Dow tracks target-dates
NEW YORK – Target-date funds that take care of asset allocation and rebalancing decisions for those of us with a “set it and forget it” approach to retirement investing are growing in popularity, but until recently, benchmarking them had been difficult.
A new series of indexes launched by Dow Jones last month may help investors gauge the performance of these all-in-one products, which start out with an aggressive mix of stocks and bonds and gradually adjust to more conservative positions.
Target-date funds are essentially self-contained portfolios of several different mutual funds. They differ from a static, balanced fund in that their allocation changes automatically as an investor’s retirement approaches. Also called life cycle funds, their asset levels have more than doubled since 2000 as a growing number of providers and retirement plan sponsors roll out new offerings.
“There’s lots of organizations that provide life cycle mutual funds and investments,” said Ridgely Walters, senior director of client development and sales at Dow Jones Indexes. “But there’s been no index up until now that’s been available to measure them by their time horizons.”
At the end of last year, about 55 companies offered life cycle fund products, according to fund tracker Lipper Inc. The biggest players in the field are Fidelity Investments, with a 33 percent market share, and The Vanguard Group, with about 17 percent.
To decide what target-date funds are right for you, figure out when you’re going to retire, select a fund with a year in its name that’s close to that date and make it your core holding. For example, a 35-year-old who plans to work until age 65 might invest in the Fidelity Freedom 2035 fund or Vanguard’s Target Retirement 2035 fund.
“The analogy I like to use is that you can go to Home Depot and pick out every piece of wood you want, every nail and every knob, or you can find the house you like and just move in,” said Michael Dalis, director of Institutional Sub-Advisory Services at State Street Global Advisors, which recently relaunched a series of target-date portfolios pegged to the Dow Jones Target Date Indexes. “It’s not perfect for every investor, but it’s appropriate for that portion of investors who don’t have the interest or the skill to decide how to invest their funds.”
The new series from Dow Jones comprises 10 indexes with target dates set at five-year increments, out to 45 years. They include nine Dow Jones equity indexes, four Lehman bond indexes and a Lehman short-term Treasury index as a cash component, and they adjust their allocations monthly. The relative risk ranges from 90 percent in global equities at the most aggressive point to 20 percent once the target date has been reached.
Investors can access the indexes on the Dow Jones Indexes Web site, at www.djindexes.com.
Because these are funds of funds, they’re only as good as the shop that provides them. And because you’re committing to the shop’s overall investment strategy over the very long term, potentially decades if you hold your investment through retirement, you must be certain you buy from a provider you trust, said Lucas Garland, a research analyst at Lipper.
“You want to be sure the company will be around a long time, and that you’re comfortable with them ethically and otherwise,” said Garland. “These kinds of funds market themselves on a hands-off approach, but that doesn’t mean you shouldn’t continue to monitor their asset allocation and performance in relation to your retirement needs.”