Are You on Target?

If you don’t follow Wall St. that closely, rest assured you can count on one thing- Wall St. is always coming out with something new. From floating rate bank loan funds to credit default swaps to collateral loan obligations the Wall St. factory is always churning out a new product. Sometimes, the inventions are good, but often they are not.

Back in early 1990s Wall St. created something called target date funds (also known as life cycle funds). These investments are often found in company 401(k) programs and were created as an “easy” way for an investor to choose an investment that automatically resets the mixture of stocks, bonds and cash as the investor ages- decreasing risk tolerance the closer one gets to retirement. They are the quintessential low-maintenance retirement plan product.

So are they a good deal? For some, yes. Target date funds are indeed an improvement for an unsophisticated investor just blindly choosing investments from a list of options. But they aren’t without their pitfalls. For instance, target date funds don’t account for risk tolerances- so if you’re a young investor, say in your 20s or 30s, with a moderate level of risk tolerance, choosing a target date fund of say, the year 2050 (35 years until retirement), will almost certainly yield a much higher degree of risk than you may be comfortable with. Another thing to consider- the asset allocation in target date funds with the same target date may, in fact, vary widely from one fund to the next. After all, there is no one definitive, authoritative answer as to what percentage of stocks and bonds one should have at any particular point in time. Lastly, fees can also be quite high, with many funds charging more than 1%/year.

So, what’s an investor to do?  If you aren’t willing to pay for professional help, or do a large amount of research yourself, than target date funds may not be a bad option.  But a study earlier this year by Financial Engines and Aon Hewitt noted hiring a professional (even if you do have to pay him or her), is almost always going to get you a better end result (by about 2-3%/yr).Target Date Mutual Funds

This shows a typical “glide path” for target date funds, moving from very conservative (retiring tomorrow) on the left to more aggressive (retiring in 2040) on the right.

The Prior Month

Stocks continued their recovery from the October setback in November with a two and a half percent advance on the S&P 500. The unemployment rate remained steady at 5.8% as the U.S. economy added 321,000 jobs in November. Interest rates on the benchmark 10-year U.S. Treasury fell as well from 2.34% to start the month down to 2.19% by month’s end. Re-finance rates continue to remain attractive across the spectrum, cats and dogs are holding paws and there just doesn’t seem to be anything that can keep this market down for more than a few weeks. Oil prices (and thus gasoline prices) have fallen which should put additional money in the hands of the consumer and help retail establishments from restaurants to department stores. Airlines are also helped by this while oil and oil services companies are feeling the pain.

This Month

With Santa coming to town and the markets setting new highs almost daily all seems well for the financial markets. We still have some lingering doubts about the relatively shallow correction we had for three weeks this fall but until the market starts to trend down, we can’t be overly concerned. Central banks around the world continue to pump trillions into economies even though markets in many places are at all-time highs- which seems odd. We’ll continue to take a balanced approach with both equity and bond investments and some cash as well. December is typically kind to stocks and the fabled “Santa Rally” figures to show up at some point. There exists debate about whether it’s supposed to come in the week leading up to Christmas or the week between Christmas and New Years. To be blunt, we don’t care and wouldn’t place a trade based on one week’s expected return anyway. Keep an eye on retail sales- Black Friday weekend data was absolutely dreadful. While past experience has shown this data to not be indicative of the rest of the season, seeing a down 11% number certainly was eye popping, especially with gasoline prices tumbling.

Calendar of Events

Boulder Yardbusters

We volunteered one final Saturday morning last month for the Boulder County Care Connect Yardbusters Program. A few hours of leaf raking and lawn mowing later one Boulder county resident’s yard was all set for winter. And not a moment too soon- it snowed four inches the next day! While the Yardbusters program is shut down for the season the Ice Busters program now takes over. If you’re interested (and have a flexible schedule that allows you to shovel snow within 24 hours of it falling) please consider signing up for this wonderful program. Contact me for more details.

Have a great December,

Steve Zakelj, CFP®
Chrome Asset Management

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