Editor's View: New Discovery Backs Target Date Funds

Think stocks are only for risk-takers? Think again. It's one of the most heated debates of investing that gained traction when Boston University economist Zvi Bodie stated in the mid-1990s that time plays no role in decreasing risks of holding stocks. But a new study by two college professors and the head of retirement research for Morningstar Investment Management pokes holes in Bodie's argument.

It shows stocks may appear less risky for long-run investors based on U.S. data. But the U.S. is just a piece of the global puzzle. Using a bigger sample size and time period (113 years of real return data to be precise), the research finds that stocks are less risky for long run investors in 18 out of 20 countries. Australia and Switzerland were the two countries that didn't see a benefit to long-run stock investing.

It's important to note the authors aren't talking about holding any specific individual stocks for the long haul. ... They're advocating that investors hold indexes or baskets of stocks.

What's the bottom line for mutual fund and ETF providers? This new research backs up the use of products that reduce stock allocations as investors get closer to an investment goal, managers say. More specifically, it "provides empirical confirmation about the use of target date funds, which reduce the equity exposure as the retirement date approaches, for reasons extending beyond the traditional arguments about the ratio of human capital and financial assets," says Wade Pfau, one of the authors of the study.

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