Risky targets

If you have a lifecycle fund and are near retiring, a money manager's strategy could be putting your nest egg in danger

Do you have the right mix of investments?

This is the single most important question for all investors. Professional money managers call it asset allocation - the mix of stocks, bonds, and cash in a portfolio. The right answer depends on how aggressive investors want to be with their money or, most often, how old they are and when they plan to retire.

Many individual investors contributing to a 401(k) or some other retirement account don't have a clue. Target-date mutual funds, sometimes called lifecycle funds, are supposed to solve the problem for them. Pick a fund that matches your timetable and leave the asset allocation to the manager, who is moving money around with people like you in mind.

Investment firms manage about $196 billion in target-date funds, which have become a popular choice in retirement plans. Chris Brown of Sway Research LLC estimates about 20 to 25 cents of every new $1 contribution to 401(k) plans goes into target-date funds. He thinks the funds could collect as much as 40 percent of new retirement fund money within a few years.

Target-date funds should perform very differently in dire conditions like the stock market of 2008. Funds managed for people expecting to work for decades into the future should have been heavily invested in stocks - and they probably have lost big. Funds run for people close to retirement should have been protecting the nest egg.

Most target-date funds performed as expected. The shorter the time horizon, the smaller the average loss: While 2010 funds lost an average of 27.3 percent over the first 11 months of this year, the 2020 funds lost 32.3 percent, the 2030 funds shed 38.7 percent of their value, and the 2040 funds lost 40.3 percent, according to Lipper Inc. Over the same period, the Standard & Poor's 500 index declined 37.7 percent.

But some target-date funds managed with a short-term horizon in mind, those with a target date of 2010, produced remarkably different results as the stock market plunged this year. In a few instances, the nest egg took a beating.

Here's why: Money managers all agree long-term investors should be piled into the stock market, but they have different ideas about the right asset allocation for other investors with relatively short-term horizons. Those opinions had a big impact on 2008 performance and overall value of some funds.

The average 2010 fund lost 27.3 percent of its value through November this year, according to Lipper. But some of the most aggressive 2010 funds lost as much as 43 percent while the most conservative alternatives declined about 14 percent. That's a huge difference if you're hoping to retire in a year or two.

Investment firms with the most aggressive 2010 funds, like AllianceBernstein and Oppenheimer Funds, invested about two thirds of their money in stocks. A conservative 2010 fund operated by MFS Investment Management limited its stock market exposure to less than a third of assets.

"These [funds] are one-stop shopping options but you have to look under the hood and see what the equity weighting is going to be," says Greg Carlson, who tracks target-date funds for Morningstar Inc. "Obviously, you'd better at least consider the worst-case scenario."

The more aggressive managers of 2010 funds say they favor more stocks because shareholders face greater risks of outliving their money as a consequence of longevity and the possibility of future inflation. The stock investments are intended to boost returns over years and limit that risk.

Managers of more conservative funds, like Joe Flaherty at MFS, run computer simulations assuming painful markets just before retirement dates and estimate the risk of shareholders running out of money in the future because of that bad performance. They say the risk is too high when more stocks are added to the assumptions.

Dozens of companies manage a total of more than 1,000 target-date funds, but four firms dominate the investment niche. Fidelity Investments, Vanguard Group, T. Rowe Price, and Principal Financial Group combined manage about 80 percent of all target-date funds.

The 2010 funds those four firms manage fall between the extremes of stock allocation, and their performance this year has roughly tracked the industry average. Vanguard's target-date funds have performed best this year among the four leaders, and Principal funds have slumped most.

Target-date mutual funds were invented to take decision-making out of the hands of individual investors. But money managers calling the shots have different ideas about how to earn the most for your retirement.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.