I've had several comments against Target Date Funds. Are they really less effective than having a US stock ETF, a world stock ETF and a broad bond market ETF? If so, why and by how much % growth per year?
For me, answers specific to taxable and tax-deferred accounts would both be of interest.
Posted by Buck169
6 Comments
TDFs are great. The main issues are too many bonds for some or high ERs
Who hates them?
There’s no reason to *hate* them, but for my tastes they ramp up your bond allocation too early. I don’t like the idea of owning bonds until 10-12 years before retirement, and I don’t want a 35 year ramp-up. They’re more expensive, too, especially since you can get broad ETFs for less than 0.1% ER. But I think they’re great for people who don’t know about investing and have no interest in learning. People who do can do better than TDFs.
I don’t really see hate. The big criticism is they are aggressive with ramping up bond allocations.
TDFs in taxable accounts make little sense because they may be forced to return capital gains at some point and in general bonds are not great for a taxable account.
But for a tax advantaged account like a 401k or IRA, they are awesome for 70-80% of people who just want to set and forget it.
The main issue people find with target date index funds is the share of bonds, but a lot of people can just pick a much later dated Target date, index fund and then the bond allocation will be more in line with their own wants.
That being said, I think more people could do with more bonds