Target-date funds, which are widely used in 401k plans because many investors assume they have less risk, failed miserably during last year’s market meltdown.
SmartMoney reports that Morningstar now has come out with a new ranking system designed to make it easier to compare these types of funds:
Ever since target-date funds were introduced a few years ago, critics have complained that the funds — a mix of stocks and bonds that are supposed to get more conservative the closer the investor gets to retirement age — are nearly impossible to compare to one another.
Not anymore, says Morningstar, the biggest and most popular mutual fund research and ratings firm. On Wednesday the company announced its first comprehensive rankings of the funds. Vanguard, known primarily for its low-cost index funds had the best group of target-date funds. Oppenheimer was ranked last. Fidelity, the largest manager of target-date assets, offers two series of target-date funds: its no-load Freedom Funds were rated “average” and its advisor-sold Freedom Advisor funds were rated “below average.”
Again, while it is helpful to compare apples with apples, it does not mean that these types of investment can be purchased indiscriminately.
I wrote about these funds, which used to be called Lifestyle funds, during the last bear market in 2002 in an article called “Do Lifestyle Funds Provide Greater Security?” Their miserable bear market performance then was repeated in 2008 to the same degree.
Don’t let ranking schemes give you a false sense of security. These types of funds will work in bull markets but will harm your portfolio when the bear shows up for his curtain call. As always, if you invest in anything, be sure to use my recommended exit strategy to protect your portfolio should disaster strike again.
Comments 2
Ulli,
I really wonder what good those mutual fund ratings do for anyone anyway, the ratings seem to lag the up and down events so much that they seem useless to me. People are basically ignorant about investing and tend to leave it all up to someone else. There is one good timing service that would help people a lot if they only knew. http://www.timingcube.com, which has a long and good history of protection during bear markets as well as good gains in both bull and bear markets. For their shorter term trades http://www.timing4profit.com works quite well and one needs none of the rating systems at all.
W.B.
TR Funds are a Con Game IMO.. Just another way for a fund Family to Keep your $ in their Funds and No One Fund Family has all the Best Funds and Vanguard nor Fido are any different..
They also Contradict their proven Bal. Funds VWELX and VWINX, which have been proven time an time again to be the best to go an stay with.. Even owning Both equally gives ona nice 50/50 mix and only a -15% loss in 08' and if used your Sell Stop guide of -7%, you'd lost only about -8% over-all.
When a Bal Fund drops that Much? They ave -50% of what the S&P; does and that ment the S&P; was already down some -15%..and that m my friend was more than a Clear Red Flag Sign to Bail.
And Util? What's with allowing this Guy Advertisng this Timing Cube business? It's a $500/yr Fee business? and Useless.