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Age in bonds and Target Date Funds
Old 03-10-2010, 01:51 PM   #1
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Age in bonds and Target Date Funds

There are a couple of very good articles in the March issue of the Journal of Financial Planning (They are available for free only in the current month)

Asset Allocation for Retirement: Simple Heuristics and Target-Date Funds
The authors study static and dynamic asset allocation methodologies (like age in bonds) including those used by target date funds.

Unsafe at Any Speed? The Designed-In Risks of Target-Date Glide Paths
Zvi Bodie and others look at the risks in Target Date Funds and suggest a method for measuring their risk. I thought this was a very insightful article.

And from the Boglehead's forum, this entry was very interesting especially the analysis done by the 2nd poster.
Bogleheads :: View topic - Static Asset Allocation vs. Shifting With Age

I use a 60/40 equities/bonds static allocation, but of late, am questioning it. Hence, this reading list. I haven't been convinced that a dynamic allocation is the way to go - maybe a more conservative one - say, 50/50.
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Old 03-10-2010, 02:36 PM   #2
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I think about asset allocation in terms of a target rate of return. As I age, and as the duration of my retirement declines, my return requirements go down. They also become more certain. Lower, more certain, return requirements permit a higher bond allocation. Near the very end of life (say at age 85 or so), I can see constructing a 100% TIPs ladder.

Similarly, I'm also thinking about increasing my bond allocation as equity gains push down my withdrawal rate (and push up equity valuations). With a lower withdrawal rate, my return requirements are lower and therefore can be met with a higher bond allocation. This has the added benefit of reducing equity exposure as valuations rise.
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Old 03-10-2010, 04:20 PM   #3
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I do not think target funds are set it and forget it investment vehicles. Like any securities, they need to be monitored.

The JFP article shows the VG fund with a loss of 20% at the end of 2008. That is a far cry less than DOW or S&P 500 level losses at the same period. Pretty much what one would expect from a balanced fund with the allocation.

Those funds do not completely guard against stock volatility. If one wants no stock volatility, go with some type of fixed securities.
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Old 03-10-2010, 04:23 PM   #4
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I do not think target funds are set it and forget it investment vehicles. Like any securities, they need to be monitored.
I think that's Zvi's point. They are marketed as set and forget, but really do not provide the lay investor the correct information they need to make a good decision.
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Old 03-10-2010, 10:01 PM   #5
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The first one confirms my 100% equities plan, with a cash buffer near retirement. Looks good in Table 5 and Table 6.

Especially near the end of retirement, if the portfolio has even just maintained its value in inflated dollars and you're still taking out your old 4% SWR your safety margin is in the shorter retirement span. Why the heck does a 90 year old taking 4% or less of their portfolio per year need 50% in bonds?

If you die with everything in bonds, will your beneficiaries leave it in bonds or invest in equities? You've just been putting them heavily in bonds at a time when better growth might have been nice (they're younger than you hopefully). Presuming you care.
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Old 03-11-2010, 04:02 AM   #6
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If you look at the VG 2010 target fund. From its inception in 2006, it is up 3.21% Of course, one could pick any specific year (or time range) for an investment valuation look better or worse. Pick any stock investments after the 1929 market crash bottomed and you will see the same thing. Extraordinary Financial Meltdown = valuation loses!

I have read the VG Target Mutual Fund Prospectus. I thought it was pretty clear how it worked. They clearly make the statements about investment risk.

Perhaps they need to put a label on the cover (like a cigarette package)... This is an investment, therefore you could lose money!

I cannot comment on the other mutual fund companies list in Zvi's article... I suppose some of them could have misrepresented the products (but I doubt it).

I like the FPJ and find most of the articles interesting and insightful. And I admit, I have not read the complete article from Zvi...

But when considering the source.... sounds a little like the cheer leading cry of financial planners criticizing a product that cuts in on their territory! An article written by Fin Planning Pros for Fin Planning Pros.

Unfortunately, it seems like those Fin planner guys are more interested in helping one manage their money than figure out how to manage all of the other aspects of their retirement years.

I was talking to guy who uses a Financial Planner. His Fin Planner Genius is pushing him in and out of the stock market.... Bonds to Stocks to Bonds.... Timing the market with his retirement assets. Unfortunately the guy feels some comfort that the Fin Planner is at the helm. If it were me, I would rather have a target fund than someone in my corner doing that for to me!

IMO - The mutual fund industry is coming up with some innovative products that make a Fin Planner's hands on asset management irrelevant.
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Old 03-11-2010, 06:25 AM   #7
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Why the heck does a 90 year old taking 4% or less of their portfolio per year need 50% in bonds?
Alternatively, why in the heck would a 90 year old limit themselves to a 4% or less withdrawal rate just so they can own a portfolio full of equities?
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Old 03-11-2010, 09:49 AM   #8
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Alternatively, why in the heck would a 90 year old limit themselves to a 4% or less withdrawal rate just so they can own a portfolio full of equities?
Yeah, that's a big problem. You'd like to spend your money early, but uncertainty of returns may prevent that. So you get to spend it late fairly safely instead. I'm not planning on raising spending as I age. I'll be happy to hand it to the kids when I'm done with it.
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Old 03-11-2010, 10:32 AM   #9
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Originally Posted by walkinwood View Post
There are a couple of very good articles in the March issue of the Journal of Financial Planning (They are available for free only in the current month)

Asset Allocation for Retirement: Simple Heuristics and Target-Date Funds
The authors study static and dynamic asset allocation methodologies (like age in bonds) including those used by target date funds.

Unsafe at Any Speed? The Designed-In Risks of Target-Date Glide Paths
Zvi Bodie and others look at the risks in Target Date Funds and suggest a method for measuring their risk. I thought this was a very insightful article.

And from the Boglehead's forum, this entry was very interesting especially the analysis done by the 2nd poster.
Bogleheads :: View topic - Static Asset Allocation vs. Shifting With Age

I use a 60/40 equities/bonds static allocation, but of late, am questioning it. Hence, this reading list. I haven't been convinced that a dynamic allocation is the way to go - maybe a more conservative one - say, 50/50.
Summary for anyone which wants to do less reading...

Quote:
Given these findings, we suggest that financial planners encourage their clients (provided they can emotionally tolerate market volatility) to stay fully invested in equity until approximately 10 years prior to retirement. However, for those clients who are less sophisticated and therefore likely to exhibit behavioral biases that prevent maintaining composure in down markets, we suggest that planners may want to propose a simple target-date fund or equivalent allocation.
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Old 03-11-2010, 10:46 AM   #10
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Summary for anyone which wants to do less reading...

HAHAHAHA - excellent summary, although I did .pdf the first onet to read sometime in the future :-)

Yup, risk tolerance drives asset allocation.
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Old 03-11-2010, 08:30 PM   #11
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[QUOTE=chinaco;913054]If you look at the VG 2010 target fund. From its inception in 2006, it is up 3.21% QUOTE]

If I invested in a fund with a target date that is only 4 yrs away, I wouldn't expect anything more (or less) than a MM or CD-like return.
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