In recent years it seemed as if Ron Popeil was running the fund industry: One-stop solutions for investing, like so-called target-date funds and retirement income funds, promised the no-muss, no-fuss answer for overwhelmed investors everywhere. It looked simple enough; you put all your money into one fund, picked a “target” year for retiring and let the manager invest it for the decades to come.
But in the post-crash era, Americans are discovering that “set it and forget it” doesn’t always work, especially not for investors who hope to retire sooner rather than later. Indeed, instead of protecting this group from the volatility of the stock market, most target funds with a retirement date of 2010 were heavily invested in equities. Most of those lost at least 20 percent — and some as much as a third — since the beginning of 2008. And while that’s still better than an all-stock portfolio would have fared over that period, losing a big chunk of your balance a year before your anticipated retirement can obviously derail those plans. Says Craig Israelsen, an associate professor at Brigham Young University and a longtime critic of target-date funds: “Why are you swinging for the fences with just two years to go?”
The fund companies say target-date funds are designed to carry investors through their entire retirement — decades past the date on the fund. And financial planners agree: To make a nest egg last 30 years or longer, most people need a hefty dose of equities. So for the 13 percent of investors who plan to stick with the target-date funds in their 401(k) plans after they retire, stock-heavy target-date funds might be fine. But the other 87 percent, Israelsen says, “are really taking a huge risk.”
What’s the answer? Investors who don’t need to gamble for big gains in their final working years may want to start managing their own mix of stocks and bonds as retirement gets closer. Planners say that’s not hard — you can replicate most target-date funds with a low-cost total stock market index fund and a bond index fund, then tweak the mix (once a year is plenty). Or investors could simply choose a more conservative target-date fund offered by another fund company: Wells Fargo and MFS dial down to about 30 percent stocks within 16 months of retirement (their 2010 funds were down less than 17 percent in 2008).
And anyone with decades until retirement may want to skip the target-date merry-go-round completely. In fact, a look at T. Rowe Price’s own retirement calculator-which runs more than 1,000 market scenarios — a portfolio with 60 percent stocks and 40 percent bonds will actually generate more retirement income than T. Rowe Price’s target-date funds over periods lasting more than 15 years. That means a traditional balanced fund will suit most long-term investors just fine. Stuart Ritter, a financial planner at the firm, says he still prefers target-date funds, but “if you’re going to pick just one fund and hold it, a balanced fund is a perfectly fine choice.”
A good balanced fund is a worthy alternative to a target-date fund. Over the long haul, these three have held up nicely.
American Balanced (ABALX)
1-year return: -28 percent
5-year return: zero
Expense ratio: 0.58 percent
This fund is weathering the storm better than 73 percent of its peers. The funds’ management avoided most banks, preferring companies with stronger balance sheets; on the bond side, the managers prefer highly rated bonds to riskier fare. All told, it’s made the fund a less volatile option — good news in markets that don’t seem to be mellowing.
Oakmark Equity & Income I (OAKBX)
1-year return: -17 percent
5-year return: 5 percent
Expense ratio: 0.83 percent
This fund’s managers have found more shelter than most in this market, using short-term Treasurys for 40 percent of the portfolio and cheap stocks for the other 60 percent. The fund just reopened to make up for investors who have left, but it’s hard to see why shareholders would flee: In recent years the fund has been a top performer; over the past decade, it’s been half as volatile as the S&P 500, with substantially higher returns.
Manning and Napier Pro-Blend Moderate Term (EXBAX)
1-year return: -21 percent
5-year return: 3 percent
Expense ratio: 1.11 percent
This small Rochester, N.Y.-based fund shop takes a novel approach to its four balanced funds: Instead of sticking to a static mix of stocks and bonds like most competitors, the managers can change the allocation as they see fit. This fund invests 20 to 60 percent in stocks, which the company says is appropriate for investors who have three to 10 years before they expect to need their money. These days, with so many bargains post-crash, stocks make up more than half the portfolio.