Hennion & Walsh Trending

Given the widespread devastation that took place across the markets in 2008, and through the early stages of 2009, many individual investors are no longer confident making their own asset allocation and investment choices. Accordingly, it makes sense that pre-packaged investment strategies, such as Life Cycle or Target Maturity Funds, which incorporate the principles of asset allocation and simplify the decision making process for the individual investor, are attracting a lot of attention. However, I suggest that Target Risk funds or strategies offer a better solution for these types of investors than Target Maturity funds or strategies.

Target Maturity funds tend to homogenize investors into pre-defined risk profiles based on their age or expected year of retirement. Regardless of a given investor’s resources, risk appetite or objectives, each investor in a Target Maturity fund is placed into the same asset allocation oriented portfolio as other investors within their particular age category. These portfolios then follow the same “glide path” towards their pre-determined retirement year. The underlying glide paths usually incorporate more of a conservative allocation (i.e. more bonds and fewer stocks) as they get closer and closer to retirement. While the strategy certainly has its merits, and is generally an improvement over individual investors picking and managing their own portfolio of stocks, bonds, funds, etc.., I believe that it can leave investors with a false sense of comfort and may often fall short of meeting each investor’s long-term investment goals. To start, investors in the same age category do not all share the same resources, risk appetite or objectives, so why should they all be lumped together? Secondly, working within a household asset allocation strategy, an investor may choose to be more aggressive with one account (Ex. in an IRA) than with another (Ex. in a taxable brokerage account). The Target Maturity fund solution would not allow for this flexibility. Finally, there is an opportunity cost associated with moving to an overly conservative portfolio too soon, as Target Maturity funds often dictate. This cost, and the ensuing nest egg effect, may be too large for some retirees to overcome. Remember that a retirement date is not a finish line but rather a milestone stage of the marathon race called life.

Target Risk funds, such as the SmartGrowth® Mutual Funds that we here at Hennion & Walsh launched in June of 2007, or strategies, on the other hand, appear to us to offer the better overall solution by allowing investors to determine their individual risk appetites/profiles for the pool of money they are considering for investment. Once determined, the selected Target Risk fund or strategy is typically managed and periodically re-balanced with the objective of continuing to provide for diversified growth within each range or risk. This approach provides for more flexibility and control than most Target Maturity funds.

In terms of full disclosure, the author of this post is also the portfolio manager of SmartGrowth® Mutual Funds, which are target risk fund strategies.