Asset allocation of the 2010 target date funds.

Target date funds are under scrutiny by Washington because apparently the 2010 funds from different fund families (Fidelity, T Rowe, Oppenheimer) took a 40% dive in 2008. Most of the target date funds were heavily invested in stocks instead of bonds and cash despite being so close to the target date (2010). The fact of the matter is that 2008 has been an ugly year for all funds out there. Even pure income/bond funds have been hit hard. Bonds are safer than stocks but they are not risk free. Even money market funds carry some risk. The 2008 meltdown has effected stocks and bonds equally. The only safe place is "cash". Below are some of the year to date asset allocation numbers for 2010 funds from different fund families.

TRRAX (T.Rowe 2010)

Cash 43.83%
Stocks 34.47%
Bonds 21.12%
Preferred 0.16%
Convertible 0.08%
Other 0.34%

JSWSX (JPMorgan 2010)

Cash 9.51%
Stocks 40.88%
Bonds 48.71%
Preferred 0.11%
Convertible 0.01%
Other 0.77%

FFFCX (Fidelity 2010)

Cash 11.37%
Stocks 50.17%
Bonds 35.64%
Preferred 0.22%
Convertible 0.12%
Other 2.49%

VTNEX (Vanguard 2010)

Cash 2.57%
Stocks 52.23%
Bonds 44.42%
Preferred 0.05%
Other 0.73%

OTTAX (Oppenheimer 2010)

Cash 8.15%
Stocks 61.48%
Bonds 29.12%
Preferred 0.05%
Convertible 0.01%
Other 1.19%


JP Morgan 2010 is the only fund with more bonds than stocks in 2009. Even though T.Rowe 2010 is more invested in stocks, it has the highest cash position (which I like), the 44% cash position offsets any risk the 35% exposure to stocks entails. The folks at T.Rowe have it right. When you are closest to your target date, most of your money is allocated to the safest medium "cash".

I did hate to be the owner of OTTAX, VTNEX right now. Unless, you are a raging nursing home equity trader, you are SOL with that kind of asset allocation so close to the target date. I guess the fund managers are trying to make up for the 2008 losses in HOPES of a 2009 recovery and have therefore invested in stocks so late in the game (close to 2010). The ethical question they are facing is whether they should stick to the asset allocation ratio they were supposed (as dictated by the fund prospectus) or should they deviate from it so as to make up for the unprecedented 2008 losses. In the end, its all about making money for the investors, however HOPE was not the sentiment I was looking for in professional money managers.

Good v/s Bad - The stock market way

If you are Generation X, you have probably heard your parents lament about how the "state of the union" (where the union = world) is bad and how we are all going through a giant wave of ethical, moral and religious degradation. Life back then was a lot more innocent and folks back then were less crime prone. Is our generation more crime prone or are we just victims of a media on steroids which has its spotlight on the tiniest of infractions. I mean seriously, when did a drunk driving incident in Hong Kong warrant CNN coverage in the US?

Nevertheless, it seemed like an interesting exercise to see if there was a single metric that would sum up our moral,ethical and religious priorities and I figured the stock market is one hell of an indicator. Take three mutual funds VICEX, AVEMX and IMANX.

VICEX: The "Vice" fund is a mutual fund that invests in companies that deal with human vice i.e. alcohol, tobacco, firearms, wars. Companies include: Philip Morris (Marlboro), Carslberg (Beer), Lockheed Martin (planes, missiles...wars?).

AVEMX: The Ave Maria Catholic Values. Invest in companies that support catholic values and meet their religious criteria. Companies include: Western Union, Sherwin-Williams, General Cable etc.

IMANX: Iman K. This fund invests in companies that adhere to Islamic values. Companies include: Google, Coca-Cola, Eli Lilly, China Mobile (I'm still researching the connection between Islam and these companies).

Over the past 10 yrs, which are a slice of the "supposed evil times" we live in, the VICEX grew 33%, AVEMX grew 10% and IMANX grew 12%.

Here's the 10yr Google chart

Of course, the same chart over 1yr, 5 yr periods shows that the good and the bad got hammered by the UGLY (the sub-prime mortage mess)

1 yr chart

5 yr chart

However, the YTD chart for 2009 are looking good for the "faith based/religious" funds. Looks like all that praying during the downfall of 2008 paid off!!.

Year to date chart

Insuring your retirement

Popular retirement vehicles such as 401K and IRA just expose the average investor to raw equities/bonds with no guarantees. Even though these vehicles are for parking your money for the long term and they are tax deferred, there is no security net. Your retirement can go to $0 in theory.

When you buy a big ticket item like a house, car you get insurance. The money that you sock away for retirement is sacred and it makes sense that it should be insured too. Annuities offer exactly that. They provide insurance for the money you sock away for retirement. They are tax deferred. There are fixed income and variable annuities (backed by the equity market) depending on what sort of income you want upon maturity of your annuity. A fixed income annuity will give you fixed income which may not keep up with inflation. A variable annuity (backed by mutual funds) can give you more income but can also go down, but because these are packaged with insurance, you do get some money if things were to go sour when you were about to retire.

Annuities because of their inherent tax deferred nature are best handled outside a 401K and IRA

Here's an excellent article on Annuities from the SEC

California's $24 billion budget deficit & YOU!

California is facing a $24 billion budget gap with no obvious way to close it. You may not live in CA, but the budget cuts in CA and its Govt's inability to pay its own employees is a warning bell for all those California "bond" holders like you.

A "bond" is something Govt's issue to raise money for infrastructure projects. So its essentially an IOU from the Govt where the U is literally you the investor in mutual funds. If the CA Govt does not feel the need to pay its employees because of the budget cuts, it certainly will default on the IOUs it has doled out to the average Joe investor. California defaulting on its $59 billion in outstanding general obligation bonds is unavoidable.

To the average Joe investor this means check your mutual fund portfolio and make sure you are not heavily invested in CA govt bonds through local municipal bond funds or national funds that invest heavily in CA. Unfortunately, CA is the highest issuer of tax exempt bonds, so its popularity is high and it is probably sitting right there in your portfolio about to go bust.

Target date mutual funds

Target date mutual funds (aka Life cycle, retirement funds) are growing in popularity in company 401Ks and IRAs. They are mutual funds where you pick a date when you want to retire (say 2030) and then you pick a fund with that date. Target date funds model the classic investment mantra of picking more risky stocks over bonds when you are still young and decades away from retirement and then as you approach retirement you limit your risk and have some income generating bonds in your portfolio. The appeal of these funds is that all the rebalancing and asset allocation is done for you automatically and is adjusted as you approach your retirement age. These funds are ideal for passive investors who do not have the time to research funds on a continuous basis nor do they have a professionally managed portfolio. Since a target date fund models diversification, asset allocation and all that good stuff for you, it makes sense to allocate 100% of your money to a target date fund in your portfolio. If you have other funds in your portfolio, your "overall" portfolio mix will be skewed I.e. you might be over/under invested in stocks/bonds.


Most fund families (Fidelity, T.Rowe Price, Vanguard and Oppenheimer) with their respective 2030 funds (FFFEX, TRRCX,VTHRX) offer no-load funds. Look out for expense ratios, fees, Morningstar rating, read about the fund manager and have an idea on the fund's objective.