The Amateur Financier

(Welcome as always to another installment of Investing 101, where we take a look at some of the many, many different types of investments in the financial world.  This week’s subject is target date funds, a popular choice for retirement savings, especially in 401(k) plans.  Understanding what they are and how they work is important if you are deciding if they are appropriate for your investment goals.)

Q: What are target date funds?

A: The term target date funds refer to several different products offered by financial companies.  They all share several characteristics, though.  First, they are ‘funds of funds’, consisting of several different mutual funds from the sponsoring family.  Second, all the funds have a target date, when the investor is planning to stop depositing money into the fund and start withdrawing it.  Finally, all the funds of this type gradually become more conservative in their investment holdings as the target date approaches (the fund mixture shifts from mostly stocks towards a higher portion of bonds and cash).

Two major uses for target date funds are to save for retirement and to save for college.  Both of these goals are similar in that you have many years (if not decades) before you need the money.  The target date funds can be more aggressive at the start of the investment period and have lots of time to shift the investment mix every few years and become more conservative.

Q: Why use a target date fund, then?  Why can’t you simply shift your investments over the years by yourself?

A: The short answer is, you certainly can manage your investments on your own.  Target date funds are just more convenient for many people.  They allow you to invest in a single fund and have an investment mixture that is appropriate for your age and the length of time you have before you need the money.  If you want to set up your investment plan and then not think about it again, a target date fund will serve you well.  (Plus, when investing in 529 plans, your ability to shift your investments around is rather limited; using a target date fund will make it easier for your plan to stay on track to meet your college savings goal.)

Q: Sounds intriguing.  What’s the catch?

A: One of the most significant problems is that different fund families follow different investment schedules.  (Although, if Congress has its way, soon this may no longer be the case.)  As a result, a Retirement 2010 fund from Vanguard might have 50% Stocks/50% Bonds, while the 2010 Fund from T. Rowe Price has a 60% Stocks/40% Bonds mix.  If you don’t know what mixture your fund offers, and how it will change over time, you could find yourself holding investments that are inappropriate for your goals and risk tolerance when it comes time to withdraw your funds.

Along the same lines, you might not be able to find a target date fund whose investment progression matches how you want your portfolio to change over time.  If you think that a 50/50 mix of stocks and bonds a year before retirement is too risky, neither of the above funds will meet your needs; the same holds true if you want more stock exposure as you begin retirement.  And of course, the schedule for shifting the asset allocation might not meet your needs, either.

Q: What can I do to get around these problems?

A: Well, there are several possibilities.  If you’ve researched the major fund families, and haven’t found an appropriate fund for when you plan to retire from any of them, you can consider purchasing a plan with a different retirement date.  Funds with later dates will be more aggressive in their composition, while funds with earlier dates will become conservative more quickly.  If shifting dates does not solve your fund composition problems, you could try buying another fund or two to compliment the target date fund.  That way, you could boost your stock or bond holdings while continuing to keep the automatic investment shifting of the target date fund.

If neither of these options goes far enough in fixing the problems you have with the funds’ holdings, you could always forgo using a target date fund at all, and create your own personal mix from the available mutual funds at your preferred fund company.  You’d be giving up the automation of the target date fund for the increased control and effort of a do-it-yourself approach; whether that’s a good trade depends a lot on you and your personality.

I hope you’ve enjoyed this discussion of target date funds, and now have a better appreciation for how they could be used in your portfolio.

One of the things that I enjoyed about getting a psychology minor at college was seeing just how psychologists attempt to examine and classify people.  Since it’s illegal to subject people to degrading and bizarre tests just to see how they will react (unless you are running a reality show), psychologists have come up with a variety of indirect tests to ascertain a person’s basic characteristics.  These can include every from Rorschach (ink blot) tests and dream analysis to more mundane methods like personality tests.

With the widespread nature of the internet, it should come as no surprise that there are even online personality tests.  Recent, My Life ROI pointed out the results he got from 41 Questions.  And, being the curious type that I am, I decided to give it a spin myself.  Here are my results:

My Take on the Results:

The test seems to be pretty spot on in my case.  I do tend to be rather introverted in nature, and focus more on rational thought as opposed to feelings.  I’ve actually held a few jobs in the fields they recommend as careers that could fit me, as a QC chemist and as an organic chemistry tutor, both of which I enjoyed quite well.

That said, their comments are a bit off; I’m not much of a leader, and have trouble turning plans into action.  And furthermore, the fact that there are no negative comments listed makes me suspiscious about the overall results; surely, someone who is as introverted as me should have some negative qualities as a result.

Ultimately, though, the real value of quizzes like this are that they get you thinking about your personality.  And that sort of deep thinking can lead you to make appropriate changes in your life.

Big Brothers/Big Sisters of America is one of the perennially popular organization.  It’s hard to disagree with the goal of pairing up young boys and girls in troubled situations with adult mentors.  Heck, they were even the subject of an episode of The Simpsons; you can’t get more culturally relevant than that.  With that, let’s take a closer look at the organization.

Charity: Big Brothers/Big Sisters of America (BBBSA)

Website: www.bbbsa.org

Organization: Big Brothers/Big Sisters is an independent 501(c)(3) organization.  Contributions are deductible from taxable income according to IRS guidelines.

Goals: Big Brothers/Big Sisters matches up low income or at risk kids with caring adult mentors for one-on-one support.  Providing adult mentors lowers the risk of drug or alcohol use and encourages school attendance.

Classification: The NTEE classification on Guidestar lists Big Brothers/Big Sisters as a Children’s and Youth Services charity.

BBB Report:  Big Brothers/Big Sisters of America meets all twenty Standards for Charity Accountability as set out by the BBB.  These standards ensure that there is adequate oversight, methods of measuring effectiveness, use most of the finances toward charitable purposes and engage in proper fundraising.

Expenses: As noted by the Better Business Bureau, Big Brothers/Big Sisters spends 6% of its budget on fund raising and 4% of its budget on administrative expenses.  It brought in $27 million dollars during 2007.

You can donate to Big Brothers/Big Sisters here.

Ah, it’s a wonderful time of the year.  The sun is shining, the birds are singing, the grass is turning green, and college students are preparing for finals.  And, as a supplemental instructor, I am helping the organic chemistry students at my old school to learn and prepare for their test.

I always find it interesting, seeing just how far the students can come in a semester.  Chemistry that was giving them trouble when I started up my sessions in January is now second nature to them, although I wonder how many of them even stopped to realize it.  Of course, they have also managed to forget much of the material from fall that they haven’t used lately, so I suppose they’ll have some use for me yet.

Of course, out in the real world, there are no final exams or mid terms.  Instead, you have to keep monitoring your progress through life as you go and keep track of how you are doing.  With that in mind (and my awkward segue over), let us see where my finances are this week:

My net worth took a pretty heavy blow this week.  This doesn’t surprise me; on top of my usual expenditures, I also booked a flight, hotel room, and rental car for a trip out to California to visit my girlfriend’s extended family.  It’ll be nice to see her family and have a relaxing time out in the sun, but it does hurt my finances, at least for the time being.