Financial Answers

As I have said many times before, the financial world can be a very confusing place.  With that said you have a new wrinkle to consider when setting up your investment portfolio.  Of all the mutual funds out there these seem to be getting the most publicity recently.

A little history on target date funds

A very popular mutual fund over the last decade or so has been the “Target Date Mutual Fund”.  This type of fund was supposed to make investing easier for you and me.  However, the poor performance of target date funds in 2008 and 2009 has raised a lot of serious questions about the way target date funds work.

Some of the target date funds lost up to 80% of their value which was a disaster for the people who owned them…especially those getting close to their retirement years.  Target date funds were supposed to prevent that from happening by being more conservative in their investments as the target date fund got closer to the retirement date of the person who owned it.

 If you would like to see more on target date funds from In Simple Language put target date funds into the search box and read those articles.

Make sure you understand what you are buying

There is a lot of concern about the poor performance of target date funds in the past which was mainly caused by the fund managers not following but rather changing the structure of the fund.  The SEC (Securities Exchange Commission) is calling for new rules that would require the various target date fund providers to be clearer on what direction the fund will specifically take as it heads for its target date in the future. 

This is critical information because many target date funds got into trouble in the past when they were supposed to be investing conservatively when they got close to their target date. Instead many were heavily invested in stocks and lost a ton of money for their fund owners.  This new  SEC disclosure requirement should be a good thing.

What I want you to be aware of is when you buy a target date fund the target date is usually set for some time in the future like 2020 when you would be retiring.  The fund expires in 2020 and you get your money and move on to something else. 

What is being proposed now are target date funds that don’t just go up to your date of retirement but many years past.  These new target date funds are being called “through retirement” target date funds. These new target date funds will not only stay in place up to your date of retirement but also for however long after that you want them to. 

This may be good for you and it is certainly good for the company handling your target date fund…they get to use your money longer. That is not necessarily a bad thing. 

If you want to stay invested until retirement than select an “up to retirement” target date fund.  If you don’t want to be bothered worrying about what to do with your retirement money after you retire than maybe part of your retirement money should be invested in a “through retirement” target date fund.

I know this is confusing but you need to know what you are buying so make sure you talk to your trusted financial advisor to make sure you are getting the investment(s) that fits and meets your goals.

Remember it is your money and you need to protect it.

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