New Ranking Scheme For Target-Date Funds

Target-date funds, which are widely used in 401k plans because many investors assume they have less risk, failed miserably during last year’s market meltdown.

SmartMoney reports that Morningstar now has come out with a new ranking system designed to make it easier to compare these types of funds:

Ever since target-date funds were introduced a few years ago, critics have complained that the funds — a mix of stocks and bonds that are supposed to get more conservative the closer the investor gets to retirement age — are nearly impossible to compare to one another.

Not anymore, says Morningstar, the biggest and most popular mutual fund research and ratings firm. On Wednesday the company announced its first comprehensive rankings of the funds. Vanguard, known primarily for its low-cost index funds had the best group of target-date funds. Oppenheimer was ranked last. Fidelity, the largest manager of target-date assets, offers two series of target-date funds: its no-load Freedom Funds were rated “average” and its advisor-sold Freedom Advisor funds were rated “below average.”

Again, while it is helpful to compare apples with apples, it does not mean that these types of investment can be purchased indiscriminately.

I wrote about these funds, which used to be called Lifestyle funds, during the last bear market in 2002 in an article called “Do Lifestyle Funds Provide Greater Security?” Their miserable bear market performance then was repeated in 2008 to the same degree.

Don’t let ranking schemes give you a false sense of security. These types of funds will work in bull markets but will harm your portfolio when the bear shows up for his curtain call. As always, if you invest in anything, be sure to use my recommended exit strategy to protect your portfolio should disaster strike again.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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