With all the financial innovation that has occurred in the past decade, it's easy to lull yourself into a false sense of security by relying on your gut impression of a particular investment. Unfortunately, if you just look at an investment's name and make what seem to be reasonable guesses about what's behind that attractive cover, you're leaving yourself vulnerable to unexpected losses.
Getting burned
That's exactly what happened to a group of investors using Illinois's Bright Start college savings program to set money aside for their kids' education. Among the options offered by the plan was one called "Core Plus," an investment that focused on fixed-income securities. Fund manager OppenheimerFunds billed the option as a more conservative investment than others that featured stocks.
Unfortunately, that particular fund invested in mortgage-related securities that lost huge amounts of their value when the real estate bubble burst. Just as mortgage-related stocks like Fannie Mae
Investors in other states, including Oregon and New Mexico, faced the same issues with OppenheimerFunds and its bond investments. Those states have also settled with the fund company to offer reimbursement to shareholders.
Going off target?
Yet that's not the only example of a situation in which investors may not be getting everything they expect. In an unrelated story, Bloomberg recently reported that a 2010 target retirement fund managed by John Hancock had 35% of its overall bond portfolio invested in risky high-yield bonds.
At first glance, that may not sound like a ridiculous amount. But in a fund marketed specifically for investors who are planning to retire in the next year or so, you would expect to find only the safest investments available. Given the Hancock target fund's status as a fund of funds, it can choose from a number of safer fixed-income alternatives.
Instead, among the fund of funds' holdings, you'll find two junk bond funds. One focuses solely on U.S. issuers and includes bonds from companies including Ford Motor
This isn't the first controversy about 2010 target retirement funds, either. Last year, many investors were surprised at how much these funds dropped in value, as they hadn't previously realized that their funds had a substantial portion of their assets invested in stocks. Although there are good reasons why someone who's about to retire should keep some of their money in the stock market, there's nothing more important than knowing at least in general terms how your assets are allocated
Keep your eyes open
All of these experiences are good reminders that when it comes to managing your investment portfolio, you simply can't afford to count on one-stop investing solutions or hand off responsibility for tracking your money to anyone else. Those who saw early on some of the inexplicable losses in their college savings plan could have taken steps to minimize the damage and retreat to better choices. Similarly, by making sure to look at the materials that all target funds release to shareholders on their holdings, you can familiarize yourself with the investing strategy that your fund managers use and watch for unexplained deviations from those strategies.
Financial innovation has made a lot of things easier for investors in recent years. What hasn't changed, though, is the need to stay on top of your investments. Without regular supervision, your funds can hand you some nasty surprises that you could otherwise have avoided.
There's a smart and easy way to save for retirement. Let Chuck Saletta show you his secret to making your first million.
