Tuesday, May 01, 2007

Target Date Evolution

I didn't invent the "Target Date Mutual Fund" concept, but I do believe I've come up with a unique idea that will make the Target Date concept even more mainstream. The concept, drum roll please.......Risk-Based Target Date Funds (or portfolios).

For those of you who are not familiar with "Target Date" funds, they are basically mutual funds that invest your money in a diverisified portfolio of stocks and bonds based on your retirement date. The closer to retirement you are, the more conservative the fund becomes. These funds automatically adjust as you age, you don't have to do anything.

The problem with most of these funds is that the asset allocations cannot be controlled by the investor - it is one size fits all. If you don't have the same philosophy about risk as your target date provider does, you are up the creek. This is where my concept comes in.

Basically, instead of a fund company creating one target date fund for those who retire in 2040, they create multiple versions of the 2040 Target Date Fund that scale in terms of risk. For example, a company would have the Conservative 2040 fund, the Moderate 2040 fund, and the Aggressive 2040 fund.

Yes, it does add another layer of decision making, but not much, most people can place themselves within the conservative, moderate, aggressive monikers.

This approach allows people with different risk profiles to still invest in an auto-pilot type fund.

Currently there is not a single company or mutual fund provider doing this, however I know of one high profile firm that will be rolling this concept out soon. In ten years I expect it to be the norm......and you'd have heard it here first!

Scott Dauenhauer, CFP, MSFP, AIF