The Growing Battle: Target-date vs target-risk fund construction

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The extreme market volatility in recent weeks has put a number of passive investment approaches under scrutiny. Among these is target-date funds (TDFs). Though activity in these funds has exploded in the last few years, TDFs suffer from lock-in, making them unresponsive to the kind of changing market conditions we’ve seen lately, or to changes in personal situations. In addition, because of their laser-like focus on maturity date alone, TDFs are often composed of mediocre or poor underlying investment strategies.

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Target-Date vs Target-Risk

According to Robert Michaud, CIO at New Frontier Advisors, investors should focus more on targeting risk than targeting a specific date. Michaud points out that studies have shown that the overall lifetime risk taken by the “glide path” – the way the asset allocation of a portfolio changes over time - is the most important determinant of expected wealth when the targeted date is reached.

  • Almost as important in determining realized wealth at the target date is market performance, specifically of the asset classes with greater exposure within different time periods along the glide path. This fact justifies a more dynamic strategy of tailoring risk exposure to actual market conditions as time passes.
  • Retirement funds should not be locked in and left alone, forgotten and unresponsive to market conditions. Assets should instead be thought of as building blocks to be assembled on the fly, rather than locked-down into unchangeable trajectories. They should reflect a customized investment plan that is responsive to both market and personal considerations.
  • In addition, target-date funds are often built on poor underlying strategies that ignore correlations between assets. An effective investment program should instead be constructed from globally diversified risk-managed funds that balance asset classes appropriately and manage risk effectively.

What do you think about target-date funds? Comment below.

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About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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