Don Phillips: What do you think about target date portfolios?
John Bogle: I'm increasingly nervous about target date portfolios with each passing day for a whole bunch of, I think, rational reasons.
Number one, the fact that you're going to retire in 2015 means something to investor A in terms of asset allocation, and something very different to investor B--[yet] they're both going to retire in 2015.
Take one example. One does not have Social Security, and if he has, say for the purpose of argument, $300,000 and he's 65. Using what I modestly call the Bogle Rule, he's 65% in bonds and 35% in stocks.
Investor B, also retiring in 2015, has a capitalized value in his Social Security an incredibly valuable and wonderful investment of, in round numbers, $300,000. So his $300,000 in his personal account, same as the other guy, if he puts, just for the purpose of argument here, $150,000 of that in bonds and $150,000 in stocks, he's 75% in fixed income and 25 percent in stocks. So it's a very different allocation, just whether you have a pension plan or a retirement plan, or, for example, other sources of income.
It's a little bit too clever a solution, I think, when it's perfectly easy for an investor to manage his own target date fund to take that into new account and just automatically rebalance.
I'm not a believer, as it happens, in rebalancing every month or anything. I'm a believer--I don't do it myself, by the way--but rebalancing maybe once a year, if you want to do it, and only when the proportions get distinctly different. I wouldn't rebalance to change 55/45--I don't think I would, anyway--to 50/50. It's just too uncertain. So number one is different circumstances for investors but the same strategy.
Number two is how is that strategy implemented? I find myself really not amused by this kind of, originally, race for the top in terms of equity allocation. Of course, these target date funds by and large have the allocation percentages set based on Monte Carlo simulations, which you've just heard quite as much as you want to hear about today, I'm sure. So I don't trust those allocations.
But then there is this pressure when markets are going up for firms to raise the target allocations. I don't like that. It's a marketing thing. Nobody's buying our fund at 60% stock allocation. They're buying somebody else's with 70, so let's change ours to 70. I mean, that seems to me to be totally irresponsible.
Finally, obviously I'm going to like the idea of using index funds as basis for the target funds, but they should have much lower costs across the board than they do. So it's going to be a difficult thing--a very difficult thing--to fix. But it seems like a good idea that for those various reasons just went wrong.
By the way, I want to be clear here. I don't think it's going to devastate the returns of investors, but it certainly wasn't helpful last year to have that higher equity ratio, higher than was reasonable, in a year like that.