Is your 401(k) allocated to help achieve your retirement goals?
Most 401(k) and other retirement plans now offer Target Date Funds (TDFs), which are intended to align investment risk with your anticipated retirement date. They have become increasingly popular for a few good reasons but are rarely the best solution once your accounts achieve some size.
Let’s look at how they work and whether they are the most efficient choice for you.
TDFs are a great choice for beginners, or when you join a new employer plan. There is typically a lineup of 10 or more funds in a plan targeting every five years for the next 30 or 40 years. Often, they are funds run by the plan sponsor and are an envelope “funds of funds”. So, this diversifies each payroll contribution to maybe a dozen funds selected to complement each other. The main difference between choices is the percentage of stock funds vs. bond funds, as they all get increasingly conservative as their target date approaches.
Newer plans may even automatically enroll new employees. This helps both the employee and the plan sponsor. Most companies match half of the first 6% of salary you defer into their 401(k), providing extra retirement savings and reducing fees by growing the total plan balance. So, TDFs are the default investment election for participants based on age, which is a big advantage over holding the money in cash.
So, why are TDFs not the greatest thing since sliced bread?
To start, all of your money is invested with one fund family, instead of getting different approaches and methodologies. These funds are also allocated evenly across asset classes and industries instead of tactically selecting investments suited to the current economic environment. They also evenly spread bond exposure instead of actively selecting appropriate issuer qualities and maturities.
The biggest challenge with TDFs is that you don’t want all your investments too conservative as you enter retirement! Yes, you want to make sure that you have some conservative assets to draw on during rough patches, but you need growth because you still have a long-term timeframe for some of the money and you want your income to keep pace with inflation.
Here are a few things to consider:
How do you make your investment decisions? Is it by looking at last year’s performance?
Do you actively rebalance your accounts?
Do you compare what you own against what’s available?
If you have money in an old employer plan, have you thought about the advantages of an IRA?
Are you familiar with the concept of layering investment risks to match your goal timeframes?
You should review your 401(k) often as it will fluctuate along with the markets.
Call us to review your investment approach (404) 941-2800.
The big question for investors now is where to be invested going forward. With the overall market trading at 20x earnings and first half gains concentrated into only a select few stocks, most of the market has been left behind. With the valuations of the high-fliers now in excessive territory, the rest of the market looks much more attractive. Value stocks and cyclicals such as financials, energy, materials and consumer staples are a relative bargain and beginning to see some traction. We have maintained value exposure in all of our strategies, seeing better risk/reward near-term than in large growth. Yet the best longer-term risk/reward is in areas not much investor attention has been paid to in several years.
We see potential in sectors and industries left behind in this tech-centric advance. The relative weaker performance of small cap companies to large caps appears to have begun unwinding. We have meaningfully added to small caps in recent months. Today, foreign markets are most attractive as they are generally at lower P/E ratios, and with virtually all regions (except Europe and Japan) growing faster, they offer better value. Plus, when the Fed stops hiking rates, the U.S. Dollar should weaken relative to foreign currencies, which enhances foreign markets’ performance in dollar terms.
We stay focused on what we can control and seek the best longer-term opportunities for growth. The impact and mistakes made during and after the pandemic continue working themselves out. This is a perfect example of the cyclical dangers we work to avoid with our time-appropriate strategies. For our clients with current income needs, we maintain a sufficient level of conservative assets to withstand periods of market weakness until the tide ultimately turns higher. With shorter-term needs funded, longer-term capital can remain invested for growth, and fund future goals. This is part of each client’s personalized investment structure. We like to tell our clients to go live and enjoy life, because we’ve got their backs!
The S&P 500® Index (S&P) is up 16% YTD after posting back-to-back 8% quarterly returns. In the face of a deteriorating economic backdrop and expectations for even higher interest rates, this exceeded even the most optimistic expectations.However, not all is rosy with this advance. 75% of the gain was due to only 7 mega-cap stocks, and 95% due to the largest 30 companies as the hype around Artificial Intelligence sparked near mania for anything related to the technology. The rest of the market advanced less than 1% – not the healthy advance of a broad rally. To signal a healthier investment environment, there must be broader participation across sectors and market caps. (For the record, as of this writing we are pleased to be beginning to see just that).
While surprising gains are welcome, they point to potential repercussions for the rest of the year. The S&P is now expensive, trading at a 20x price-to-earnings ratio (P/E). It seems rather optimistic that earnings can grow quickly enough to sustain these prices, in the context of a Fed predicting two more rate hikes this year, multiple signs of a weakening economy (outside of housing and employment), and the previous rate hikes having yet to fully impact the broader economy. Despite many signals to the contrary, markets appear to have ruled out not only recession, but slower earnings in a weakening economy.
Economic growth remains but is slowing. Spending in the travel, dining and other service sectors remains strong, but cash accumulations and consumer confidence are waning. The manufacturing economy is weakening as spending on goods is slowing. Credit card and auto loan delinquencies are rising while banks tighten lending to only the most credit worthy. As the summer travel season tapers off, we expect households to reassess spending and consumer demand to slow this Fall.
While much of the economy is contracting, some parts continue to grow (technology, travel-related industries, construction, etc.). The housing market remains strong due to a severe supply imbalance and continuing job growth. Assuming no widespread credit defaults, banking crises or liquidity issues, we may very well escape true recession and end up calling this period a rolling recession, where economic sectors phase through recessionary cycles at different times. This is what the market is currently signaling it believes is happening.
We are near the end of the Fed tightening cycle. Consensus views are for two more rate hikes of 0.25%. The drivers for these additional hikes are continued inflation in housing and services. Then, we will see how much demand destruction, credit constriction and confidence erosion has occurred and whether the economy can continue growth in the face of a 5.5% Fed funds rate. The narrative will be a slow moving and ever-changing picture.
Continue reading to hear how Integras Partners is navigating the current market.
