Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:18]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to Risk Parity Radio. If you have just stumbled in here, you will find that this podcast is kind of like a dive bar of personal finance and do-it-yourself investing.

Mostly Voices [0:53]

Expect the unexpected. It's a relatively small place.

Mostly Uncle Frank [0:57]

It's just me and Mary in here. And we only have a few mismatched bar stools and some easy chairs. We have no sponsors, we have no guests, and we have no expansion plans. I don't think I'd like another job. There are basically two kinds of people that like to hang out in this little dive bar.

Mostly Voices [1:20]

You see, in this world, there's two kinds of people, my friend.

Mostly Uncle Frank [1:24]

The smaller group are those who actually think the host is funny, regardless of the content of the podcast. Funny how? How am I funny?

Mostly Voices [1:32]

These include friends and family and a number of

Mostly Uncle Frank [1:36]

people named Abby. Abby someone.

Mostly Voices [1:40]

Abby who? Abby normal. Abby normal.

Mostly Uncle Frank [1:47]

The larger group includes a number of highly successful do-it-yourself investors. many of whom have accumulated multimillion dollar portfolios over a period of years.

Mostly Voices [2:02]

The best Jerry, the best.

Mostly Uncle Frank [2:06]

And they are here to share information and to gather information to help them continue managing their portfolios as they go forward, particularly as they get to their distribution or decumulation phases. of their financial life. What we do is if we need that extra push over the cliff, you know what we do? Put it up to a level 11. Exactly. But whomever you are, you are welcome here. I have a feeling we're not in Kansas anymore. But now onward, episode 333. Today on Risk Parity Radio, it's time for our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolio's page. And a little preview of that. I love gold! Which is a good thing, 'cause we're not loving much else these days.

Mostly Voices [3:05]

Uh, what? The money in your account, it didn't do too well. It's gone. But before we get to that, I'm intrigued by this, how you say, E-mails.

Mostly Uncle Frank [3:19]

And today we're gonna have one of those special episodes where we devote everything to one topic and one email. And so... First off.

Mostly Voices [3:28]

Second off. Last off. First, second and last off, we have an email from Ingrid. He's looking at you, kid. And Ingrid writes...

Mostly Uncle Frank [3:40]

Hello, Frank.

Mostly Mary [3:43]

I am a new listener to your podcast and a late start self-investing student. I have been listening to your podcast episodes, both recent and working from the bottom up for this last month and am learning a lot. I am really enjoying the style too. You are talking about the nonsensical ravings of a lunatic mind. In one of your recent episodes, you have briefly expressed the dislike of the retirement target date funds.

Mostly Voices [4:12]

Can you explain it further? You fell victim to one of the classic blunders.

Mostly Mary [4:15]

My husband and I are in our 50s and planning to retire in the next five to 10 years. Most of our retirement investments are in our employer-sponsored 401 s and invested in Vanguard retirement target date funds 2030 and 2035 accordingly. I understand the logic behind them for the simplicity of investing and hands-off rebalancing, But what are the downsides, especially at different stages of life? If there is a specific episode of your podcast where you have already addressed this topic, please direct me to it. Thank you in advance, Ingrid. Play it once, Sam, for all time's sake. Play it, Sam.

Mostly Uncle Frank [5:01]

Play as time goes by. Well, Ingrid, you may have just I poked a hornet's nest with this question. Because I've often said things like friends don't let friends use target date funds. So this may end up being a bit of a rant. Surely you can't be serious. I am serious.

Mostly Voices [5:25]

And don't call me Shirley. Then I'll try to be mostly civil. I want you to be nice until it's time to not be nice. Well, how are we supposed to know when that is? You won't. I'll let you know. Well, you might as well push the rant button as well.

Mostly Uncle Frank [5:48]

I can just find that button. And away we go. Yes. Now I've often pointed out various drawbacks and problems with target date funds, but I have not done it all in one place. So I think we should do it all in one place here. So we have it to refer to in the future. The Inquisition.

Mostly Voices [6:20]

Let's begin the Inquisition. Look out, Satan. We have a mission.

Mostly Uncle Frank [6:27]

But before we get into the meat of it, I think we need to understand what we're talking about and understand the history of it, because I don't think you can really make any good decisions about anything until you understand the history of where something came from and why it exists at all, particularly when we're talking about financial products. Now, target date funds were first invented sometime around the year 2000 or back in that era. The idea of a target date fund is that it will create a portfolio for you that is designed to get more conservative over time in some kind of glide path. So in its simplest form, a target date fund might be 90% stocks and 10% bonds at the beginning and then slowly change into something that might end up being 35% stocks and 65% bonds 40 years later. So the main two characteristics of these things are that they have a mixed portfolio that's on some kind of a glide path, and then they have a target date for retirement. So whenever you see one, it'll say something like Financial Companies Target Date Fund 2065, and they follow a set algorithm for everybody that invests in the fund. So when they were first invented, they were not very popular. There was kind of really no purpose for them in the world because financial services companies were more interested in promoting their management over time of funds customized to individual customers or groups of customers and not offering some kind of one size fits all thing. So while a few companies put them out there and experimented with them, there was really not much of a demand for these kind of products. They were also expensive. You were essentially paying for a management fee for something that was not really being managed other than being put through an algorithm. Now along came 2006. In 2006, Congress passed something called the Pension Protection Act of 2006, which was signed into law. Now, part of what the PPA was supposed to fix at that time was the default options for investing in 401 plans. Because prior to that, there were no standards as to the default option for a 401 plan. And typically, if an employee started putting money into a 401 plan and they didn't actively do anything with it, as in pick a fund to invest in, the money would just sit there in cash or some kind of low yielding short-term bond investment or something similar to that. The problem being is that if you're not really invested, your money is not going to grow and it's not going to help you get to retirement. Now, there are obviously two ways of fixing this problem. One would be to actually educate the people investing in 401 plans and tell them that they needed to pick something and perhaps make some suggestions as to what that might be. That was not the primary solution that was chosen. The solution that was chosen was to create a category of investments called qualified default investment alternatives, or QDIAs. And QDIAs could be several different things. They could be some kind of managed alternative. They could be some kind of balance fund, but one of the options that QDIAs could be was a target date fund. So the Pension Protection Act of 2006 said that all new 401 plans were required to have a QDIA option without specifying exactly what it is. Target date funds were listed as one of those possibilities. So what did target date funds give or what made them more useful was that they gave retirement plan sponsors a safe harbor option for automatically enrolling employees who didn't choose their own investments. By selecting a QDIA, like a target date fund, plan sponsors could reduce their liability for investment decisions made by employees. That is the straight stuff, O' Funkmaster. Now, there were further regulations after that put out by the Department of Labor to clarify what this needed to be. And so this is what made target date funds popular. They were not popular because they were the best thing for any particular investor. They were popular because they were a way for plan sponsors to provide something and avoid liabilities that they would have if they were to just dump the uninvested money into cash or short-term bond funds like they had been doing in the past. What do you think of a person who only does the bare minimum? And so plan sponsors promptly farmed this problem out to the financial services world who create funds who I'm Frank Vasquez, and welcome to Risk Parity Radio. I'm Frank Vasquez, and welcome to Risk Parity Radio. I'm Frank Vasquez, and welcome to Risk Parity Radio. I'm Frank Vasquez, and welcome to Risk Parity Radio. I'm Frank Vasquez, and welcome to Risk Parity Radio. I'm Frank Vasquez, and welcome to Risk Parity Radio. I'm Frank Vasquez, and welcome to Risk Parity Radio. be all solution for investors because that way they I'm Frank Vasquez, and welcome to Risk Parity could attract more investors, get more money and charge more fees. Radio.

Mostly Voices [12:30]

I'm Frank Vasquez, and welcome to They're sitting out there waiting to give you their money. Are you gonna Risk Parity Radio. I'm Frank Vasquez, take it? Many of these target date funds have and welcome to Risk Parity Radio.

Mostly Uncle Frank [12:37]

I'm Frank Vasquez, lots of layered fees not only for the target date fund itself and welcome to Risk Parity Radio. but for the funds included in the target date fund.

Mostly Voices [12:45]

A guy I'm Frank Vasquez, and welcome to Risk Parity Radio. I'm Frank Vasquez, and welcome don't walk on the lot lest he wants to buy.

Mostly Uncle Frank [12:49]

to Risk Parity Radio. I'm Frank Vasquez, All right, what are the basic pros and cons of target date funds? Now you reference those pros and welcome to Risk Parity Radio. I'm Frank Vasquez, summarized as the simplicity of investing in hands-off rebalancing. and welcome to Risk Parity Radio. I'm Frank Vasquez, and welcome to Risk Parity Radio. I don't think that's quite accurate actually, particularly if you're calling target date funds simple. I'm Frank Vasquez, and welcome to Risk Target date funds are not simple, they are easy. There's a Parity Radio. I'm Frank Vasquez, and welcome difference between simple and easy. Target date funds make it very easy for you to invest. Target date funds themselves are not simple. They have many moving parts inside them. Those moving parts are changing all the time. That is not simple. It is easy. An analogous kind of investment would be a whole life insurance policy or a variable annuity. Those are also very easy. The reason they are easy is you just go to any insurance provider. They are happy to roll out their products, show them to you, tell you all about them, tell you where to sign up. It's very easy. You give them your money. You don't have to worry about it again. They take care of everything. It's very easy. Those products are not simple. They have lots of moving parts in them. They have lots of details to them. Target date funds are very similar to that. Very easy to invest in, not very simple to comprehend.

Mostly Voices [14:17]

Hard choices, easy life. Easy choices, hard life.

Mostly Uncle Frank [14:21]

If they were simple to comprehend, you would know exactly what you were invested in when you looked at the name of a fund and it said, Target date 2065 on it. You don't know anything about what's in that fund just by looking at that name. I know nothing. Instead, in order to actually know what you're invested in, you'd have to look under the hood, look at all the pieces in there, look at how they're combined, and then look at each piece and see what it is invested in. And that is not simple. It's just not. Forget about it. You would also need to understand how it's changing over time. That is not simple either, and it's different for every family of funds, including funds offered by the same provider if they're in a different family. And that can also change over time without warning. Again, it's easy to use. It is not simple to understand. It is not a simple product. Forget about it. All right, now here are the five basic cons that are generally pointed to with respect to target date funds. First is the one size fits all approach. Target date funds are designed with a single investor profile in mind, somebody of your approximate age with an average risk tolerance. They may or may not be appropriate if your risk tolerance differs from the average. If you want more control or customization, a TDF may not work. The other problem with this is also they do not and cannot account for any of your other investments, your spouse's investments, any of your other circumstances. In order to use a target date fund properly, you need to put all of your invested money into that one fund and then it may work out the way it should for an average investor retiring at an average period of time who had started investing in that target date fund in their 20s because the idea of a target date fund is you're investing in the same thing for your entire career. If you start investing in a target date fund 10 years before retirement and it's got the number on it that's 10 years in the future, you're not going to save enough money in that thing. It's not designed for you.

Mostly Voices [16:41]

That's the fact, Jack. That's the fact, Jack.

Mostly Uncle Frank [16:49]

All right, the next big problem pointed out for these things is the potential for conservative glide path. Now, the glide path is how a target date fund shifts its allocation over time. To protect your money near retirement, most target date funds get more conservative as the target date approaches. This may hinder returns if you have a long time horizon for retirement. And it may also cause the same problem I just mentioned, that if you haven't saved enough and you're trying to catch up, you need to be even more aggressive early on when you're putting money into your investments. But the main problem we do see here is that they have very young investors with substantial allocations to bonds that they don't need, and they probably won't need until they're at least halfway through their investing and saving journey. Problem number three, or con number three, is fees. Target date funds often have higher fees than simple index funds. This is because target date funds are funds of funds. They hold other mutual funds or ETFs inside them. Those underlying funds charge their own fees, so the overall expense can be higher compared to directly investing in a few low-cost index funds. Watch out for that first step.

Mostly Voices [18:01]

It's a doozy.

Mostly Uncle Frank [18:05]

And this is endemic across target date fund land. Most target date funds charge lots of fees, both for the funds themselves and the funds inside the funds. Am I right or am I right or am I right? Right, right, right. And if you are investing in this in a 401, You do not get a choice as to which family you get to use. You get to use whatever your employer provides. And so when people say, well, just use Vanguard funds, it's like those may not be available to you and probably are not available to most people. And how are most people supposed to know what the fee structure is of these things without knowing the details of them and without getting inside of them, which again, is not simple.

Mostly Voices [18:55]

I says, pigpen, this here's a rubber duck and I'm about to put the hammer down.

Mostly Uncle Frank [18:59]

It is difficult to understand what is going on inside most target date funds, which leads to con number four, problem number four, lack of transparency. It can sometimes be difficult to determine exactly what mix of assets a target date fund holds or how its asset allocation strategies differ from competing target date funds. In fact, I would say it's well-nigh impossible if you look at all of the different target date funds across the spectrum to really be able to compare them in any meaningful way. There are too many funds with too many algorithms and too much obfuscation as to what they're doing and no guarantee that they're not going to change internally over time.

Mostly Voices [19:42]

It's a piece of crap that doesn't work. I could have told you that.

Mostly Uncle Frank [19:50]

And number five, which may be the biggest problem, potential for underperformance. While a target date fund is designed to mitigate risk and provide solid returns over time, past performance is not always an indicator of future results. And in fact, the data shows us that target date funds do underperform similar investments. That is a fact. And we're going to talk more about that in a moment.

Mostly Voices [20:17]

You can't handle the truth.

Mostly Uncle Frank [20:21]

But this is now well known that target date funds tend to underperform. All right, now how do we know that? We know that because lots of academic research has now been done on these things since they've been around for over a decade. And I've just pulled one paper for you because it's a recent one and fairly comprehensive. This one is called the Unintended Consequences of Investing for the Long Run, evidence from target date funds by Masa, Musawi, and Siminov. And it was originally published in the year 2020. It's been updated through 2022. And not to bury the lead just from looking at the abstract of the paper, and I will link to this in the show notes. It says that their evidence suggests that asset managers exploit reduced investor attention to deliver lower performance in target date funds. This results in a hypothetical cumulative return loss of 21% for the average investor holding the funds for 50 years. Now, I want you to hold that thought in your brain that somebody investing long term in a target date fund is going to have 21% less than somebody who took a simpler path to wealth. Because this is very similar to what Jack Bogle wrote in Common Sense Investing when he was comparing managed funds to index funds and the cost of, quote, helpers, unquote, from the financial services industry and how much that was really costing you over time. The truth of it is, is that target date funds similarly cause you to lose lots of your retirement money over time. And that is the evidence, that is a fact, and this is no longer subject to debate. Now we're going to look at some other highlights from this paper. In the introduction on page two, I'll read you another little section here. Target date funds typically do not invest directly in individual securities, but invest in underlying pooled investment vehicles such as index mutual funds, exchange traded funds, and active mutual funds. According to industry insiders, most target date funds are constructed entirely from mutual funds from their sponsoring organization. For example, the Fidelity Freedom 2030 fund consists of 23 different Fidelity mutual funds. Looks like I picked the wrong week to quit on Fidelity. Let me just stop there. Does that sound simple to you? 23 mutual funds? Who needs 23 mutual funds? Are you stupid or something? Nobody needs 23 mutual funds. That is not simple. Yes, it's easy to invest in that, but it's not simple to understand. In fact, I doubt anybody understands what's in there other than the people that designed it. And they didn't design it because they wanted something simple. They wanted something complicated that they could get more fees out of. That's what that represents.

Mostly Voices [23:21]

Because we're adding a little something to this month's sales contest. As you all know, first prize is a Cadillac El Dorado. Anybody want to see second prize? Second prize is a set of steak knives. Third prize is you're fired.

Mostly Uncle Frank [23:40]

Moving on. The average target date fund in our sample allocates 50.3% of its portfolio to actively managed mutual funds. with the rest split between index funds, ETFs, cash and individual securities, stocks, bonds, et cetera. These underlying investment vehicles are managed primarily by the same family. In 2019, around 58% of the Target date funds only invested in their families' funds, while another 20% invested between 50% and 99% in their families' funds. Only 10.6% of the Target date funds did not invest in their own family. In other words, most target date funds are closed architecture funds, even if all of them are open-ended investment vehicles. Again, what that's telling you is these things are designed to keep things all in the family. They may have things hidden in there like managed funds that are expensive and fee generating. And as far as the investor is concerned, they are limited. All right, now moving to page six of this paper. where they're discussing the underperformance of target date funds. And they conclude that the longer you have your money in one of these things, the worse the underperformance gets. They write, A simple back-of-the-envelope calculation shows that fund underperformance is more pronounced and significant, both statistically and economically, for funds with longer horizons. For an average investor who invests for 50 years, the drag on performance induced by the behavior of target date funds reduces the investor's accumulated performance by 20.6%, and that compares with a drag of 5.9% for a 20-year time frame. And then they go on. Multivariate analysis confirms these results. We find that target date funds underperform with respect to traditional balanced funds. The annual performance of the target date funds is 77 to 88 basis points. That's 0.77 or 0.88 of a percent lower than the performance of balance funds in terms of net of fee performance. The effect is concentrated in the period after the passage of the Pension Protection Act of 2006. After the passage of that act, the annual performance of the target date funds is lower than that of the balance funds by 103 basis points, 1.03% in terms of the net of fee or Gross of fee alpha. So these things are chronic underperformers and they get worse over time. Meanwhile, as we observe on page eight of this paper, these things have become some of the largest areas of growth and profitability for the financial services industry. Their number has grown from 63 of these funds in 2000 to 2,778 in 2019. The total market capitalization surpassing $1.4 trillion at the end of 2019. Target date funds are big business for the financial services industry and a major source of their profits. And the industry makes this intentionally difficult to understand.

Mostly Voices [26:53]

Always be closing, always be closing.

Mostly Uncle Frank [26:56]

As they also write on page eight, target date funds report information to their investors in a way that makes it difficult to properly and fully understand and benchmark the performance implications of asset allocation decisions. As JPMorgan's research noted, the absence of standard performance benchmarks, coupled with a wide and varied landscape of target date funds, makes comparing the performance of TDFs challenging.

Mostly Voices [27:24]

Hearts and kidneys are Tinker Toys.

Mostly Uncle Frank [27:31]

Guess what? Guess what? They, as in the financial services industry, does not want you to know how bad these funds actually are. So, they make it difficult to even compare them with other funds. And that is why we need academics to go through all of this data and write these papers and tell us the truth about them.

Mostly Voices [27:55]

For mercy sakes alive, looks like we've got us a convoy.

Mostly Uncle Frank [28:00]

Now the paper also reviews the purpose of these things in their relationship to the Pension Protection Act of 2006 and notes on page nine, the PPA removed the potential liability of plan sponsors for investment losses by offering a safe harbor provision for pension plan sponsors who design their plans with a default option. The fund should fit one of three qualified default investment alternatives, or QDIAs, to qualify for the default option. These alternatives are lifecycle funds, target retirement date funds, balanced funds, and professionally managed accounts. And as we saw this evolved, through the miracle of the financial services industry into largely using target date funds because those are the most profitable QDIA for the financial services industry.

Mostly Voices [28:55]

Because only one thing counts in this life, get them to sign on the line which is dotted.

Mostly Uncle Frank [29:02]

All right, now moving further into this paper, there's a whole section addressed to the question of do TDFs underperform Starting on page 21, and it says, A summary perspective of the main results is provided in figures four and five. Figure four shows the longer the horizon, the more the funds underperform. So it's not even a question that target date funds underperform other alternatives. Just the question is how much and how bad is it? Real wrath of God type stuff. They go on in page 22 to write, The numbers are staggering. For an average investor who invests for 50 years, the drag on the performance induced by the behavior of the target date funds reduces their accumulated performance by 21.9% in the case of net of fee performance and 20.6% in the case of gross of fee performance. This suggests that the underperformance is not just a result of the fees on fees effect but also related to the inability of target date funds to deliver better asset management skills relative to the other open-ended funds. I suck. That means they're not only bad because of their fees, they're bad because they're poorly managed. These algorithms that they're using are not designed to maximize your performance. They're not designed to make you more money. In fact, these algorithms that target date funds use underperform. They do worse. They leave you with less money at retirement. Or you can just keep working longer. I mean look at you. You couldn't even drive a wheelchair.

Mostly Voices [30:44]

You should look at yourself, Max. You're a mess.

Mostly Uncle Frank [30:48]

Moving on to page 23 and 24, they write, Comparing the performance of balanced funds and target date funds, A balanced fund would be something that is like a static 60/40. We see that target date funds underperform by 77 to 88 basis points per annum for a net of fees alpha and a 39 to 46 basis points for a gross of fees alpha. The effect is stronger for the long funds and the differential of underperformance between the short and long funds varies from 84 basis points per annum Net of fees to 65 basis point gross of fees. We also see the underperformance did not exist before 2008 and suddenly increased from zero to 103 basis points net of fees. Think about that.

Mostly Voices [31:39]

Hello, hello, anybody home? Think McFly, think.

Mostly Uncle Frank [31:44]

What this is saying is that after 2008, When the law went into effect and these things became popular, the financial services industry found a way to extract another 1.03% of your money for using these target date funds that they weren't even getting before that. Think McFly, think! They go on page 24, we see the same pattern repeated for comparison between target date funds and all open-ended funds. The performance of target date funds is lower than the other open-ended funds. Target date funds deliver a 10 to 104 basis points lower annual performance than the other funds in terms of net of fee alpha, 65 to 68 basis points gross of fees. The effect is stronger for the longer horizon funds with a net of fee annual underperformance differential of 33 basis points for the long horizon. Again, these things are underperforming just about any other thing they're comparing them to. Think McFly, think! And they conclude this section on page 25. They write, We find the effects of a long horizon are concentrated in the period after 2008. It is nonexistent before 2008, strong from 2008 to 2013, and marginally weaker after 2013. In particular, the difference in annual performance between the fourth and first quartile is about 124 basis points for the period after 2008 and before 2013, and reaches 106 basis points after 2013 for the overall sample. This result is consistent with the underperformance of long horizon target date funds becoming stronger after investing in target date funds has become the default option in retirement accounts. Think McFly, think! What that is telling you is that the financial services industry has taken advantage of the fact that these things are a default option in retirement date accounts and are taking you to the cleaners. Coffee's for closers only. To the tune of 1% annually over the long run. Are you stupid or something?

Mostly Voices [34:03]

Stupid is a stupid does, sir.

Mostly Uncle Frank [34:06]

Now they go on to investigate this further and attribute a lot of this underperformance to the fact that these funds are using their own family of funds to construct these target date funds, that they are switching funds in and out of them, that a lot of these are managed things or funds that are unpopular and they need some way to boost the performance or use of these unpopular funds in their fund families. On page 30 and 31, they talk about fee skimming. The conclusion there is the results suggest that one reason why target date funds underperform at longer horizons is the fund families' desire to use them to exact higher fees on the underlying funds. That's just taking higher fee funds and hiding them in the target date fund. Bing! And they go on to say on that page, the previous findings suggest that target date funds engage in behavior that helps the affiliated funds. The outcome is lower performance. Bing again! And in the conclusions on page 33, they write, Both multivariate analysis and portfolio analysis confirm that target date funds deliver lower performance than other comparable U.S. equity funds. and that target date fund performance is worse the further the target date fund is from its maturity date. That is, at the very time in which the literature and practitioners suggest that performance ability is higher, thanks to the ability to invest in equity with no constraints. These findings suggest that target date funds are subsidizing the underlying funds managed by the same family.

Mostly Voices [35:45]

But what Jimmy really loved to do, what he really loved to do was steal. I mean, he actually enjoyed it. Jimmy was the kind of guy who rooted for the bad guys in the movies.

Mostly Uncle Frank [35:57]

So this is only one academic paper, but the results are obvious, and this is being repeatedly found by others that investigate this, that target date funds are bad news for investors. They are chronic underperformers. And almost all of them were gimmes.

Mostly Voices [36:16]

I mean, they just gave it up, no problem. They called them Jimmy the Gent. Tommy, help the lady. Drivers love them. They used to tip them off about their really good loads and of course everybody got a piece.

Mostly Uncle Frank [36:28]

So since that's the truth, the $64,000 question now is why do a lot of financial advisors and the financial services industry and other misguided individuals continue to say that target date funds are a good idea for investors, particularly people starting their investing journey. And whenever I have discussions with people about this, we end up at three fallacies that are used to justify the use of target date funds. One is magical thinking, another one is moving the goalposts, and another one is the false dilemma. First, let's talk about the magical thinking. That goes to where you say the simplicity of investing and hands-off rebalancing. All right, first, why would anybody do rebalancing? The main reason you do rebalancing is that it helps with performance over time, and it keeps your risk profile the same. But it's not that hard to do, and it shouldn't cost you 1% a year to be doing that. In fact, it should benefit you, not cost you money. So this whole idea that target date funds are helping you do better with your investments is wrong. Wrong! That's magical thinking. These algorithms do not work in your favor. They are not improving your investment results. We know that from the paper. We know that from other things. Yet people still persist in this idea. It's like they want to believe that because this thing has an algorithm and a magic date on the front of it, that it's magically going to make their retirement dreams come true because it's nicely labeled, properly packaged, and nicely presented with a bow on it.

Mostly Voices [38:22]

The money's out there. You pick it up, it's yours. You don't, I got no sympathy for you. You want to go out on those sits tonight and close, close, it's yours, not you're gonna be shining my shoes. And you know what you'll be saying, a bunch of losers sitting around in the bar. Oh yeah. I used to be a salesman. It's a tough racket. But the truth is, it's more like the cardboard cake that's very well decorated. A-I-D-A, attention, interest, decision, action, attention. Do I have your attention? Interest. Are you interested? I know you are. You close or you hit the bricks. Decision. Have you made your decision? and action.

Mostly Uncle Frank [39:10]

Target date funds are not improving your investment performance in any way, shape or form. They are detracting from your investment performance to the tune of about one percent a year, which is going to take away from your overall accumulation by over 20% over time if you persist in using them. If you have other findings, I'm happy to look at them. They were probably produced by somebody who is a purveyor of target date funds and they're making an inaccurate comparison because the academics who are doing this from an unbiased perspective have found out the real truth and have published it for our consideration. Now you can choose not to believe that you can choose not to ignore those things. But you are engaging in magical thinking if you are doing that.

Mostly Voices [40:05]

You're so magical, yeah. You're so wonderful, yeah. You're so colorful, yeah. You can be all of these things. We're unicorns, unicorns, unicorns, yeah. We love you. We're unicorns, unicorns, unicorns, yeah. Make wishes come true, wishes come true.

Mostly Uncle Frank [40:31]

Yeah. And they are not going to get better over time. They are not going to reinvent these algorithms. They're not going to become magically better. In fact, they are becoming worse over time as the financial services industry figures out more ways to extract more money out of these Things.

Mostly Voices [40:55]

Because only one thing counts in this life. Get them to sign on the line which is dotted.

Mostly Uncle Frank [41:00]

Now let's talk about the moving the goalposts arguments I hear about these things. This goes something like this. And it's usually from somebody who's otherwise well-meaning. I read this commonly in personal finance books. And it said, well, for somebody who wants to pay no attention to their 401k, this is a good option. Okay, let's set the goal post there then. Somebody who wants to pay no attention to their 401k. This person also wants to pay no attention to any of their finances. That is where you have set the goal posts. Because I agree that a target date fund is a better option to leaving the money in cash or not investing it at all, like what happened before 2006. If you are going to set the goal post there, then we agree. But if you are going to set the goal post there, then you are also saying that this person is incapable of doing any of the other things in your book about doing basic investing, like doing a simple path to wealth kind of solution, because they are incapable of making any choice whatsoever in their funds. that's where you've set the goal posts. Once you move those goal posts to somebody who wants to pay a minimum amount of attention to their finances, just do the basic stuff. Just be able to open an IRA. Once you have moved the goal post there, then I win because that person who can do the bare minimum is capable of looking through a menu of funds and picking out an S&P 500 fund or a total market fund or some other basic combination of a couple of funds in their list in the 401k. If that is where the goal posts are, the same person that needs to be able to manage a budget and open a bank account or look for a high yield savings account or open an IRA and put money in there or even order something off of a menu from Amazon or DoorDash and have it delivered. That is the kind of skill we're talking about here. If they're capable of doing that, they are capable of going into their fund list and picking out an appropriate fund for them to invest in as a beginning investor. And they only need one or two funds. You can start with that S&P 500 or Total Market Fund. If you want to hear more about this, go back and listen to episode 208 in this podcast series. So don't tell me that somebody is capable of doing these bare minimum kind of things, but they need to go invest in a target date fund because all of a sudden they become incapable of looking through the menu in their 401k. That's just not true. The only people that should be investing in target date funds are the ones that are comatose. and are incapable of doing anything. That's what the PPA is supposed to protect. The people who are comatose about their investments and do absolutely nothing. They're not listening to this podcast, they're not reading a personal finance book. They're not doing anything. If the goal posts are there, that's fine. Once you move the goal post to somebody who wants to do the bare minimum about their investments, there is no reason under the sun That they should be investing in a target date fund because they can find another choice that's easily available and that is appropriate for them, which leads to the related fallacy, the false dilemma fallacy, which is another version of this, which acts like the only choices you have in the world are not investing or using target date funds. Those are not your only two choices. That is not, that is all that's on the menu. If we are going to educate people in investing, we need to stop pretending that these are the only two choices just because the financial services industry loves to promote these things. Which leads me to another observation that I've made about target date funds in the financial services industry. The biggest promoters of target date funds these days I see that are ostensibly people that otherwise are trying to help people are people that offer financial services for themselves. And this is the way they're thinking their business model works. I will tell the younger people to put their money in target date funds because it's a nice black box. Then they don't need to learn anything about investing. They don't need to pay attention to it. They don't need to know. They don't need to learn. They can remain completely and blissfully ignorant. And why do we want them completely and blissfully ignorant? So when they get a bunch of money and they get scared, they gotta come running to me.

Mostly Voices [45:56]

My straw reaches a cruel straw and starts to drink your milkshake.

Mostly Uncle Frank [46:09]

And I will say, okay, you did well with that target date fund for as well as you did, but now let me take your money and help you invest it in another way. And you still don't need to be mindful of what we're doing here. You put it in a black box before, you can just take it out of that black box and put it in my black box and everything will be great.

Mostly Voices [46:31]

I drink your milkshake.

Mostly Uncle Frank [46:37]

I drink it up. And if you are a financial services provider and you are recommending target date funds for younger investors, this is what I think of you. I think you are doing this maybe unconsciously, maybe consciously, but the reason it makes sense for you to recommend this is it funnels people into you who remain blissfully ignorant, much like Dave Ramsey wants to keep people as babies in playpens. Target day funds are a form of a playpen or a high chair for somebody to sit in and be taken care of and not learn about investing, not being financially educated. They are not helping people become more informed. They are helping keep people less informed. And that plays to the financial services industry in the long run, because an uninformed person is a scared person and a person who is willing to believe in black boxes and magical investments and crystal balls and all of those sorts of things that we know are not good investment choices or a good investment practices.

Mostly Voices [48:08]

Do you think anybody wants a roundhouse kick to the face while I'm wearing these bad boys? Forget about it.

Mostly Uncle Frank [48:16]

All right, now let's deal with the other big fallacy I hear, which I call the Vanguard fallacy. And the Vanguard fallacy goes like this. It's like, well, the Vanguard target date funds are special, and they are so much better than other target date funds that that I can count on Vanguard to take care of me through their magical target date funds. That is another form of magical thinking. It does reveal a problem with the whole point in recommending a generic target date fund though, because most people in most 401 s do not have Vanguard target date funds to invest in. So they're investing in something else, which is probably a hell of a lot worse. and it's probably getting maybe up to 2% of their money a year.

Mostly Voices [49:05]

You're gonna end up eating a steady diet of government cheese and living in a van down by the river.

Mostly Uncle Frank [49:16]

But the fact that most other target date funds are much worse than Vanguard does not make Vanguard target date funds some kind of wonderful solution. In fact, they are just kind of slapped together. generally with their total US fund, total international fund, total bond fund, and a total international bond fund. That last one makes no sense at all. I don't know any reason why any US investor needs to be investing in international bonds. And I don't know any US investor who would choose international bonds for somebody who is in their 20s or 30s or 40s. That would be something you would talk to an advisor about or about whether that even makes sense for you at all. And most advisors would say, no, you don't need to be invested in international bonds. So what are they doing in there?

Mostly Voices [50:08]

They're doing in there is making it look like Vanguard is doing something useful

Mostly Uncle Frank [50:12]

when what that is doing is actually detracting from your performance by causing you to essentially speculate in foreign currencies. in the form of international bonds. As I mentioned in other podcasts, the combination between a total US and a total international fund is no great shakes either. That's not maximizing anything. That's not maximizing diversification. It's not maximizing performance. There's a great deal of overlap in the performance of those two things. And the only thing the international fund is doing is giving you a speculation in foreign currency. So there's no optimization going on there either. Now if you really want those funds, you can invest in them directly. There's nothing preventing you from doing that. It's not hard. You'll probably do better not to be changing the makeup of your fund over time when you're trying to accumulate money. You want to leave more money for longer in the equity funds and not be converting them into bonds just because the calendar ticked another year. Again, that's not accounting for any of your other investments or what's going on in your life or how much money you're making or what your expenses are. You should be changing your portfolio based on what's going on in your life, not what's going on in some algorithm. So again, this is a form of a false dilemma when people say, well, Vanguard target date funds are better than other target date funds. That's fine and good, but those aren't the only two choices on the menu of investments. You do not need to choose between Vanguard target date funds and other companies' target date funds, because you can just choose no target date funds and use basic index funds yourself. And then finally we get to the other excuse or solution which goes something like, Well, maybe that's not the right target date fund for you. Maybe you need to pick a target date fund of a different date to make it more aggressive or less aggressive. Or maybe you need to add other funds on the side to change the allocations of these funds. Like since these things are usually deficient in things like small cap value, let's slap some small cap value fund on the side of this thing and then re-jigger it every few years to see if we can make it go faster or something. This is like the person who is banging themself on the head with a hammer and somebody comes along and says, well, we can make that better. Here, put this helmet on your head. Then while you're banging yourself on the head with a hammer, It won't hurt so much. Why don't you just stop banging yourself on the head with a hammer? In this case, instead of trying to fix a bad thing, a target date fund, why don't you just stop trying to use it? Because there are so many other better options. And they are not hard to find. They are not hard to understand. They are not hard to use. And don't move the goalposts again and try to tell me that it's too hard. It is not too hard for somebody to make basic investments in a few basic funds. And if you really want people to become financially literate, if you say you want people to be financially literate, then stop telling them to be financially illiterate. Stop telling them to trust black boxes. Stop telling them that, we'll just do this easy thing, because it's easy, and then you won't have to understand anything. You won't have to learn anything. That's not helping anybody long term.

Mostly Voices [53:58]

Hard choices, easy life. Easy choices, hard life.

Mostly Uncle Frank [54:02]

That's helping the financial services industry. That's helping people who sell things. That's helping the person that's able to package things in the most attractive package.

Mostly Voices [54:15]

A, B, C. A always, B, B, C closing. Always be closing. Always be closing.

Mostly Uncle Frank [54:27]

Now I realize I may be early on this memo. Did you get that memo? And a lot of times I feel like I'm shouting in the wilderness. Or being the Cassandra that nobody's listening to. But people are figuring this out. I see more people getting close to retirement who have been invested in a target date fund for five or 10 or 15 years and looking at it and saying, I thought this would have performed a lot better. What happened? What happened to me? Why wasn't somebody looking out for me? I thought that this would be a good solution for me and it wasn't. You know why it wasn't? Because it just isn't. It's a good investment for people who are comatose and desire to remain financially illiterate for as long as possible. It's not a good kind of investment for anyone else.

Mostly Voices [55:38]

So don't move the goalposts again and try to say that it is.

Mostly Uncle Frank [55:46]

And don't make me have to say, see, I told you so in another 10 years, because I will not let my children invest in target date funds, and you shouldn't let yours invest in them either.

Mostly Voices [55:58]

I says, Pink pan, this here's a rubber duck. We just ain't gonna pay no toll. So we crashed the gate doing 98. I says, let them truckers Roll 10-4. But I think that's enough ranting about this topic.

Mostly Uncle Frank [56:09]

At least for one episode. I do thank you for bringing it to our attention because I think it was about time I addressed it. And thank you for your email.

Mostly Voices [56:23]

Class is dismissed. And now for something completely different.

Mostly Uncle Frank [56:31]

And the Something Completely Different will be our weekly portfolio reviews of the seven sample portfolios you can find at www.riskparityradio.com on the portfolio's page. And just looking at the markets last week, they really stunk it up, particularly on Friday. The S&P 500 was down 1.55% for the week. The NASDAQ was down 0.45% for the week. Small cap value represented by the fund VIoV was a big loser last week. It was down 3%. Gold was actually only one of the winners.

Mostly Voices [57:06]

This is gold, Mr. Bond. Gold was up again. It was up 0.

Mostly Uncle Frank [57:12]

47% for the week, although it was up substantially more before it dropped late on Friday. Long-term treasury bonds represented by the fund VGTLT were down 1.24% for the week. REITs represented by the fund REET were down 2.25% for the week. Preferred shares represented by the fund PFF were down 2.53% for the week. And commodities represented by the fund, PBDC were down 0.28% for the week. And the big winner last week was managed futures. Our representative fund DBMF was up 1.07% for the week and is now outperforming just about everything else year to date except for maybe gold. Now moving to these portfolios. First one is a reference portfolio, the All Seasons. It's only got 30% in stocks in a total stock market fund, 55% in intermediate and long-term treasury bonds, and 15% in gold and commodities. It was down 1.03% for the week. It's up 0.70% year to date and up 2.24% since inception in July 2020. Going to these kind of bread and butter portfolios, first one's Golden Butterfly. This one's 40% in stocks divided into a total stock market fund and a small cap value fund. 40% in TreASuries divided into long and short and 20% in gold. It was down 0.98% for the week. It's up 1.53% year to date and up 22.4% since inception in July 2020. Next one's the golden ratio. This one's 42% in stocks and three funds, 26% in long-term TreASuries, 16% in gold, 10% in a REIT fund and 6% in a money market. It's down to 1.16% for the week. It's up 1.02% year to date and up 18.23% since inception in July 2020. Next one's the Risk Parity Ultimate. It says 15 funds in it that I won't go through. It was down 1.41% for the week. It's up 3.77% Year to date and up 11.8% since inception in July 2020. And now moving to these experimental portfolios. We run hideous experiments here so you don't have to. These all involve leveraged funds. First one's the Accelerated Permanent Portfolio. This one's 27.5% in a leveraged bond fund, TMF 25% in a leveraged stock fund, UPRO. 25% in PFF, a preferred shares fund, and 22.5% in gold, GLDM. It was down 2.82% for the week. It's down 0.1% year to date and down 8.45% since inception in July 2020. Next one's the aggressive 50/50. This is the most levered and least diversified of these portfolios. It's one-third in a levered stock fund, UPRO, one-third in a levered bond fund, TMF, and the remaining third in ballast in a preferred shares fund and a intermediate treasury bond fund. It was down 3.41% for the week, it's down 2.54% year to date and down 20.08% since inception in July 2020. And the last one, which has been around a year less than the others, is the levered golden ratio. This one's 35% in a composite levered fund called NTSX. that is the S&P 500 in Treasury bonds, 25% in gold, GLDM, 15% in EREIT, O, 10% each in a levered small cap fund TNA and a levered bond fund TMF, and 5% in a managed futures fund KMLM. It was down 2.11% for the week, it's up 0.46% year to date and down 13.06% since inception in July 2021. And that concludes the portfolio reviews for the week. April is getting off to a lousy start for just about everything except for managed futures and gold. I just looked at that representative fund, DBMF. It's up 14.26% year to date so far. And a lot of that seems to be, if you look inside it on the strength of the US dollar against things like the Japanese yen, but it really is demonstrating how diversified it is from anything else you might be holding. But now I see our signal is beginning to fade. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparityradio.com put your message into the contact form and I'll get it That way. If you haven't had a chance to do it, please go to your favorite podcast provider and like, subscribe, give me some stars, a follow or a view. That would be great. Mmmkay? Thank you once again for tuning in.

Mostly Voices [1:02:37]

This is Frank Vasquez with Risk Parity Radio signing off. Sing it, Sam. you must remember this. A kiss is just a kiss. A sigh is just a sigh. The fundamental things apply as time goes by. And when two lovers woo, they still say, I love you, on that you can rely. No matter what the future brings as time goes by. Sam, I thought I told you never to play.

Mostly Mary [1:03:36]

The Risk Parity Radio Show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.