I have a new column at Advisor Perspectives this week called, "The Pros and Cons of Target-Date Funds in the Accumulation Phase." To be clear, the discussion is about pre-retirement, and it does not relate to the separate post-retirement rising equity glidepath issue. Basically, as a general default assumption, I'm in favor of a U-shaped lifetime equity glidepath with the lowest lifetime stock allocation occurring around the retirement date.
In the column I first review two general justifications provided for target date funds: an argument about the human capital and the total household balance sheet, and an argument about how declining stock allocations support the "best" distribution of wealth outcomes at the target date. Then I discuss various challenges which have been made against target-date funds.
By the way, the May 20th webinar went well. Thank you to everyone for your support and interest. There was a maximum allowed 250 registrations, and I've heard from a number of people who could not get registered after 250 was passed. Down the road I will re-do that presentation. It was not recorded. Meanwhile, we are planning two follow-up webinars in June. I'll provide specific details and links soon, but as a heads up, the plan will be to discuss "safe savings rates" on June 18, and a part 2 of the original webinar in June 26 in which I move forward with material I didn't have time to cover on the first go-around.
In other news, I'm honored to be included in the Investment Advisor IA25 list for 2014. As well, Michael Finke, David Blanchett, and I have been selected as recipients of the 2014 Montgomery-Warschauer award for articles published in 2013 issues of the Journal of Financial Planning. The award is for "The 4% Rule is Not Safe in a Low-Yield World."
One of the things that drives me nuts about much of the financial planning is the abstract probabilistic way that the finances are evaluated with little discussion about behavior. Yours and Dirk Cotton's blogs are some of the few that look at this issue. I particularly enjoyed Dirk Cotton's post on the "Chicken is involved but the pig is committed."
ReplyDeleteI can assure you that many of the 60-65 year holds who had 80%+ equities in 2007 were bailing out of the equity markets in 2008-2009 as they watched their house equity and retirement accounts going up in a puff of smoke while the TV is blaring that ATMs might not be open on Monday and Social Security would be bankrupt in just a few years. They would have switched over to the business channels where the "rational economists" are hyperventilating in panic. A solid well diversified low-cost TDF with a 50%-70% equity allocation at that point would have prevented much of the panic selling. Major market plunges like this are going to happen with regularity. The late 60s and 70s, 1987, and the 2000s are all living in infamy. Looking at the valuations etc., I would be surprised if we don't see at least a 25% drop sometime in the next handful of years that will probably be a glorious buying opportunity setting up the following decade or two of solid returns.
So it is quite likely that somebody will run into one of these heart-stopping market periods in their late 50s and 60s before they have gotten their financial retirement lives fully sorted out. Since the advisors, the press, the financial firms, the Fed, and the US government are always trumpeting how good things are (except at the peak buying moment in the heart of the crisis) the average person is caught with their shorts down mentally when the crisis hits since the financial leaders are also caught with their shorts down. A good TDF with a decent glide path is about as good a tool as any to provide buffering against a major selling mistake at the moment when a person has maximized their assets and the markets have already greatly devalued the equities. Instead a good TDF is rebalancing the bonds back into equities right when it is of most benefit to the individual.
The pretty probabilistic studies need to be bathed in a vat of behavioral economics in order to be truly relevant to the average person and their financial advisors.
Nice article. I agree with you that TDF probably take more heat than they should. Here's another positive from a recent blog post of mine:
ReplyDeletehttp://awealthofcommonsense.com/behavior-investment-strategy/
They actually help investors behave better by limiting their decisions.
Congratulations! Nice work!
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