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By Harry Milling | 04-19-2010 05:36 PM

The Case for Higher Equity Exposure in Target-Date Funds

T. Rowe's Jerome Clark on why investors should take the added equity risk exposure in the shop's target-date funds.

Harry Milling: This is Harry Milling, mutual fund analyst with Morningstar. I'm here with Jerome Clark. He is the head of T. Rowe Price's target date funds. Welcome, Jerome.

Jerome Clark: Thank you.

Milling: These funds have an above-average equity allocation and that resulted in some underperformance in 2008. Of course, they roared back in 2009 along with the stock market.

My question is, though, for the long term, why should an investor take that added equity risk with their target date funds?

Clark: Well if you look at the 2008 market, it's true those funds that had a high equity allocation did have challenging times. But if you look at 2009, they actually had the opposite thing occur with up markets, those with higher equity allocation did quite well.

If you look at each of those years, year by year, and you were to design a strategy based upon that year, you would have very different approaches based upon these very short, certain market situations.

I think that any provider of a target date fund will tell you it's an advocate of coming up with a long-term strategy based upon a long-term outlook, because it's years of investing for retiring, and once you retiring, years of utilizing those assets to support your retirement.

So, it's really about coming up with a long-term strategy. What our analysis shows is for a higher equity allocation does quite well over a longer time period.

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