Investing: Under attack

That is, if everything goes according to plan. When the stock market cratered over the past year, some 2010 target-date funds dropped 20% — a rude shock for many investors who were counting on the funds to finance their retirements beginning next year.

While these funds have since recovered a bit, many are still down over the past couple of years. The losses have surprised many investors who figured that a target-date fund was the ultimate in safe investments, especially if the target date was close at hand.

Dan Hallett, president of Dan Hallett & Associates, an investment research firm in Windsor, Ont., says it’s a natural misunderstanding. Many target-date funds become highly conservative as their target date comes near — but not all target-date funds do. In fact, two funds with the same target date can hold entirely different mixes of assets. A recent study by Watson Wyatt, a U.S. investment consulting firm, looked at a variety of shorter-term horizon target-date funds and discovered that the amount of their portfolios invested in the stock market ranged anywhere from a relatively conservative 32% to a very risky 80%.

Despite what many investors think, target-date funds aren’t guaranteed, except for a few that offer capital guarantees, which are expensive. “If you really want guarantees, just buy a guaranteed product,” Hallett says. “Whenever someone is taking risk out of your hands, you’re shifting that to someone else and you’re going to pay for it one way or another.”

Target-date funds are best for someone who wants to hand over all their investing decisions to someone else. “When you take a long-term view of someone investing and looking to progressively become a little more conservative when they approach retirement, then it is a fairly good product,” says Jean-Daniel, a principal at consulting firm Mercer in Montreal. But be sure to look at the asset mix of the fund and make sure that its definition of conservative matches your own.