As the bull market soared, investors in America’s
These so-called target-date funds hold $1.4 trillion, equal to a quarter of the money in 401(k)s. The offerings generally place 20-year-olds mostly in stocks and then glide gradually into bonds as clients near their departure from the workforce. In theory, that strategy should protect older investors from the worst of bear markets—like the one sparked by the coronavirus pandemic.
But those who’ve just reached retirement may be in for a nasty surprise. These supposedly sensible target-date funds can be quite aggressive. Under a time-honored rule of thumb—albeit one many think is out of date—the percentage you hold in bonds should equal your age. By that approach, a 65-year-old would have only 35% in stocks.
The three biggest providers of target-date funds bet way more on the market. For investors retiring this year,
Being aggressive during the coronavirus-related market plunge smarted. From Feb. 20 to March 20, Vanguard, Fidelity, and T. Rowe Price, which together manage 69% of all target-date assets, had among the steepest losses for portfolios geared toward 65-year-olds, according to fund tracker
“People have been exposed to far more risk than they realize,” says
Fidelity, Vanguard, and T. Rowe Price representatives say their asset allocation reflects a prudent balance of protecting nest eggs while providing for needed growth over what could be decades of retirement. The companies consider these funds long-term investments, and, in general, more aggressive funds have posted higher returns over the decade. For example, the T. Rowe Price Retirement 2020 Fund’s ten-year return of 6.5% beat 95% of similar funds, according to Morningstar. Vanguard beat 91%, and Fidelity’s Freedom fund, 51%. “People are living longer than a generation ago and are more reliant on savings in 401(k) plans and what they get from Social Security,” says Joe Martel, a T. Rowe Price target-date portfolio specialist. Stocks have also rallied in recent days, paring back those steep losses.
Still, other investment firms are more cautious. The reason: While markets tend to recover, timing matters. Those who enter a bear market early in retirement may end up selling off their investments when they’re beaten down to meet income needs.
Target-date funds were designed to prevent classic investment mistakes, such as piling into funds with the strongest recent performance or being too conservative when young and too aggressive in retirement. A new kind of advisory service, relying on automated recommendations, uses a similar approach. Like target-date funds, so-called
Some financial scholars have found shortcomings in the assumptions behind target-date funds, particularly in the way they can be one-size-fits-all. In their view, investors need to consider individual circumstances such as the stability of their career and their health and wealth. “If you are a retiree in a 2020 target-date fund, and you and your spouse have a guaranteed pension, then maybe there is nothing wrong with having 50% or 60% in stocks,” says
Target-date funds aren’t the most aggressive retirement products. Billionaire money manager
After the 2008 financial crisis, Fisher Investments faced at least a dozen legal claims from retirees with aggressive portfolios. In some cases, the firm successfully argued that clients would have been fine if they’d held on through the downturn. Spokesman John Dillard says the company’s Global Total Return strategy fell as much as 32% during the recent crisis but is now down 16% this year, through April 6, which is a smaller loss than its benchmark. “Clients of all types who have been with us are nicely ahead over the last few years or longer in an absolute and relative sense,” he says.
Last month, Fisher sent a letter to clients: “The best thing to do in moments of extreme panic is sit tight.” Raymond Runquist, a client who’s 76, is doing that for now. The retired Dallas engineer is nearly all in stocks and avoids checking how much he’s lost. “I’m going to stay the course,” he says. “I have lived through other ups and downs.”
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