A. It is wise to reevaluate your target fund decisions in a rising interest rate environment.
First, what is a target fund?
A target date fund is an all-in-one fund so an investor doesn't have to worry about portfolio allocation. The target date fund will automatically adjust its stocks/bonds allocation as time goes by so it always fits your risks tolerance levels.
However, that is in theory. In practice, a target fund could increase your investment portfolio's risk even though you might think it is safe. Here is why.
Since the financial crisis, all of the target date funds have shifted more weights to bonds and reduced exposures to stocks, hoping to avoid repeating the same portfolio meltdown experienced in the 2008 financial crisis. For example, based on a Wall Street Journal report, in 2007, the average stock exposure for target funds with planned retirement years between 2000 and 2010 was 50.4%, this percentage dropped to 42.4% in 2015 for target funds with similar retirement time horizons.
Unfortunately, such reduction of exposure to stocks will be be a bad move when the Fed starts raising interest rates. We will explain in our next blogpost.