Target Maturity Funds

[John G]

Target maturity funds are the "new thing" in the mutual fund industry. Since many folks just getting started scan this message board for advice, I want to post something about these kinds of mutual funds.

The concept behind these funds is simplicity for the customer. Just pick a fund that matches the year you expect to retire.... 2055, 2045, etc. The maturity year fund will start with shift the balance between stocks and bonds. In the early years the portfolio will include a higher percent of equity (stock) holdings, perhaps as high as 80%. As you get older, the fund will automatically shift towards a greater percent in bonds, even as high as 80% for some of these funds. Its all automatic, its simple, its easy.

What could be wrong with this approach? Well, I am not a big fan, and here are my concerns:

1. Do you really want 100% of your retirement assets in just one fund?

2. Anytime someone says "easy" or "simple", keep you hand firmly on your wallet. Some of these maturity funds are funds of funds with high imbedded fees. You best hope would be with the Vanguard version. What is even more rediculous is that many of these new packages are being sold via commissioned agents - aka LOADED funds.

3. You just can't "set it and forget it" with investing. The implication in the way these funds are marketed is that your on autopilot. It is foolish to think that you can have hundreds of thousands of dollars in a mutual fund that does not need to be monitored. That you don't need to periodically evaluate the performance of your fund.

4. While notching back on risk as you get older is a widely accepted concept, you better look very carefully at the percents used. Going with 80% bonds when you are 65 seems way to conservative since you could readily live three decades. And some of these funds start you at 60% equities, which is probably too conservative if you are in your 20s. Automatic percents vary by fund family and are based upon your assumed retirement age - no one asks you if you got started late, your retirement needs may be higher/lower than average, or how well you tolerate risk. And, these "lifecycle" or "lifestyle" (other industry names for this catagory) have no knowledge of how any other retirement assets (401k, 403b, pension, etc.) are invested.

My conclusion: think twice about the alure of the marketing hype about these funds. Am you getting dinged for higher fees and expenses? Does the rigid formulation match your needs? How does this fund match up with my other investments?

I think that most people would do very well choosing a few NO LOAD and low expense funds - perhaps a combination of index, growth, value and bond funds and handling their own "mix". Remember, these funds only address on issue - the balance between fixed income (bonds) and equities (stocks) which is called asset allocation. When you are just getting started and know next to nothing about investments, perhaps these funds put you at ease. But, please don't buy into the "simple" part. Successful investors never give up on the thinking part!

I invite folks who have choosen these funds to post.

[Guest runninlate]

Hey John G

I just opened and contributed $4000 for 2005 and $4000 for 2006 and I happened to read this message before hand.

The advisor I met with suggested I start with a somewhat easy type of allocation plan that TD Waterhouse or TD Ameritrade as it is now, its called an Amerivest plan or Roth IRA.

Have you heard of it ?

The way I understand it is that every 6 months you should get online and look at suggested adjustments and make them if necessary, also the mutual funds or equaties are with 3000 large medium and small companies.

I think its Johnson 3000 or something like that , I will have access to my account by tuesday and will be able to get that exact name but I do know the inception date was in 2000 and since inception its percetage is 15.34% yearly, I explained the Target Maturity Fund example that you posted in this prior message he said it wasn't like a TMA in the way of "set it and forget it", also the expense ratio as you suggested is actually .20% and the are no transfer fee's let me know what you think

[John G]

I did the tour for Amerivest... just a quick look. This is a internet based querie and calculator which asks about 10 questions about when you will retire, how long you might live after that date, how you might react to market flucuations, etc. The program then suggests a model portfolio of Exchange Traded Funds (ETFs) for your IRA. It does talk about rebalancing, which many planning tools leave out.

This is not a bad idea if it gets you thinking about a "plan" - but it leaves out a lot of important information. I did not see anyplace where you were supposed to input your social security, pension, 401K, 403B or other sources of income or in what they are invested. This system seemed to be focused on an individual, I did not see anything about spouses and there retirement date, age, goals, and other resources. In some key areas, like how long are you likely to live, the system gives zero guidance. Folks often underestimate their expected lifetimes. This system does not even ask how old you are, so if you plugged in a silly number for expected lifetime, the software can not prompt you to reconsider. Good software should have a cross checking to catch odd formulations by novice users. I did not see that here, but then I am not an Ameritrade customer and perhaps if you are an account holder the system uses your account profile.

Buried in the small print was a small thing about "fees". If your assets are over 100K, you pay 0.35%. But for those under 20K, you pay 2.95% annually or $100. Beginners don't get dinged for $100 at other locations so I would say that is a high fee. It was not clear to me if any of the ETF transactions have other fees, or if there is an additional IRA/Roth annual custodial fee. I think that you might be better off picking up a low annual expense index fund directly from a mutual fund. Some of the Vanguard index funds have annual expenses below 0.20% and an annual custodial fee of $10. You might be better off picking a no load fund through TD Waterhouse.

How about the result: My "plan" suggested that I had a risk tolerance and put me in 85% in IWV which is essentially a Russell 3000 index. The Russell 3000 includes the 3000 largest companies in the US, representing 98% of the stocks traded by total value of the companies. So, it has Microsoft and GE at the upper end, and some company with a market cap of 23 million at the bottom end. Recent performance has been very good because mid size firms have blossomed. If the plan says 85% in IWV and 15% in bonds... it is not hard to find two mutual funds that do the same job.

You mentioned a 15% performance since 2000. First, five years is not a long record, but you can find other sources for the underlying performance over more years for the Russell 3000. Second, past performance is not a predictor of future performance. You want to select investments on fundamentals and not chase last years top niche. Since this ETF represents 98% of the domestic US stock market, you basically get market performance, so it would not be as bad as if they suggested a energy/resouce index that has rocketed for two years.

I did not see a reference to a .20% expense ratio. This may refer to the underlying cost of running a computer list based ETF. That is very close to the expense ratios at some of Vanguards index funds.

Conclusion: Its a start, but don't assume that the software really knows you. Also don't assume that you are using it correctly. Double check all selections. Tonto, the LR and silver bullets are the stuff of TVland. Planning and investing are more complicated.