Target Date Funds are just as bad as the MPT approach
Perhaps the most beneficial piece of investment legislation crafted during the past thirty years has been the 401(k) plan, which has allowed millions of workers to make pre-tax and/or post-tax salary deferral contributions to a retirement account sponsored by their employers. The need for this type of legislation came about in recognition of the fact that the enormous baby-boomer generation was eventually going to retire, at which time something more than social security was going to have to be there in order for them to be able to afford to maintain the standard of living to which they were accustomed.
The original 401(k) legislation only addressed the contributory aspect of the plan, but it did not specify exactly how that money should be invested. Originally most plan sponsors offered only its company stock as an investment option, and/or a low interest savings account through an insurance company. While these arrangements were attractive for obvious reasons to the stock issuer and the insurance companies, they weren't so great for the employees. Over time most plan sponsors expanded the investment choices to include a limited variety of mutual funds, with a typical plan offering a U.S Large Cap fund, U.S. Small Cap, International stock, a Balanced Fund, and perhaps a U.S. Treasury Bond fund (in addition to the company stock fund and the low interest savings account). This made it possible for each employee to allocate his own investment account according to their personal risk tolerance and performance expectations, and allowed for portfolio diversification.
As my father used to say a tool is only as useful as the skill of the person holding it, and many employees simply did not know how to use these different investment choices properly to grow their accounts over time. Human nature being what it is, most people tend to make future investment decisions based on very recent performance ("rear-view mirror investing"), which unfortunately is usually the best way to experience a fairly significant decline in value very soon as those overvalued assets fall out of favor and are surpassed by the previously undervalued assets that you just sold and no longer own. It can become a vicious cycle that can result in losses far greater than that experienced by any one asset class over the same period of time.
Page Two "Off" Target Date Funds
