Sunday, December 12, 2010

Targeting Target Date Funds: An Update

Yesterday, I posted an article about target date funds where I compared the holdings of three popular ones.  A picture is worth a thousand words, so I created a chart which shows the relative stock holdings of each:



As you can see, prior to 2030, all three hold about the same percentage of assets in stocks.  Generally, the T. Rowe price is the most aggressive, and the Fidelity is the least aggressive.  However, they start to converge up until 2030.  After 2030 they start to diverge again.  The Fidelity fund's stock holdings drop to 20% over a 10 year period, while the T. Rowe Price fund drops to 20% much more gradually.  The Vanguard fund drops at about the same rate as the T. Rowe Price fund, but it only drops to 30%.  As a result, the Vanguard fund becomes the more aggressive after 2050.

The point is that you need to examine the holdings of your target date fund before you invest so that you are comfortable with its investment philosophy.  Knowing what you are investing in the cornerstone of being a smart financial consumer.  Just because target date funds are advertised as set-it-and-forget-it investments doesn't mean that you don't have to know what you are "setting" your money to.

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