Hi all,
Paul Merriman recently released a set of target date allocations that go up to the year 2085, arranged in Motif. Being who he is (a value premium believer), Merriman has made the interesting choice of having folks form age 0-25 all-in on Small, value, and emerging markets stocks, slowly gliding towards growth, and finally fixed income. It's an interesting idea.
http://paulmerriman.com/achieving-success-with-target-date-funds/Target date funds that add bonds in the early years create significant drag on long-term investor returns. The only justification we can think of for that drag is a belief that young investors will bail out of their investments in a market downturn without that added stability. Perhaps this is needed in a mass-market offering, but we believe savvy young investors would be better served by having no fixed income in their early years.
One simple approach to mitigating the drag of bonds in a target date fund is to augment it with a second investment in a small-cap-value fund. This relatively simple approach significantly increases the chances of success in our modeling with manageable increases in risk when approaching retirement.
Lastly, our simulated results suggest young investors can benefit even more by tilting heavily toward small-cap-value and emerging markets in their early years of investing.
Investors need to be aware that there are likely to be many years, even a decade or more, where this approach does not match or beat the S&P 500. Having said that, the higher expected balances more than offset the risks, making it a most attractive alternative for some.
Any opinions? Clearly for total DIYers, this is not their thing; but if folks are going target date fund or not at all, do you think them staying the course with Merriam's strategy is at all feasible, or overly optimistic?
