FACTS ON FUNDS
New product will make your investment life easy and adjustable,
In the last five or so years, a new investment product has sprung up using computer programs to create portfolios based on your age and stage.
These portfolios are called “Target Date Funds” and they’re growing in popularity. Mutual fund companies, banks and insurers are all offering them now. Target-date funds make things easy by automatically adjusting what you hold in your portfolio as you get older. Early on, you can accept more risk and later on as you close in on retirement, less.
For example, someone who is 30 today and hopes to retire in 30 years would buy a 2045 target-date fund.
The 30-year-old has plenty of time to ride out market ups and downs, so he or she can take more risk now. Stocks return on average 7 per cent over long periods, but in any one year things can be really bad or better than average. So the 2045 fund might have as much as 90 per cent in stocks, with just 10 per cent in bonds.
Every so often the portfolio adjusts the weighting of what’s inside. You don’t have to do anything. That’s why target-date funds are taking off. They offer a way to adapt and hopefully improve returns without any action on the part of investors. They’re easy to understand and simple to use. When you set up the account you choose a high, medium or low risk and the portfolio does the rest. That’s it.
Sun Life Financial noted in its 2014 review of the pensions it manages that more companies are opting for these funds. Sun Life also noted that between 2009 and 2014 target date funds grew from about 7 per cent of its assets under administration to 16 per cent. About 90 per cent of new pension plans are making them the default option when employees enrol, Sun Life says.
Michael Greenberg, a vice-president involved in creating these portfolios at Franklin Templeton Investments, said in a recent interview his company started offering target-date funds about five years ago. It now has 11.
Greenberg said an advantage of the portfolios is that they overcome investing inertia. He believes some investors take too little risk, setting their fund defaults to cash or money market options where gains are meagre. Or they lose interest and don’t adjust their holdings over time, losing out on potential gains.
Another plus, he says, is that they limit panic selling when markets drop.
“Target-date funds are good for those who are not comfortable doing it on their own,” Greenberg says. “It also saves people from buying high and selling low, because it’s done for you.”
When clients enrol in target-date funds, they typically provide basic information about age and income, risk tolerance, when they plan to retire and how much they’d like to live on. The risk tolerance determines what goes inside the portfolio. If at a later date they want more or less risk the preferences can be changed.
The portfolio is reviewed periodically and the changes show up on your monthly statement.
Dave Paterson, an independent mutual fund analyst who helps investment advisers build portfolios for clients, says the funds are an option for those who don’t want to be actively involved in their investments. “But if you are willing to spend even a minimal amount of time on your portfolio, I bet you could do better,” he says.
I agree. As investing and pension management become more complex, target-date benefit plans offer a solution for those who don’t really want to pay attention.
They aren’t the worst choice you could make, though a better one would be to take an active interest in your affairs. Nobody should care more about your hard-earned money than you. Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Reach him at amayers@thestar.ca