What I don't understand about targeted asset allocation funds is how (or whether) they take into account an individual's risk tolerance.
In other words, if two people are retiring in the same year (say 2040), but one comes up "conservative" on the risk tolerance questionnaire and the other comes up "aggressive," why should the same targeted asset allocation fund ("Retire 2040") be suitable for the both of them?
One fund would not be suitable for both situations. The more aggressive investor might choose a later date (like 2045 or 2050), or the more conservative investor might choose an earlier fund (2035 or
2030).In general the reason for the targeted allocation funds is because:
1) many investors invest too conservatively in their early investing years- I think the fund companies want someone to choose the date and look less at the assett allocation. 2) the funds gradually become more conservative over time.I read an article a few weeks ago which compared the target funds of many mutual fund companies. I remember reading T Rowe Price was more aggressive than Vanguard and most others for the same year (which the article considered a good thing). TRP was also above the average expense ratio (.77%??, avg was .71%).
They don't - that's my principal criticism of them, I think they're of interest to a very limited group of investors. Even two people with similar risk tolerance are likely to have differences that affect choice of investments -- e.g. is this your only account, if not what else do you have, how much money will you need to begin drawing at retirement, etc.
-Tad
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