Portfolio Investing Blog: Portfolioist

The Wall Street Journal’s recent article, “Same Returns, Less Risk” discusses different approaches to managing portfolio risk while maintaining exposure to potential returns available from stocks and other riskier asset classes.  

 If you are a Portfolioist reader, you know that we’ve written about the importance of risk budgeting in the past (see, “Risk Budgeting: A Critical Tool for Portfolio Management”). You also know that we believe that risk budgeting is an important part of successful long-term investing. That’s why we constructed our line-up of Target Date Folios using a risk budgeting approach—and this stands in stark contrast to the strategy used in more traditional Target Date Mutual Funds that generally use static asset allocations that don’t adjust their risk allocations in volatile market conditions.

When we first launched our line-up of Target Date Folios, we did our own research and found that existing Target Date Funds that were available in the industry were not as well diversified as they ought to be, and carried too much exposure to certain types of risk. That’s why we designed Target Date Folios to maintain specific risk targets (within projected ranges, using volatility as a quantitative measure). We believe that broader diversification, combined with risk budgeting, will lead to reduced risk and increased returns over time.

Target Date Folios: The Performance Speaks for Itself

Folio Investing’s Target Date Folios were launched in December 2007 and built their track record during one of the most tumultuous periods in market history (believe it or not, this proved to be an excellent market environment to test our new approach). 

Since their launch a little more than four years ago, Target Date Folios have substantially outperformed both their benchmarks and the largest Target Date Funds. Their average annual outperformance, (versus across a wide set of target date years and comparable funds) has been about 2% per year (assuming a $75,000 investment and Folio Investing’s unlimited brokerage plan which costs $290 per year). For additional detail, download our White Paper: “Improving Target Date Offerings: Lessons Proven Over the Last Four Years.“

Why 2% Percent Matters in Retirement

Research has shown that an added percentage point in returns over a working career has an enormous impact on lifetime accumulated wealth. A variety of analysis, including research from the Department of Labor (DOL), finds that just a reduction of 1% in return per year–can equate to a reduction in lifetime wealth accumulation of 20% or more. So, if the 2% outperformance of our Target Date Folios were to continue, the differential in lifetime wealth accumulation under the same DOL methodology would be around 48% (or 32% under other more conservative analyses).

Those are potential retirement returns that as an investor, you can’t ignore.

Risk Management Solutions Are New? Not to Us.

The Journal article states that risk management solutions available to investors (including the Folio Investing Target Date Folios) are:

“…so new, [that] the strategies don’t have a long enough track record for investors to know how they will hold up under different market conditions.”

 Ordinarily, we’d agree. 

However, because of the extraordinary market environment of the last half decade (combined with the significant outperformance of Target Date Folios vs. Traditional Target Date Folios) we believe the results are clear and we now have real-world performance over four and a half years.

Pay Close Attention to Portfolio Design

Whether you choose to invest in Target Date Folios or not, we strongly urge all investors to pay close attention to how their retirement portfolios are designed.

Target Date Folios have achieved their success thanks to an objective risk budgeting approach that maintains returns on market upswings and mitigate losses on market downturns. To learn more about Target Date Folios, visit Folio Investing.

Related Links:

• How Much Risk Should a 65-Year-Old Take?
• The Most Common Mistake Investors Make
• The Hidden Risk in Target Date Funds

Folio Investing The brokerage with a better way. Securities products and services offered through FOLIOfn Investments, Inc. Member FINRA/SIPC.