Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why America's Bestselling Retirement "Plan" Is Jeopardizing Your Retirement

Personal_Finance / Pensions & Retirement Dec 13, 2013 - 02:05 PM GMT

By: Money_Morning

Personal_Finance

Robert Hsu writes: I recently received a call from "Russ," a client of mine. He was wondering why the investments he holds at my money management firm have gone up so much more than the money he's entrusted to a major fund broker.

I'd be wondering, too.

That's because, in a year filled with hundreds of 52-week highs and a broad market that climbed roughly 25%, they've managed to "grow" Russ' money all of... 2%?


It didn't take long to find out why.

It's estimated that by 2020, nearly $3.85 trillion will be invested in the same "one-click" mutual fund industry's bestsellers that Russ did: "Target Retirement Funds."

I'm so glad he called.

These "funds of funds" are dangerous. They're far too simplistic, automatically adjusting your investments based largely on one factor: your age. And that just doesn't work anymore.

In fact, these "solutions" are more dangerous than they've ever been...

The Market Doesn't Know - or Care About - Your Birthday

"Target" funds allocate client money to other funds within their respective investment "families," and they do so almost exclusively based on the client's age.

Basically, the older the client, the greater the percentage of the target funds allocated to bond funds rather than equity funds.

That sure sounds good. I mean, who doesn't want an easy retirement solution?

But if successful investing were as simple as knowing your age, then everyone would get it right.

Yet all of the big brokers push these "Target Retirement Funds" now.

Vanguard, Fidelity, T. Rowe Price, Schwab...

And they push them to everyone.

Income investors, retirees, would-be retirees... They even now sell funds that you can tailor to the age when your children will head to college... as if the market cared about our children's ages, too, let alone ours.

Russ found this out just in time...

So Much for "Safety"

My client is 86 years old, and when he told me about his target fund and its underperformance versus my income allocations, I immediately suspected that most of his money was allocated to long-term Treasury and corporate bonds.

Indeed.

Stocks, private-equity funds, business development corporations (BDCs), and other nontraditional income-generating assets have done very well this year.

But bonds, and particularly long-term Treasury bonds, have had a very rough go of it.

For example, the iShares 20+ Year Treasury Bond ETF (TLT), an exchange-traded fund (ETF) that tracks the performance of an index of public obligations of the United States Treasury with a remaining maturity of 20 or more years, is down nearly 17% over the past 12 months.

So much for those "safe" long-term Treasury bonds...

The chart here of TLT shows the bearish trend in this once-hot market segment.

Here's the Problem
One reason why Russ' target fund has disappointed this year is because these funds follow an easy-to-understand formula called the "rule of 100."

This rule states that if you want to find out how much of your investment capital you should put into equities, and how much you should put into bonds, then subtract your age from 100, and the resulting sum is how much of your portfolio you should have allocated to equities. The rest is what you should have in bonds. So, if you are 86 years old, then just 14% of your money should be in equities, and the rest in bonds.

Yet given how poorly many bond segments have performed in 2013, this rule has been a miserable failure for income investors.

And this "rule" will continue holding you back from achieving your goals.

You can thank a long-term trend of rising interest rates for that...

The Inevitable Shift Has Begun

The inevitable shift toward rising interest rates, i.e., falling bond prices, means many older investors will be grossly over-allocated to one of the worst-performing market segments at the time when they need income most. With bank savings, CDs, and other "safe" investments yielding next to nothing, income investors simply cannot afford to uncritically follow the formulaic underpinnings at the crux of these target funds.

Today, investors need to be more involved, more aggressive, and just plain smarter when it comes to making investment allocations in their income portfolios.

The plain truth is that the new bond landscape demands that your strategy change along with it. In the current environment, you simply cannot buy and hold long-term bond funds, or formulaic target funds, and hope to achieve the kind of yield and share price appreciation required to generate the total return results that many income investors enjoyed during the bond bull prior to 2013.

It's just not enough today to wait around passively for your income holdings to eke out a 2% gain, the way Russ' did. That barely keeps up with inflation, and it definitely doesn't give you the kind of income most of us need to live the way we want to live.

How I Fixed the Problem

In the end, I advised Russ to exit his Total Retirement Fund, and stop relying on outdated allocation strategies, like the "Rule of 100."

He's much better off in "total return" holdings, like Apollo Investment Corp. (Nasdaq: AINV) which we covered right here, and Kinder Morgan Energy Partners LP (NYSE: KMP), another long-term winner.

After just a few weeks, the move has already paid off for Russ...

Source :http://moneymorning.com/2013/12/13/americas-bestselling-ret...

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in