Wondering if anyone else is like me. I don’t have a lot of money to invest into my Roth so diversification is tough… My workaround is investing in a target date fund (small amt initially and small amt each month) and then adding asset classes I believe will do well, or better diversifies my portfolio. I can’t help feel lazy doing this since I work in investments. Does anyone else do something similar?
I used to work as an analyst for a small/micro cap long/short HF. So I’m like a financial genius, right? Hardly. The type of analysis I did and investment ideas I generated are wildly inappropriate for most individuals. Furthermore, I realized that people a lot smarter than me were spending all their time looking at the entire market. So even as a guy following the market all the time, I have no problem using index funds for my personal investment. I think you could do a bit better than target date funds by using individual ETFs, but you could certainly do a lot worse.
If you don’t have a specific view to act on, why not just allocate sensibly. No problem with using a target date fund, particularly if they diversify for you. In the future, when your balance is presumably larger, you can take the money out of the target date fund and allocate it as you see fit if you have developed investment views that warrant changes to your retirement. So no, don’t feel lazy, it’s a perfectly sensible thing to do. Concentrate on adding value to your employer’s investments first, since that will probably do more to raise your lifetime income than allocating a few grand here and there in your retirement account.
I do it. My 2050 target date fund gained 53% last year, so I’m not complaining. It’s from Fidelity, so I would expect nothing less. I spend too much time picking investments for other people to worry about myself. Also, it’s one less account you need to run through compliance. Do it, you can get more hands on when you have more cash to play with.
no you are not. but buyer beware, not every target date fund is created equally. Two different 2040 funds may have significantly different asset allocations. It all comes down to asset allocation decision. how much you want to be invested in different asset classes? (Cash, Domestic Equities, Developed, Emerging, IG Treasuries, HY etc) and your risk/return objectives. Then select the target date fund. There’s a good discussion about this topic in the below link: http://news.morningstar.com/articlenet/article.aspx?postId=2686718&t1=1251728718
notenoughtheta Wrote: ------------------------------------------------------- > I do it. My 2050 target date fund gained 53% last > year, so I’m not complaining. It’s from Fidelity, > so I would expect nothing less. It must’ve been a junior intern at Fidelity managing your portfolio if they only made 53% last year.
Yes you are lazy. Even with a small amount of money, you can buy ETFs that provide the diversification you seek. Alternatively, since this is long-term money that your adding to on a regular basis, go beyond the CFA materials and buy the one or two things that you think will be the next big thing when your 59 years old. EDIT: I am only saying this because you have CFA after your name. If you were one of my buddies that do not know the difference between a stock and a bond, then my advice diffinately be a target date fund. But you should know better.
NorthernCFA Wrote: ------------------------------------------------------- > Wondering if anyone else is like me. I don’t have > a lot of money to invest into my Roth so > diversification is tough… > > My workaround is investing in a target date fund > (small amt initially and small amt each month) and > then adding asset classes I believe will do well, > or better diversifies my portfolio. > > I can’t help feel lazy doing this since I work in > investments. Does anyone else do something > similar? Fidelity uses a proprietary FoF approach with their target date funds. You’d be surprised at the number of asset classes you already hold in that one fund. 53% is great but good luck ever seeing that kind of return again. Target date funds are best suited for the blue collar individual who has little to zero market knowledge. They do help keep the uninformed from allocating 100% of their money into a natural resources or emerging markets fund. Use your knowledge gleaned from the CFA curriculum and apply it to the market. I have a small Roth account and hold individual equity positions. It’s a lot more fun to talk about the stocks you own rather than your target date funds.
I always compare the performance of my 401k to a 2045-2050 target date fund. Sometimes I do better sometimes I don’t. I guess I could save myself the trouble and just throw everything into the target date fund, but that just doesn’t seem like any fun.
The biggest problem with a target date is you are paying two layers of fees, one for the target date fund and one for the underlying funds. You are paying the target date fund ~25 bps to do very little. That being said if your total investmetn portfolio is less than 10k, you can’t really reach fund minimums to allocate on your own so in that case its ok. If your investmetn portfolio is 10k or more, allocate yourself. If you are young and comfortable with taking on risk for the long term, start with 60% domestic equities (1/3 small mid and large), 20% foreign equities and 20% aggregate bond fund. Thats not far off from what a target date is doing and you save a layer of fees.