Over the years, I’ve always enjoyed going to growth stock conferences. You meet interesting people and learn about upcoming companies. Sometimes, you even learn about yourself. That happened years ago in Baltimore. For whatever reason, I was late at the start of the conference and decided to stand in the back of the room rather than disturb people. By happenstance, I stood next to a man who was intently focused on two 30ish self-proclaimed Harvard Business School graduates explaining their business. They had a west coast restaurant chain and were “excited” about “new products” on their menu. When the word “product” was used, the man next to me turned and asked sarcastically, in a soft southern accent, “Son, are you going to go out tonight and have a nice ‘product’ for dinner or a good steak?” The man, David Evins, was the founder of the Cracker Barrel restaurant chain. I nodded.

For most of my life, I had felt the same way about investment “products.” They were manufactured and something to be avoided. The products invariably had a hidden commission (annuities) that benefited the financial institutions creating them more than the customer. Having said that, there was one product that, in theory, was once a good concept. The target-date mutual fund. But to be of benefit, it would have to be bought at the right time. That correct moment does not currently exist, in fact, it is exactly the wrong moment. It could be wrong twice … on bonds and stocks.

The product was first developed in the early 1990s by Wells Fargo Investment advisors. Generally, these mutual funds have dates that you choose based on an age when you expect to retire. If you’re currently 45 and expect to retire at 65, you would choose a fund with a target of 20 years. It’s essentially a mass produced version (one trillion plus exists in these funds) of the old Boston Brahmin concept of a balanced portfolio.  A portfolio that is comprised of 60% stocks and 40% bonds.

The rational for such a portfolio construction is that as we get older we want less risk but still recognize equities are a great wealth producer. So year-by-year the stock portion is reduced and the “safe” bond part is increased as we get closer to our target retirement age. The product worked for close to thirty years. However, it worked in a declining interest rate environment because in the early 1990s, when it was started, interest rates were high.  Now– with negative global rates – it’s over.

A balanced account was a concept created in the Boston Brahmin era of fiduciary money management.  In 1830 Judge Samuel Putnam ruled in the case of Harvard College v. Amory that a “prudent man” is required to invest trust assets as he would invest his own property. This includes the need of beneficiaries, the need to preserve the trust and the amount and regularity of income. BUT, this isn’t 1830 and there comes a time when one shouldn’t own income producing securities. There are but two risks in owning income producing securities. The first risk is the issuer; the second is how long the maturity is. The longer the maturity, the greater the risk to capital if rates move higher.

It has been close to 40 years since investors felt the financial pain of rising interest rates. Rates are at record lows.  As rates move higher, bonds will go lower. So will stocks. The last time both happened was 1965 through 1982. To buy a target-date fund now raises the question the C.E.O. of Cracker Barrel asked. Do you want to have a “… nice ‘product’ for dinner tonight or a good steak?” A good steak is a two year short maturity bond served with an entrepreneurially run company like Cracker Barrel.