Direction needed
NEW YORK – Page Neal socks away money into her savings but acknowledges she doesn’t want to fuss with a lot of decisions about where to invest. She’s not alone and is just the type of arm’s-length investor that mutual fund companies are increasingly targeting.
For workers like Neal, a 26-year-old jewelry designer, retirement is likely still several decades away, so deciding where to invest now for something so far off can be a daunting prospect. Knowing how many questions investors often have, financial companies have been pushing funds in recent years that automatically grow more conservative as retirement nears. But although these target-date funds are designed to work essentially on autopilot, there are still questions investors should consider.
Investors need to determine how much of their portfolios should be in target-date investments. The funds are envisioned as one-stop shopping investments – something with enough diversity to serve as the base of an investor’s holdings. Still, investors would often do well to consider other side investments as well.
And not all funds maturing in the same year would necessarily navigate the same path until then. Some funds could make aggressive investments while others could hew to a more conservative approach. Investors need to consider what kind of risk they will accept. Someone who panics and dumps a fund when markets fall can destroy much of the benefit of a long-term investment like a target-date fund. Used correctly, though, these funds can save investors from themselves. Keeping a far-off retirement date in mind might prevent some investors from calling their brokers with a sell order.
Beyond trying to evaluate how much risk a fund might take, investors would likely want to determine how well a fund is performing. But that can be difficult because there isn’t a widely used yardstick for measuring target-date funds, notes Jeff Tjornehoj, an analyst at fund tracker Lipper Inc. It’s not like with a mutual fund investing in large-capitalization stocks, for example, that would be measured against the Standard & Poor’s 500 index.
“I think a lot of the head-scratching on the part of investors considering target date funds and their comparability resolves around the lack of a solid index,” he said. So investors considering a target-date fund might want to compare how it is doing with others with the same target year.
And even hands-off investors might want to know how their holdings might look when retirement nears. An investor considering a 2045 target date fund could examine one maturing in 2015 to get an idea of how that longer-term fund might look and perform as that year approaches.
Investors should also compare expense ratios. While these measurements won’t offer a complete picture, it can help investors – even those who don’t want to make a lot of decisions – to at least set off on the right course.