Why do target date retirement funds have bonds?

[Anonymous]

I’m not retiring for 30+ years and I have a target date 2060 fund. Yet the allocation in fidelity shows I have slightly over 1% in cash and bonds. Why? Should be 0 IMO.

The only reason I hold this fund is for international allocation because the dedicated international fund they offer has a much higher expense ratio of $4.50 per $1000 as opposed to $0.44 per $1000. The target date fund has a better ER but has stupid allocations (holding cash/bonds when you’re young).

Should I just go all in the S&P 500 in my 401k instead?

[Anonymous]

Anonymous wrote:I’m not retiring for 30+ years and I have a target date 2060 fund. Yet the allocation in fidelity shows I have slightly over 1% in cash and bonds. Why? Should be 0 IMO.

The only reason I hold this fund is for international allocation because the dedicated international fund they offer has a much higher expense ratio of $4.50 per $1000 as opposed to $0.44 per $1000. The target date fund has a better ER but has stupid allocations (holding cash/bonds when you’re young).

Should I just go all in the S&P 500 in my 401k instead?

I don't think you have to worry about the 1%--look more at the glide path after. Some people argue for taking a target date fund 5-10 years later than your retirement date if you prefer a lower bond allocation. I prefer a total market index over S&P500 personally.

[Anonymous]

That's why I would choose year 3000.

[Anonymous]

You should read the chapter in Ramit Sethi's book I will teach you to be rich - on this topic. He explains it way better than I ever could have.

Target date funds are 85% good and better than what most people do. If you're willing to spend way more time to figure out perfect you can do something else to get you to 100% good.

They are there for diversification even a little.

[Anonymous]

The presence of bonds is intended to reduce volatility. The percentage is very low because of the long timeline in this case, which should allow the fund to ride out intermediate and shorter market swings. As a practical matter, an allocation of anything to just a few percent of an overall portfolio will contribute little with regard to either returns or to portfolio stability. Your fund may see returns which are ever so slightly better or worse than a 100% equity portfolio over any given period of time, but not enough to meaningfully move the needle.

So I would either not worry about it, or would invest in something else which suits your personal risk tolerance and timelines better, perhaps a S&P500 ETF analogous to the TSP C Fund.

That said, you'll need to personally have a plan and the discipline to execute it on schedule, to gradually adjust your glide path over time if you want to benefit from the premise underlying target date funds - that they automatically become progressively more conservative as their investors get closer to retirement age, reducing the risks associated with potential market declines at or near retirement.

[Anonymous]

I would not worry about 1%. Personally, I have always been all equities and it was heart wrenching to concede to doing 15% governments once I hit 65.

[Anonymous]

Anonymous wrote:I would not worry about 1%. Personally, I have always been all equities and it was heart wrenching to concede to doing 15% governments once I hit 65.

And I'm different--I'm in my 50s and have 65 percent stocks, 5 percent alternatives, 15 percent bonds, and 15 percent cash/cash equivalents (I count short-term individual T-bills as cash equivalents, some would consider those bonds). I have all the money than I need and care more about downside risk than I do about maximizing gains. I wonder if I should switch more out of equities. This is why target date funds have bonds--they are trying to please the average person when people have a range of situations and risk tolerances. Everybody thinks the stock market is "safer in the long run" -- but it's actually not, it has even more volatility the longer you look out--it just has tended to go up more than anything else on average.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I would not worry about 1%. Personally, I have always been all equities and it was heart wrenching to concede to doing 15% governments once I hit 65.

And I'm different--I'm in my 50s and have 65 percent stocks, 5 percent alternatives, 15 percent bonds, and 15 percent cash/cash equivalents (I count short-term individual T-bills as cash equivalents, some would consider those bonds). I have all the money than I need and care more about downside risk than I do about maximizing gains. I wonder if I should switch more out of equities. This is why target date funds have bonds--they are trying to please the average person when people have a range of situations and risk tolerances. Everybody thinks the stock market is "safer in the long run" -- but it's actually not, it has even more volatility the longer you look out--it just has tended to go up more than anything else on average.

Isn't that what people mean by "safer in the long run"?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I would not worry about 1%. Personally, I have always been all equities and it was heart wrenching to concede to doing 15% governments once I hit 65.

And I'm different--I'm in my 50s and have 65 percent stocks, 5 percent alternatives, 15 percent bonds, and 15 percent cash/cash equivalents (I count short-term individual T-bills as cash equivalents, some would consider those bonds). I have all the money than I need and care more about downside risk than I do about maximizing gains. I wonder if I should switch more out of equities. This is why target date funds have bonds--they are trying to please the average person when people have a range of situations and risk tolerances. Everybody thinks the stock market is "safer in the long run" -- but it's actually not, it has even more volatility the longer you look out--it just has tended to go up more than anything else on average.

Isn't that what people mean by "safer in the long run"?

No, because volatility is still just as high every step along the way (and volatility has been even more unpredictable of late). When you need the money, the market could be down 30%. You could have a whole decade or two where you were worse off than when you started. I'm Genx--graduated in a recession, just started building assets when dot.com bubble burst the stock market, rebuilt those assets to then be hit by the 2008-9 crash both in my portfolio and my house value, etc. rebuilt again. It's harder to rebuild after losses because you have less to work with. People say pile money in when the market is down, but sometimes your job is at risk and the market is down etc. Plus all the models are based on the same roughly 100-150 year period of stock market growth in the US--we have no idea what the future will be like. There are no promises and guarantees, so some people--like myself-- when they have enough money decide to cash out more of it. Why add risk? Losing 30% would make my life worse. Gaining 30% wouldn't make my life that much better. Obviously I'm not all in cash, because inflation is also a risk and life is long.

One other thing that is more quirky just to me, is that I work in modeling complex biological systems. Every time I look at the volatility patterns in stock market graphs in the last decade or so they look a lot to me like what we see when populations are hitting carrying capacities which tends at best to predict equilibrium without much growth or at worst cascading collapses. I know these things are likely not parallel, but it's hard not to impose my expertise on them and say that's a system I'm not sure I trust with all my assets to keep growing.