To determine if defaulting employees into Target Dated Funds or Glide Path Funds is a good thing, one must first examine the alternatives. An examination of the history of asset allocations by employees before Target Dated Funds were the default option tells us that it is.
In addition to Target Dated Funds, many investors buy passive index funds for their 401k, 403b and IRA retirement plans. They do this systematically out of every paycheck. They have recently seen the three major indices fall by over 10 percent, leaving many to wonder what they should do during this market correction.
Why is this? Stock market volatility, as measured by the VIX, is a mean reverting measure, which means that what goes up must come down, and what goes down must come up. So with recent volatility levels in the mid-20’s, and the historical average volatility around 18, you can expect a drop. When it will drop is anyone’s guess.
Have you ever heard the phrase tax efficiency or tax efficient portfolio? Whenever I hear it my muscles tighten up, I get a little nervous, I lean forward to hear better and prepare to be wowed. Not long after, whatever the opposite of wowed is, I am. Once I realize that nothing has changed on this topic since the advent of governments taxing people on their investments, I scold myself for allowing this topic to capture so much of my attention. Nevertheless, I have never written a piece on this topic and thought I would share my thoughts. I urge you to prepare for some wow.
A long, long time ago in what seems like a galaxy far, far away, I was a graduate student doing my best to master finance and economics. There was this one great professor with a mission - it was to teach us to think. Our twicee-a-week assignment was to read what others had written about finance, economics or business and to find a flaw or fatal assumption. Each class, we had to come prepared to expose the faulty writing, incorrect assumption or some other clear violation of what, at that time, was the “only one and true way” to view money, finance and economics. Our source material was the universe of publications and one of our favorites was the Wall Street Journal, the business section of most any newspaper, as well as countless business magazines.