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Kiplinger's says that if you invest in a target-date retirement fund, there's no need to own any other funds, lest you undercut what the target fund is trying to accomplish. What would be wrong with putting some of my IRA money into a balanced fund, such as Vanguard Wellington? -- Joseph Masso, via e-mail
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It's all about the breakdown in your investments among stocks, bonds and other kinds of assets -- or, as a financial geek would call it, your asset allocation.
First, a quick review. You choose the target fund with the date closest to your particular goal, whether it's retirement, college or something else. The further you are from your goal, the more your fund will invest in stocks, which are risky in the short term but have outpaced other kinds of investments over the long haul.
As your goal gets closer, the fund will ratchet down its risk level by cutting back on stocks and moving into more-conservative investments, such as bonds and cash equivalents.
So, for example, Fidelity Freedom 2050 fund (FFFHX) has about 90% of its assets in other Fidelity stock funds and 10% in junk bonds. By 2045, figure that the fund will have about 55% of its assets in stocks, a smidgen in junk bonds, and the rest in cash and conservative bonds.
What's wrong with adding another fund (or any other investment) to the mix? Nothing, except that it mucks up your asset allocation. Consider what happens if you put half of your long-term retirement money in Freedom 2050 and half in Wellington, which typically holds two-thirds of its assets in stocks and the rest in high-quality bonds. Divided between the two funds, your portfolio would be more conservative than the target fund, with about 78% of your assets in stocks, 5% in junk bonds and the rest in high-grade bonds.
That may not be a calamity. But when you buy a fund with a target date that's 42 years away, you expect to take more risk in search of a higher return.
And don't forget the "glide" feature of target funds -- their procedure for shifting out of stocks and into bonds and cash. You can be confident that the fund sponsor will actually make that move, but there's no guarantee that money in other investments will follow the same path.
A defensible choice. I recently invested in American Funds 2030 Target-Date Retirement fund, which is showing negative results this year. Was it smart to invest in a new fund that is losing money? -- Tom Cleve via e-mail
We never promised you a rose garden -- or a stock fund that could withstand a vicious bear market.
If you invested for the right reasons (see the preceding question), your choice is certainly defensible. Sure, the fund is down in 2008 -- by 13% to September 8. But the fund tilts heavily toward stocks, which accounted for 82% of its assets at last report. And with the U.S. stock market and most foreign markets down by double-digit percentages this year, the fund's performance is pretty much in line with what you'd expect. Hang on and you'll be able to capture the long-term upswing.
Disaster deductions. My house was hit by Tropical Storm Fay, and most of the damage will be covered by insurance. But my windstorm deductible is $5,000. Will I be able to deduct those expenses from my taxes? -- B.W., via e-mail
Possibly. You can deduct casualty losses -- such as damage to your property caused by a disaster, fire, flood or theft -- if you itemize deductions on your tax return and if your loss isn't reimbursed by insurance. So you should be able to write off that $5,000 deductible.
But you must meet a steep threshold before you can take the deduction. First, you have to reduce your unreimbursed loss by $100. Then you need to deduct 10% of your adjusted gross income from the remaining amount.
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