Target-date funds are devising new strategies designed to help investors achieve a secure retirement. But along the way, they're introducing new risks for older investors.
What's under the hood? In recent years, many target-date funds have been trimming plain-vanilla bond holdings in favor of foreign developed and emerging-markets bonds, high-yield debt, and "unconstrained" bond strategies—which can invest anywhere in the bond market.
In the John Hancock Retirement Living Through 2015 fund (JLBAX), whose investors are just entering retirement, about 30% of the fixed-income allocation is in bonds rated BB or lower, according to Morningstar. Although high-yield bonds have been whipsawed lately, the allocation has "paid off handsomely" over the longer term because the fund added to the position in 2009, catching a major post-financial-crisis rebound, says Marcelle Daher, the fund's co-portfolio manager.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Examining your target-date fund's underlying fund holdings can give you another view of the potential risks. The Dimensional 2020 Target Date Retirement Income fund (DRIRX), whose investors are on the brink of retirement, devotes nearly 30% of assets to DFA LTIP fund—a long-term TIPS fund that is highly sensitive to interest-rate changes and lost 26% in 2013. "I wonder if investors are prepared to see those types of losses in a bond portfolio while they're in retirement," Holt says. Dimensional says it doesn't expect its target-date funds to be more volatile than others in the industry.
How steep is the slope? A target-date fund's glide path "slope" is the rate of change in the stock allocation over time. Some target-date fund families have made their slopes a bit steeper lately, Holt says, by boosting stock allocations in the years leading up to retirement while holding them steady at the retirement date.
But a steeper slope can be riskier for investors. A fund manager who is trying to stay in line with a steep glide path may be forced to rapidly sell stocks in the years leading up to the target date, even if the market is slumping. And the fund may have difficulty recovering from those losses, since it will have relatively little exposure to any subsequent stock-market rebound.
To see an illustration of your fund's glide path, along with details on the underlying holdings, enter the fund name or ticker in the quote box at Morningstar.com and click "portfolio."
-
Visa Is the Worst Dow Stock Wednesday. Here's WhyVisa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
-
Another Analyst Moves to the Sidelines on Tesla Stock After EarningsTesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
-
The 5 Best Actively Managed Fidelity Funds to Buy Nowmutual funds In a stock picker's market, it's sometimes best to leave the driving to the pros. These Fidelity funds provide investors solid active management at low costs.
-
The 12 Best Bear Market ETFs to Buy NowETFs Investors who are fearful about the more uncertainty in the new year can find plenty of protection among these bear market ETFs.
-
Don't Give Up on the Eurozonemutual funds As Europe’s economy (and stock markets) wobble, Janus Henderson European Focus Fund (HFETX) keeps its footing with a focus on large Europe-based multinationals.
-
Best Bond Funds to BuyInvesting for Income The best bond funds provide investors with income and stability – and are worthy additions to any well-balanced portfolios.
-
Vanguard Global ESG Select Stock Profits from ESG Leadersmutual funds Vanguard Global ESG Select Stock (VEIGX) favors firms with high standards for their businesses.
-
Kip ETF 20: What's In, What's Out and WhyKip ETF 20 The broad market has taken a major hit so far in 2022, sparking some tactical changes to Kiplinger's lineup of the best low-cost ETFs.
-
ETFs Are Now Mainstream. Here's Why They're So Appealing.Investing for Income ETFs offer investors broad diversification to their portfolios and at low costs to boot.
-
Do You Have Gun Stocks in Your Funds?ESG Investors looking to make changes amid gun violence can easily divest from gun stocks ... though it's trickier if they own them through funds.
