Why target date retirement funds are a bad deal

You may have read an earlier article on Hubpages regarding target retirement funds. I am not a big fan of these funds for most investors. Target retirement funds try to be a one size fits all fund for those who wish to save for retirement. I think these funds do a very nice job of asset allocation. If you look at the majority of target funds you will find most of them are a fund of funds. If you look at the Fidelity funds they are composed purely of Fidelity funds. The same is true with most other funds such as Vanguard, T. Rowe Price and so on.

I am going a little overboard here but I want to prove a point. Let us assume say I want to construct a portfolio of sports teams to get me the most wins instead of selecting mutual funds to make money. Let us just say for my asset allocation I need 25% hockey, 25% basket ball, 25% base ball and 25% football. How would I go about choosing my teams? I would do my research and determine which team I think is going to win the most games over the next year.

Let’s start with a hockey team. I might choose the Detroit Red Wings they have dominated hockey for the last decade or so, or I might choose the San Jose Sharks or the Washington Capitols. Even the Chicago Black Hawks have an up and coming team. I might even split my interest on all four teams. Contrast this with the Detroit team mutual fund company which will put 25% of there portfolio in the Detroit Red Wings. I think both I and the Detroit team mutual fund have a pretty good chance of having a good year in the hockey portion of our portfolio.

Next let’s move on to basket ball. I’m not a fan of basket ball but the LA Lakers are in first place and have had a power house team for a few years. I’m going to put my 25% basket ball allocation on the Lakers. The Detroit sports mutual fund company is going to put their 25% on the Detroit Pistons. The Pistons have been in the playoffs from time to time but seem to be stumbling this year. They could be a good team to pick over the next year but would they be your first choice?

Let’s move on to baseball. The New York Yankees won 103 games last year. The Yankees won the World Series. I cannot remember them being below 500. My money is going on the Yankees. The Detroit sports mutual fund will have their 25% in the Tigers. I’m sure there are worse bets than the Tigers. They finished tied for first place last year in their division and have a respectable team.

Next let’s move on to football. I am going to split my 25% here. The New Orleans Saints won the Super Bowl. The Vikings almost beat the Saints in the NFC play off game, The Indianapolis Colts won the AFC and made the Super Bowl a close game. The Dallas Cowboys have a good team year after year. I’m not sure where to put my assets in this class so I would divide them up. The Detroit sports mutual fund is going to put 25% on the Lions. The Lions have won 2 games in the last 2 seasons. They won only 12 games in the last 4 seasons. They have not won more than half of their games since 2000. Is this how you would want your investment made?

So come a year from now who is going to have the most successful sports portfolio? My portfolio or the Detroit sports team mutual fund? I don’t think I even need to answer. Well the same is true with investing. By picking the best mutual funds you can do better.

I recommend that an investor take time and develop their own asset allocation and invest in the best funds in those asset classes. Once the investor has their asset allocation select the best small cap, best mid cap, large cap, bond, global and even concentrated portfolio funds for their portfolio. If you are not willing to take the time to manage your portfolio then please consider investing in the best balanced funds.

Regardless if you are investing in your IRA, 401K, 403B or taxable account please invest wisely. How you invest is equally as important as how much you invest.