One of the most well-received stories about the 2008 financial meltdown is the This American Life episode titled “The Giant Pool of Money”. It’s from “way back” in May and goes into great detail without sounding like Ben Stein’s bored teacher character from “Ferris Bueller’s Day Off”. Don’t worry if you find Ira Glass off-putting; he barely shows up in this episode. Instead the reporting is done by Alex Blumberg and Adam Davidson.

At the beginning of October, Alex and Adam returned with a follow up story called “Another Frightening Show About the Economy”. What’s more, they’ve started their own show in the same “jargon-free” style of economics reporting called “Planet Money” (blog | podcast | twitter).

For example, in the interview from yesterday, they explain that regular people like me shouldn’t look to the Dow Jones Industrial Average if we want to be freaked out about how bad things are. We should instead look at the Treasury 3-month bond rate. The higher that number goes, the calmer we should be. I appreciate this kind of reporting.

Target retirement funds are increasing in popularity. The funds, and they may be called “lifecycle funds” or “target date funds” or “age-based funds” or a variety of other terms are mutual funds comprising other mutual funds. The allocation percentages of the constituent mutual funds change as time progresses, theoretically becoming more conservative as you approach your target.

For example, the Vanguard Target Retirement 2050 Fund (VFIFX) is a mutual fund of funds designed for people who expect to retire in the year 2050. You would expect an investment—one that is designed to mirror your investing strategy based on your time horizon—to be quite aggressive in order to make the most of the decades between now and the time you need to access its value.

This reveals the first problem I have with target retirement funds: they are often too conservative. VFIFX contains five other Vanguard mutual funds: Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, Vanguard European Stock Market Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund. As of today, 72% of the fund is invested in the Total Stock Market, 10% is invested in the Total Bond Market, and the remaining 18% is split between the others in amounts hardly meaningful.

I don’t see this as aggressive enough for someone who has such a long time horizon. I would suggest eliminating the bond component entirely and distributing the rest towards the international funds.

My second issue with target retirement funds is how it could lull an investor into a false sense of safety and security. While creating a hands-off approach to investing, it encourages buying and holding which is great for long-term success, but it opens the door to complacency. Your reallocations are on auto-pilot, so if you decide to change your time horizon, you may find yourself under or over-exposed to risk. Also, Vanguard, or which ever management company you choose for your target retirement fund, may decide to change strategies in the future, to the point where their guidelines no longer match your expectations.

Target retirement funds to encompass your entire portfolio. If you’ve chosen the Vanguard Target Retirement 2050 Fund for your entire 401(k) election, but you have a Roth IRA where this fund is not available, then you’re modifying your asset allocation away from that prescribed by Vanguard. If you are comfortable with Vanguard’s exposure to equities in their fund but you decide to invest in VTSMX separately in your Roth IRA, you’ve disturbed your overall asset allocation and opened yourself up to risk you may not have intended for your retirement funds.

Fund managing companies can’t seem to agree on the most appropriate asset allocation for a certain target. I mentioned Vanguard’s current allocation rule for its “2050” fund. Fidelity has a different strategy for those retiring the same year. The Fidelity Freedom 2050 Fund (FFFHX) invests in 68.5% domestic stock funds, 20.9% international stock funds, and 10.5% bond funds. Overall, this is similar to to Vanguard fund of funds, but the specific composition of the international portion provides a strong enough contrast that could have profound effects over 40 years of investment.

The fees for target retirement funds are usually a combination of the fees of the underlying investments. Rarely, a target retirement fund will add a management fee in addition to the feeds already charged by the funds held. Pay attention to these fees, because they will eat into the value of your investment. With a distant target like 2050, the fees eat into your returns even more.

In the interest of further consolidating my finances, this past week I cashed in a small collection of 1988 series EE bonds which I’d kept hidden away ever since. All had reached and surpassed their maturity dates long ago, so they were worth their face value and then some.

Here’s what mine were worth, which should give you an idea of what to expect if you’ve got some series EE bonds of that vintage hidden away as well:

1 $500 bond = $684.00
1 $100 bond = $131.52
3 $50 bonds = $68.40 each

All in all, I had $1,020.72 in cash, which I put directly into my savings account to reinvest. This does mean I’ll have to account for $645.72 in interest when I do my 2007 taxes, but I’ve got lots of charitable donations this year to offset this so I think it’ll be okay.

I might have saved cashing these until after I retired to gain a better tax advantage, but was eager to consolidate these gift monies into the rest of my savings to better leverage them for other, more immediate investments.

Do you own bonds? What’s your savings bond strategy?