Are target-date funds too cautious?

·2 min read
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Here are three of the week's top pieces of financial insight, gathered from around the web:

Are target-date funds too cautious?

New research has found that most target-date funds are too conservative, said Mark Hulbert in The Wall Street Journal. Target-date funds let investors set a theoretical retirement date in the future (say, 2040) and then follow an "algorithm for reducing equity exposure over time." The intention is to minimize risk as one gets closer to retirement age. But according to researchers at MIT and the University of Illinois, this approach may be too simplified. The researchers built an AI program that considered numerous scenarios, including the potential for market crashes. In a typical target-date fund, equity exposure drops to 50 percent at retirement age, and then falls as low as 30 percent. But the optimal "equity exposure in the researchers' model never fell below 60 percent." For the wealthiest investors, "the optimal equity allocation was close to 100 percent even during retirement."

A predatory student-loan scheme

Navient, one of the country's largest student loan servicing companies, settled claims by 39 states that it "baited" borrowers with predatory lending practices, said Stacy Cowley and Tara Siegel Bernard in The New York Times. The deal requires Navient "to cancel $1.7 billion in delinquent private student loan debts for nearly 66,000 borrowers and pay $95 million in restitution." Navient, which was spun off from Sallie Mae in 2014, targeted private loans to students at for-profit schools with poor job-placement records. "At some schools, Navient anticipated that more than 90 percent of the loans would default. But what it lost on the private loans was far outweighed by what it gained on the federal loans — guaranteed by the government — that students at those schools took out."

Mortgage rates are rising fast

Mortgage rates are back to their highest level since March 2020, said Leslie Cook in Money. "The average rate of a 30-year fixed mortgage hit 3.45 percent" last week, up from 2.79 percent a year ago. And experts are not expecting a reprieve anytime soon. A survey by real-estate brokerage Redfin found that 29 percent of respondents "would look for smaller homes or in different areas" if rates rose above 3.5 percent, while 14 percent said they would pause their home search. Still, the housing market continues to sizzle, thanks to a dearth of inventory. The number of active listings has fallen sharply in recent weeks, and sale prices have risen 14 percent in a year.

This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.

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