TARGET-DATE INVESTING FOR RETIREMENT PLANNING

by Bryan McCrea

If you have invested in a 401(k) you may have heard the phrase “target-date funds,” a class of mutual fund or exchange-traded funds which strategically allocates assets, rebalancing them over time to optimize risk (typically, becoming more conservative over time), until they are to be used at a future – or target – date, most likely in retirement. 

Target date funds within 401(k)s are often a “fund of funds,” which means they invest in other mutual funds or exchange-traded funds – meaning you pay a fee for managing (and selecting) all the underlying funds on top of the normal mutual fund fees. Some consider the overall management/selection fee a convenience fee so the employee can basically “set it and forget it.” 

At Legacy, your money is also managed using the strategy of becoming more conservative as you become closer to needing income from your investments. We utilize five stock portfolios that fall into certain risk and growth categories depending on your risk tolerance, age, and years to/in retirement as well as factoring in other assets held outside Legacy such as an employee retirement plan.

We also hand-select mutual funds from different asset classes, including value, growth, international and specialty funds, that fit in eight strategic “model” portfolios, ranging from conservative to aggressive. 

One pitfall of a target-date fund is that not everyone who is scheduled to retire at a certain date may have the same risk tolerance as everyone else in that group. The main difference between our investment strategy and those in target-date funds is that we factor in your personal and financial situation, goals and objectives when making investment decisions beyond just when you plan on retiring.

And when there’s value in actively managed portfolios

by TC Falkner, CFP® 

Back in 1975, Jack Bogle, the “father of Index funds,” devised a fund to hold a portfolio of companies that attempts to mimic a benchmark, or index. Since then, investors have allocated billions of dollars to these low-cost investment vehicles, which are easily accessible and available for nearly any type of benchmark or index.

Commonly known as “passive funds,” these funds attempt to match the broader market, instead of relying on a manager to beat the market. We use index funds, but in a limited capacity. Here’s why: as investors and money managers we need to be proactive and intentional.

• Our investing philosophy constantly strives for a well-balanced, well-diversified portfolio. 
• Many times, our market outlook differs from the broader market. 
• The lack of control over the holdings in an index fund is limiting

If you’re considering investing directly in index funds, first determine what balance of investments is appropriate for you, (stocks, bonds, cash, etc.), taking into account your overall financial plan and risk tolerance. Then determine how actively you want to manage your investments. Index funds could be a good solution for part of your investment plan, but most likely not all of it. 

If you want a professional to direct your investments, you may find index funds are not the best strategy, and that the value of professional managers outweighs the low costs and limitations of index funds. If you have questions about index funds or how we actively manage and diversify your investments, give us a call.