MarketWatch Quotes CIO Tom Graff on Target Date Fund Nuances
MarketWatch turned to Facet CIO Tom Graff to unpack why traditional target date funds can leave retirees taking on more risk than they realize when inflation rises.
In [a world of relatively stable inflation], bond yields primarily move with the business cycle, rising during booms and falling during recessions. That works great from a portfolio management perspective. Bonds should have a big up year right when your stocks are falling.
If inflation is more volatile going forward, it means people are taking more risk than they realize by using target date funds in their portfolios. If your portfolio takes a real loss in your first few years of retirement, you’re not just waiting for it to recover. Instead, you’re actually drawing from it while it’s down. Every dollar you take out at this depressed price is a dollar that has no chance to participate in the rebound. That’s what sequence-of-return risk means to a retiree.
The average investor should think about risk in three dimensions: equity risk, inflation risk and interest rate risk. A target-date fund really only manages the first. Be careful not to blindly follow the target-date fund. Instead, determine the right asset allocation for your situation, then execute it using separate funds. Most plan menus have what you need, and a stock index fund and bond fund will usually do it.