Make Your Own Target-Date Fund

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A recent study by investment firms AB (formerly Alliance-Bernstein) and Compass Investors shows that the performance of many target date funds is sorely lacking. In fact, the returns during the critical "downhill" period of funds have been downright pitiful. They believe that the poor results are largely due to the rigidity of the fund structure. What makes these conclusions really bad is the fact that many companies now automatically enroll their employees in their 401 (k) plan and place them directly into a target date fund.

The idea behind these funds is strong: as we age, our approach to investing must adapt to reflect changes in our risk appetite and investment objectives. The fund manager adjusts exposure to stocks and bonds according to the aging of the investor, which changes the asset mix and reduces risk exposure. All an investor needs to do is decide when to retire, choose the target date fund for this year and forget about it.

The results of the study, however, should prompt us to think twice before using a "one-size-fits-all" investment model. Common sense should tell us the same thing: there are far too many variables in life for a model to suit so many people. None of us have a crystal ball.

Is there a better way? Yes there is. With a little practical effort, investors can create their own target date funds and adapt them to meet their specific needs … even when these needs change. These personalized funds will be more responsive, more flexible and therefore much more powerful than one-size-fits-all models.

To create a personalized target date fund, all you need is a handful of index funds and a simple age – based asset allocation method. Set up the fund, monitor it from time to time and rebalance it if necessary. This can be done as part of an investor's 401 (k) plan or IRA, usually with cheaper charges and charges.

The flexibility of these "in-house" funds gives investors the necessary control to adjust their portfolios according to the evolution of:

– their lifestyle / unexpected life events

– market conditions / choice of investment

– their planned retirement date / other employment opportunities

Although this method requires a little more effort on the part of the investor, the commitment in time is minimal. Once established, the fund needs to be monitored only once a month or less – no more often than any other long-term investment. Better performance, lower costs and more control – these are three good reasons why creating your own target date fund is worth it.


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