Cookie Cutters are Great for Making Gingerbread Men, Not Retirement Decisions

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While your investment options are increasing with the new UNC System’s retirement plans, so is the standardization of how your investments could be managed.

The options offered in Tier 1 are a set of mutual funds that managed solely based upon your expected (target) date of retirement. As your retirement date approaches, the portfolio automatically becomes less aggressive.

Tier 2 comprises a series of pre-constructed portfolio models with varying degrees of risk. These models are created using mutual funds from the core list of funds.

Both investment approaches described seem simple as they require no involvement from you other than providing your expected retirement date or selecting the portfolio model you wish to utilize. We believe that this cookie-cutter approach could be reasonable for those with small balances in their accounts. But for most individuals, there are strong reasons to avoid this standardized approach.

First, neither target-date funds nor pre-constructed portfolio models allow you to manage your assets in response to the variability inherent in the markets. For example, in a rising interest rate environment, you cannot request that your portion of your portfolio be sold to avoid subsequent loss in value or that if technology stocks have had a dramatic drop in value that you could then purchase this sector at reduced prices. Second, because the risk-tolerance level is built-in with both investment methods, you cannot easily adjust to a more conservative or aggressive approach to your investing. Third, if a fund(s) within a pre-constructed model begins to underperform with respect to similar funds, you cannot replace the fund with another.

The limitations of target-date funds and model portfolios are especially problematic during retirement. Few investment professionals would suggest selling proportionately across all assets for every withdrawal. However, the structure and mechanics of both methods actually create this outcome by default.

Our approach to investing is quite different. We show you how to arrange your portfolio so that you are in control of how your retirement assets are invested. We want you to have as much flexibility as is possible, especially when it comes to providing retirement income.

Contact our office with questions.

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