Back in the early 1970s, investors became enamored with a group of large growth stocks which were dubbed the “Nifty Fifty.” These 50 companies all had a history of steady price appreciation and consistent dividend growth.
In fact, their growth was so steady that investors began to refer to them as “one-decision investments,” meaning that a person could buy them and forget about them completely, never worrying about when to sell.
Unfortunately, investors became so enamored with these stocks that they ended up buying them at astonishingly high prices (P/E ratios of 70, 80, and even 90+). After having their prices bid up so high, the Nifty Fifty tumbled and performed poorly over the next couple decades.
The idea of simplicity in investing, however, is still one worth striving for. An investment plan that is easy to understand (and therefore more difficult to mess up) is certainly a good thing.
The One-Decision Portfolio
Today, there really are some legitimate “one-decision investments.” In fact, the idea of a “one-decision portfolio” is actually quite achievable.
I am, of course, talking about target retirement funds.
Target retirement funds are simply mutual funds that hold a group of other mutual funds run by the same company. They come with names like “Retirement 2040,” which–unsurprisingly–would be used by investors who plan to retire in 2040.
The idea is that target retirement funds automatically adjust their asset allocation toward more conservative investments as the retirement date draws near. They also automatically rebalance the portfolio on a regular basis (usually annually) to ensure that the investor’s asset allocation is appropriate for his or her age.
How to choose a target retirement fund
First, you’ll have to choose which fund company you want to use (unless we’re talking about a 401k in which you don’t have a choice of different fund companies).
I’d suggest looking for a company that uses index funds (as opposed to actively managed funds) to make up their target retirement portfolios. But that’s up to you.
The main consideration should be to make sure that the accompanying expenses are low. Check to make sure that the target retirement fund doesn’t add an additional level of expenses beyond those charged by the underlying funds.
After choosing a fund company, simply take a look at the fund with a retirement date closest to when you expect to retire. Then perhaps adjust 5 years either direction if the asset allocation appears too aggressive or conservative for your tastes.
Are they too simple?
In short: No.
It can feel somewhat risky putting your entire account into one fund. Almost like an “all your eggs in one basket” sort of situation. But that’s simply not the case. In reality, you’ll own a handful of funds, each of which holds hundreds–or even thousands–of different investments. You’ll be extremely diversified.
It’s entirely reasonable for an investor to put her entire retirement account into a low-cost target retirement fund that matches her desired asset allocation.
In fact, if you’re convinced as to the advantages of indexing, there’s hardly any reason why you wouldn’t want to use a target retirement fund. They add no costs, and they take care of rebalancing for you. What’s not to love?
Some people, however, will argue that target retirement funds are simply too boring. I’ve never much understood that viewpoint.
To me, retirement investing is not a game. This is your future livelihood we’re talking about here. The point of investing isn’t for it to be fun or exciting.
In summary
If you’re looking for a portfolio/investment strategy that’s:
- easy-to-understand,
- easy-to-implement, and
- low-maintenance
…a low-cost target retirement fund is very hard to beat.
Not-to-be-overlooked bonus: Your investment results are likely to be significantly better than they would be if you were picking stocks or trying to find this year’s hot fund.
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{ 3 comments… read them below or add one }
The heart of a Target Retirement Fund idea is that you should have more debt when you are young and less debt as you keep getting older. So really, not only do you need to invest all your money in one particular fund, you need to keep doing that throughout your life or at least for a very long time. I don’t see this as a practical thing at all.
Hi Manshu.
I think you have it backwards. Target retirement funds own less debt investments (bonds) when you’re young, and more when you’re old.
In other words, they adjust from a more aggressive allocation toward a less aggressive allocation as the investor gets older.
Also, what’s wrong with investing in a fund for your entire lifetime if it’s a good fund? (For example, what would be wrong with investing for several decades in a low-cost index fund that tracks the Wilshire 5000?)
Yes Mike, you are right, I am sorry that I got that backwards. I just question whether it is practical to buy just one fund for your whole life with all your money.