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What target date funds would you recommend for someone who is in their 30s but is still focused on a low-risk portfolio?

Jul 31, 2012 by Parker from Oklahoma City, OK in  |  Flag
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7 votes

Parker,

I can understand your focus on low risk, as you have just experienced one of the greatest recessions in American history. It is my hope that you continued to invest through the downturn and have been appropriately rewarded for your persistence. It is important to maintain a clear picture of the time horizon for which you are making an investment decision. Given that you have roughly 30-40 years until retirement, using only your age as a determinant, a long-term perspective must be taken. There are a number of things I would suggest when making a decision as to which fund is most appropriate for you.

-Identify a fund company that uses index funds to build their target date portfolios. Index funds are typically much less expensive compared to actively managed funds. Reducing investment fees will dramatically affect your return over such a long-term horizon. Most actively managed funds cannot overcome their fees, thus index funds remove that element of risk, which cannot be overstated. Check out this report on the active vs. passive debate: http://www.fidelisim.com/industry-insight/

-Vanguard is a company that I would consider due to their low cost and reputation as a high quality, low cost fund company. You can find a great deal of educational material regarding their target date funds here: https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList

-If this decision is being made outside of your company retirement plan (i.e. 401k/403b), identify a fee-only Registered Investment Adviser (RIA) to assist you with your investment management needs. You may find that working with a Certified Financial Planner® professional is your best option.

-Low risk is contextually different for you than it is for an investor who is at or near retirement. Remember that you are saving for the future and a diversified, low-cost portfolio will suit you well. That may be in the form of a target date or target risk fund, or perhaps a managed portfolio. Keep in mind that your rate of savings will have just as much to do with your end result as the investment in which you place your money.

Lastly, find a competent, credentialed, and prudent advisor to lead you to a secure retirement. It will be one of the best decisions you have ever made.

Comment   |  Flag   |  Aug 03, 2012 from Medford, OR

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4 votes

Parker, assuming your retirement date is more than 20 years from now I would recommend you reconsider your propensity to incur less risk than what comes with a equity based (stocks) portfolio. "Low-risk" usually refers to bonds and there is a very good chance (based on long historical precedence-not the last 10 years) that stocks will greatly outperform bonds. Even a 3-4 percentage point spread can have a impact over 20 years of tens of thousands of dollars and probably hundreds of thousand dollars.

Comment   |  Flag   |  Jul 31, 2012 from Fallbrook, CA

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Of course, I can only comment generally on target date funds. But in general, I would steer clear of them. I say this only because a) I can't control what goes into them; and b) I generally find that what does go into them is not an optimal portfolio mix. I agree with Danny Chen's answer that meeting with an advisor to review your options could be very helpful to you (and your portfolio value!)

Also, I encourage to seek out ways to better describe what you mean by "low risk." The financial services industry nearly always uses subjective terminology, which is hopelessly inaccurate. I don't know what "low" means, nor what you mean by it. This is not your fault, but I encourage you to seek out ways to be more specific and quantifiable. For example, consider that in 2008 the S&P 500 index lost 37% of its value. You might say that the next time this happens (and it will), I want my portfolio to go down in value by no more about 30%, or some other number

Comment   |  Flag   |  Aug 03, 2012 from St Louis Park, MN

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While I cannot make specific investment recommendations because of compliance, I can suggest that you refer to troweprice.com or vanguard.com for educational information regarding target date funds. Both fund companies tend to have lower expenses than most. The closer the retirement date, in theory, the more conservative the investment strategy. If you are still unsure, find an hourly planner in your area that can give you specific direction. Great starting places are cfp.net or fpanet.org.

Comment   |  Flag   |  Jul 31, 2012 from Fort Worth, TX

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2 votes

Hi Parker,

Target date funds lump all investors of a particular age into a portfolio with an asset allocation based on their age more than the current conditions of the financial markets. For your age group the Fidelity Freedom 2040 Fund (symbol FFFFX has been one of the best performers for the last 5 years). It is currently ranked 4 stars by Morningstar.

Although they are not target date funds, I also like PIMCO’s Permanent Portfolio Fund (PRPFX), Ivy Asset Strategy Fund (WASYX), and the Fidelity Funds Fidelity Global Balanced Fund (FGBLX).

When you say “focused on a low-risk portfolio” are you referring to the risk of losing your investment dollars? Are you thinking about the risk of prices for goods going up? Investors need a rate of return greater than the rise of prices during the period they are investing. My granddaughter just came over with a ball her grandmother purchase for her at $6. I bought a similar ball for my granddaughter’s uncle 30 years ago for 99 cents. My investments needed to earn almost 6% per year for the last 30 years to have the $6 for the ball that cost 99 cents thirty years ago.

While there are low risk mutual funds, none guarantee your investment dollars or your rate of return. Individual bonds, bank CDs (Certificates of Deposit), and insurance products (annuities, guaranteed insurance contracts, life insurance products…etc...) are some of the most commonly available guaranteed investments. Remember a guarantee is only as good as the guarantor. All things will change.

If you work with a financial professional, you will have a professional you may hire and fire at your side to help you work through these issues. Your professional will help you achieve the retirement you can afford in a manner that is comfortable for you.

Most people use a professional to help them with their health. Wouldn’t it be wise to use a financial professional to grow your wealth? After our health, don’t we need the wealth to enjoy our health?

Good luck Parker, Dave

Comment   |  Flag   |  Jul 31, 2012 from Thousand Oaks, CA

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Parker, Target funds usually get more conservative as you get closer to the target date. If you are looking to be more conservative then consider a "allocation fund" that is conservative, balanced, or growth oriented. Also you may want to meet with an fee base adviser that can evaluate your individual situation and provide specific direction for you. Good Luck, Dan

Comment   |  Flag   |  Jul 31, 2012 from Asbury Park, NJ

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2 votes

Parker, While it is appropriate for you to take a hard look at your risk tolerance relative to your goals and time horizon, let's assume that you have already done that.

A target date fund may not be the best solution for a young person's conservative portfolio as it will continue to become even more conservative over time. You may want to research more of a strategic allocation fund from Vanguard (Lifestrategy funds) or T. Rowe Price (Personal Strategy funds). These types of asset allocation funds do not change over time and maintain a static portfolio allocation to a predetermined mix of stocks and bonds.

Comment   |  Flag   |  Nov 30, 2012 from Denver, CO

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