Page 72 - Ready Set Retire

Stephen J. Kelley

People know this. They are made uncomfortable by it.
Anything that would seem to reduce their risk as they near
retirement feels good. Therefore the move into target funds
that presumably become safer as we age is very seductive. But
are they any safer? Are you safer with more of your money in
bond funds; especially now, with historically low interest rates?
Let’s look.

As discussed previously, bonds are debt instruments, while
stocks are equities. When you purchase a stock, you are taking
an ownership position in a company, while by procuring a
bond, you are becoming a creditor. Now both positions carry
some risk, though creditors have a priority position over
owners in case of a company failure. You can increase your
safety by finding highly rated companies and purchasing
secured bonds (not debentures, or unsecured bonds), receiving
interest on them until maturity, and then selling them back to
the company at face value which retires the debt. Unless you
sell the bonds prior to maturity, you will probably not be
subject to market risk. Assuming the company is credit-worthy,
this can be a safer investment than equities or equity funds,
unless your well-performing bonds are called.

The thing about TDFs, however, is they are funds. So, when
they reposition you from equities to bonds, they are moving
from equity funds into bond funds, and bond funds differ

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