Target Retirement Funds
Are Target Retirement Funds Right?
The target retirement mutual funds are getting popular among investors. Both Fidelity Investments and Vanguard Group offer similar kind of targeted date retirement funds. The general rule of thumps is that the weight of stocks in the retirement portfolio should be reduced over time when they are near the retirement age. The basic equation for this belief is the following.
S = g – v T
Where S is the percentage of stocks in the retirement portfolio; g is a growth factor, usually having values in the range from 100 to 125; v is a value factor, having recommended values are the range from 1 to 1.35; T is the years of age.
One commonly used equation takes the following form (with g = 100 and v =1).
S = 100 – T
The above two equations assume that the portfolio risk should be reduced if the holding time is short. In other words, risk is reduced if the holding period of portfolio is long. So that young people should hold large percentage of stocks in their portfolio while people near retirement age should hold small percentage of stocks in their portfolio.
Although this belief is popular among investment advisors and some investors, however it does not have rigorous theoretical bases. Several academic and professional studies conducted by university professors and industry practitioners do not have consistent results. Several studies concluded that the age-dependent portfolios have similar results as fixed proportions of stock and bond weights in portfolios
The target retirement mutual funds are getting popular among investors. Both Fidelity Investments and Vanguard Group offer similar kind of targeted date retirement funds. The general rule of thumps is that the weight of stocks in the retirement portfolio should be reduced over time when they are near the retirement age. The basic equation for this belief is the following.
S = g – v T
Where S is the percentage of stocks in the retirement portfolio; g is a growth factor, usually having values in the range from 100 to 125; v is a value factor, having recommended values are the range from 1 to 1.35; T is the years of age.
One commonly used equation takes the following form (with g = 100 and v =1).
S = 100 – T
The above two equations assume that the portfolio risk should be reduced if the holding time is short. In other words, risk is reduced if the holding period of portfolio is long. So that young people should hold large percentage of stocks in their portfolio while people near retirement age should hold small percentage of stocks in their portfolio.
Although this belief is popular among investment advisors and some investors, however it does not have rigorous theoretical bases. Several academic and professional studies conducted by university professors and industry practitioners do not have consistent results. Several studies concluded that the age-dependent portfolios have similar results as fixed proportions of stock and bond weights in portfolios
posted by Unknown at 8:51 PM
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