The root problem with the argument put forth by “anti-target-date-fund-advisers” is that they assume their clients will behave rationally at all times. During my 15 years in the financial services industry, I found that more often than not clients behave… like humans. Humans have a tendency to get scared during turbulent market periods (when we should be brave) and we get greedy during periods of market euphoria (when we should be skeptical).

The charts that show the awesome power of compounding are mathematically correct. If you have a magic $100 bill that doubles every 10 years (for an implied annual return of 7.2%), you’d have the following growth in your assets:

Year 0 – $100
Year 10 – $200
Year 20 – $400
Year 30 – $800
Year 40 – $1,600
Year 50 – $3,200

… so, absolutely, that last doubling is where the big wealth kicks in. The problem is that markets don’t move in smooth lines. Over the past 80 years, markets have had negative returns in over 1 out of every 4 years. That means when you get to that point of the last doubling, you may be in a period where the market is down 20%, 30%, 40% or more. And thus you may not get that last double – you may be in a period like last year when markets were down substantially. That, in turn, can cause people to make very rash decisions – like pulling all their money out of the market entirely. The advisers who state that shifting from stocks into bonds as you get older eliminates the possibility for significant upside are absolutely correct… but they are neglecting to mention that such a move also helps prevent the possibility of significant downside as well.

That’s the benefit, from my perspective, of a target-date fund. It gives you a less bumpy ride – and is particularly powerful for people who start saving early on in life so that they have more time for those “stock doubles” to occur before the asset shift from equities into fixed income.

Thanks for the thought-provoking question and hope this response was useful!

All my best,
Manisha

Thanks for bringing light to this subject. I have a question that I’m hoping you might be able to clarify along these lines.

We’ve all seen the growth curve that many financial advisors offer where “the longer your money is invested, the more earning potential it has” and the visual chart that accompanies that showing that in the latter years your investments grow at a much quicker pace than in your younger years.

Here’s my question – can you better explain the stand that some advisors take that target date funds are bad? I’ve heard it explain that if you shift your portfolio as you grow older, you are eliminating the signficant growth opportunity that exists and that your growth chart will look significantly stunted from what many use as an industry standard.

What are your thoughts on this?