Intelligent Investor
October 2011 US Stock Market Forecast $99
October 2011 Global Economic Analysis $99
October 2011 Commodities, Currencies & Precious Metals Forecast $49
November 2011 Commodites, Currencies & Precious Metals Analysis and Forecast $99
November 2011 Emerging Markets ETF Forecast $99
November 2011 US Stock Market Forecast $199
November 2011 Global Economic Analysis $99
UK Economic Analysis: Risks to the Housing and Banking Sectors $50
December 2011 U.S. Stock Market Forecast $99
December 2011 Emerging Markets Forecast $99
December 2011 Commodities, Currencies and Precious Metals Forecast $99
December 2011 Global Economic Analysis: The Big Picture $99
Telecom Industry Analysis: Industry Dynamics, Risks and Opportunities, November 24, 2011. Cost: $49
Canadian Oil Trusts: Simple Valuation Methods. Cost: $99
U.S. Royalty Oil & Gas Trusts: Valuation Analysis. Cost: $150
Global Pension Risk: Part 1. Cost $75
Global Pension Risk: Part 2. Cost: $75
Global Pension Risk: Part 3. Cost: $75
Europe's Deflationary Future. Cost: $199
Market Valuation: Methods and Analysis. Cost: $199
China: Risks & Opportunities. Cost: $199
January 2012 Global Economic Analysis $99
January 2012 U.S. Stock Market Forecast $99
January 2012 Emerging Markets Forecast $99
January 2012 Commodities, Currencies and Precious Metals Forecast $99
U.S. Stock Market Forecast Update January 26, 2012 (Cost: $50) |
| Target-Date Funds: Another Dangerous Investment Epiphany |
|
|
|
You may have heard of one of the newer (marketing) "innovations" developed by the mutual fund industry called target-date funds. They were launched a few years ago as a way to ensure investors they had developed a better way to manage investment risk after many saw their retirement accounts vaporize during the dotcom collapse. The idea behind target-date funds is simple and seemingly useful. You select funds based on your target retirement year. Based on the year selected, these funds gradually invest in more conservative financial instruments as your retirement date approaches.
For instance, if you plan to retire in 2025, the current holdings of a typical fund might hold say 80% equities and 20% bonds. By 2020, the allocation might have gradually shifted to 40% equities and 60% bonds.
The rational for the reallocation to bonds is that equities are more volatile, so as your investment horizon (retirement date) draws near, you will want to have a less volatile portfolio so as to have a more predictable income stream.
Right from the get-go, I was critical of this simplified approach to asset management. In fact, I considered target-date funds somewhat of a fraud based on the marketing used to position these funds as safer than regular funds.
While target-date funds seem to offer a theoretical improvement over investing regular mutual funds, theory and reality are often very different, especially when it comes to investments.
I could list many instances whereby target-date funds would be less beneficial over regular funds, but I will focus on three.
First, target-date funds provide a false sense of security because they imply that the assets are being managed based on your investment objectives. They use the date which you plan to retire as the primary investment objective. However, there are many other variables required to customize an investment strategy for individuals. In essence, mutual fund companies are playing the role of financial advisers, which sets them up for an entirely different liability issue.
Second, as your retirement date approaches, the fund will gradually shift to bonds. However, what if interest rates are very low during this period, as is the case now? You would be stuck in a fund that buys bonds at the worst possible time.
Third, with total assets approaching $300 billion, these funds are becoming a popular choice among investors. However, many of these funds are risky, charge excessive fees, and assume the stock market will trend upwards over the long-term. If you think the stock market will always lead to investment gains over any 20-year period (as mutual fund companies assume based on historical data) you have not considered the case of Japan. History is no predictor of the future.
Today, the SEC voted 5-0 in favor for further marketing disclosures for target-date funds. However, these requirements are insufficient. The lack of transparency seen in mutual fund marketing materials continues to be irresponsible.
While the SEC assumed the role of regulator of the mutual fund industry shortly after the dotcom implosion, the fact is that this industry still faces no real level of regulation.
When financial crises occur, many point to the need to regulate hedge funds. I would say such a consideration shouldn't even be on the table until the mutual fund industry is regulated. The same applies to ETFs.
Anytime you see investment firms that market a product attempting to make the investment process simple and generic, I will guarantee you it is filled with holes.
Human nature dictates that people are drawn to simplicity. By creating an investment strategy laymen can understand, it creates the delusion of value and the reality of higher risk, usually with higher fees.
I would say that target-date funds are in a completely different category as regular funds. These funds are offering a somewhat customized (although generic) investment portfolio. As a result, they should be fair game for lawsuits.
Aside from the inherent problems resulting from the oversimplication and lack of real active management seen in target-date funds, we cannot forget that mutual funds are fundamentally weak, costly and risky investment vehicles. This becomes even more true the more money you plan to invest.
I have discussed the fundamental weaknesses with mutual funds in the past. This might be a good time to review this material.
So what's the solution then?
You can find a financial adviser that truly knows what's going on (which is unlikely unless he subscribes to our newsletter), or you can try to tackle the very difficult investment process yourself.
If you opt for the later, you had better be armed with someone who not only knows what's going on and someone who doesn't sell securities (so as to eliminate bias), but also someone who teaches you how to become a sharp investor. This is precisely what our investment newsletter does.
Whether you decide to use a financial adviser or go at it alone, you would be wise to arm yourself with the AVA Investment Analytics newsletter.
Those who read America's Financial Apocalypse (2006) and Cashing in on the Real Estate Bubble (2007) were not only alerted to the catastrophe we see today, but were provided with SPECIFIC ways to profit that have yielded over 100% gains since then. Click here for some examples.
If you want access to institutional-level research, analysis and investment guidance, subscribe to the AVA Investment Analytics newsletter today. www.avaresearch.com Copyright © 2008-2011. Mike Stathis. All Rights Reserved. 
|
