The question investors should ask themselves is whether or not they feel that this new management team and their philosophy fits with their objectives for a balanced portfolio.

Dodge and Cox Stock (DODGX) ranks in the bottom 20% of the Large Value category for the three years ended 12/31/09 and in the bottom 34% for the trailing five years. However, the fund ranked in the top 4% for the trailing 10 years and the top 2% for the trailing 15 years.

Much of the fund’s management team has been in place for the entire 15 year period. The fund’s nearer term track record includes 2007 when the fund ranked in the bottom 38% of its category and 2008 when the fund lost 43.31% and ranked in the bottom 9% of its category.

Dodge & Cox made the mistake of replicating what worked for the fund in 2001-2002; years when the fund placed in the top 3% and 4% of its category respectively. This period marked a major market drop starting with the dot-com bubble bursting and continuing with the post-911 market decline. This was a period, however where certain parts of the market proved to be relatively safe havens. This included many traditional value stocks such as financials.

The 2008-2009 market decline saw virtually no safe havens. Financial and other traditional value type stocks were hit hard. Many of the financial holdings of this fund took a real beating. Did the managers of the fund suddenly lose their touch? Or was their investing style simply out of style?

The fund rebounded nicely in 2009 earning 31.27% for the year and ranking in the top 14% of the Large Value category.

Should you buy or own either fund? Should you sell either or both if you already own them? In both cases the numbers might lead you to one decision, but in both cases an investor should look beyond the numbers in reaching their decision.

Please feel free to contact me for a review of your investments.  Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.  

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