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Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

Target date funds have enjoyed strong growth over the past several years. Their assets have jumped from $183 billion in 2007 to $436 billion as of July 2012, according to the Investment Company Institute.

There are two big reasons why. First, target date funds are becoming the default allocation in many defined-contribution plans, such as 401(k) plans. Some employers use target date funds as the designated default option for new enrollees. Secondly, these funds have the allure of being a single solution for achieving retirement goals. Target date funds adjust their allocations over time, becoming more conservative as an investor nears his targeted retirement date.

Though the simple pitch may be appealing, these are complex funds with varying strategies. Each mutual fund family has its own approach toward allocation, holding varying mixtures of stocks and bonds. How a target date fund’s allocation evolves after the retirement date is reached also differs by fund family. Further adding to the complexity is a misunderstanding by investors about the level of risk and volatility these funds incur.

To help you better understand how these funds operate, what assets they hold and how their allocations evolve, I looked at offerings from five of the largest target date fund providers. I also extended the analysis to include the government’s Thrift Savings Plan and iShares target date exchange-traded funds (ETFs). My review starts here.

Target date funds are just one of the many options in a 401(k) plan. As anyone who has changed jobs knows, setting up a new 401(k) can be a daunting process. My latest Beginning Investor column, which appears here, offers tips on how to make the process easier and more effective.

A common error many investors make with mutual funds, both those held inside and outside of a 401(k) plan, is to sell and buy in reaction to market moves. Louis Harvey, the president of DALBAR, shows just how damaging this type of behavior can be. He also gives strategies for using typical psychological tendencies to your advantage, starting here.

Another error is to assume that just because the Dow Jones industrial average or the S&P 500 index made a big move on a given day, so did most stocks. This is not always the case. It is not unusual for market breadth indicators to tell a different story than the headline numbers imply. AAII’s Wayne Thorp covers several market breadth indicators in his latest CI in the Journal column here.

The announcement of additional monetary stimulus by the Federal Open Market Committee was not good news to those of you dependent on interest income. One option that remains viable for income-seeking investors is municipal bonds. These bonds offer tax-advantaged yields and predictable cash flows. Stan and Hildy Richelson make the case for using muni bonds as a source of income here.

Benjamin Graham, a mentor to Warren Buffett, advised buying assets (both stocks and bonds) when their valuations are low. Our Graham Enterprising Investor screen, which is based on Graham’s philosophy, has outperformed the market by a large margin, but only identifies four companies on an average month. John Bajkowski discusses the strategy and shows a few tweaks that make it more workable for real-world investing here.

Investing in growth stocks is a popular strategy, but one that can be challenging at the same time. To give you insight into how a portfolio manager looks at growth stocks, I spoke to Robert Bartolo. Rob manages the T. Rowe Price Growth Stock fund (PRGFX), the oldest growth stock fund in the United States (it was started by T. Rowe Price Jr.). A transcript of our conversation appears here.

Our Model Shadow Stock Portfolio is popular with many AAII members. James Cloonan credits the portfolio’s great long-term performance to the discipline of sticking to a consistent, well-defined approach. The rules he follows and the newest stocks added to the portfolio can be seen here.

Wishing you prosperity,
Charles Rotblut, CFA
Editor, AAII Journal
twitter.com/charlesrotblut

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.


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