Personal Money Matters

Recent experience (2008, 2009) has shown that target date funds have glide paths (stock/bond allocation over time) that turned out to have more equity exposure than people were comfortable with. People who were couple of years away from retirements, or had 529 with kids couple of years away from college, found themselves in target date funds with 60-70% equity exposure and lost 25-35% in 2008. Also, most target date funds have a high equity exposure in early years and many people may not be comfortable with putting in large lump sums when the equity exposure is that high.

One way to adjust the risk in a target fund is to combine it with a balanced fund. For example, a 529 target date fund for a baby may have a glide path of 90/10==>10/90 over 15-18 years. People may hessitate to put in a lump sum when the initial allocation is 90/10. Combining it with a moderate allocation (60/40) balanced fund in EQUAL amounts will result in an effective glide path of 75/25==>35/65. By having other appropriate ratios of target date fund and balanced fund, one can find a portfolio glide path that may be more comfortable.