Set It and Forget It Can Sometimes Be Scary

One example of set it and forget it investing is using target-date funds.  Currently, $1.8 trillion dollars +/- are invested in these funds tracking a particular year in the future or recent past. These funds seem like a logical choice when selecting investments inside your retirement plan or IRA. I’m 50, I want to retire in ten years or so, I’ll select a 2035 retirement fund. Straight forward and easy, but in my opinion it can be problematic as challenges are created in the long run. How?

Target-date funds work on the premise that as your year approaches, investments inside the fund become more liquid and short-term focused. This trend continues to accelerate as years pass in the rear-view mirror. Automatically companies are sold, and proceeds are directed towards lending to companies. We discussed the differences between owning and lending to companies in our prior post.

Over decades, the investments you begin with (owning companies) look completely different than what you have later (lending to companies) through retirement.

As target-date funds mature, they become less volatile as lending to companies has less up and down price movements than owning companies With less volatility comes lower expected returns. Meanwhile, investors want the ability to spend with confidence as life gets more expensive. This can create difficulties as no one wants to run out of money fifteen years into retirement. Longevity is not a risk, it’s a reality.

Granted, target-date funds may be ok for some who chose not to take an active role managing their investments. There is simplicity in the set it and forget it approach that target-date funds offer. The biggest challenge I see investors facing is sustainable spending, which is difficult to answer with a set it and forget it approach.

Sustainable spending should be the focus in financial decision making; not the ease of where to invest. Our brains are often over-tasked with multiple jobs, we’re seeking answers and it’s natural to land on a solution that seems to check all the boxes.

So how does an investor put sustainable spending front and center? I believe it begins with exploring what you want from your resources including where you allocate time. Your priorities, cashflows, and spending should lead the sequence before deciding where investments should be made. Think goals, planning, and then your portfolio in that order.

Slowly a plan may take shape. A periodic refresh is welcome and valuable as goals may change as life changes. Planning allows current information, experiences, and expectations to be factored together, getting you closer to what you want. Benjamin Franklin and Winston Churchill both said it best, failing to plan is planning to fail.

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