I was reading this article,The Risks of Target-Date Funds, and thought it would be worth writing about. I'm going to assume that readers already know what they are (which also goes under the name of Freedom funds, Lifecycle funds and Target Retirement funds).
First, I just want to say that I am a big fan of them. They are particularly good for average, passive investors looking for a way to "set it and forget it" for their retirement investments. In fact, my entire 401(k) is just one of these funds right now.
That said, nothing in life is without risk, and these funds are no exception. The article linked here is one such reminder of that.
The only thing I would say about the article is that they're pointing out the end of 2008 as an example of how TDFs have failed investors who were nearing retirement by having too much % equity. To which, I do have some rebuttals:
1. Retirement investing does not end at retirement. Hopefully, you'll still have 30 more good years ahead of you, so even if you have taken a hit back in 2008, there is still time to recover and grow even more.
2. Even 100% fixed income investments comes with its own risk, such as inflation risk and longevity risk. Suitability of asset allocation depends on the size of your nest egg and risk tolerance.
3. Prior to 2008, most of these TDFs were criticized for being too conservative and not matching the gains from more aggressive funds. This was an incorrect perception back then, as the point isn't so much to increase gain, but more to decrease risk in my opinion. But it's hard to be reminded of risks during the good times. Not surprisingly, more aggressive funds fell out of favor after 2008, but TDFs also took a hit for being too aggressive as well.
4. After 2008, most target funds (or at least Vanguard funds that I am aware of) have been tweaked to become more conservative. So, it's important to keep in mind that today's 5-year horizon TDFs is not the same as the pre-2008 5-year horizon TDFs for example.
But regardless of the details in this debate, I nevertheless agree that we should always be ever-vigilant of our money. In the era of Toyota and Honda safety recalls, even the best can falter, and it's up to us to be aware of these issues.