Target date funds have lost money this year. Younger beneficiaries in 2030, 2040 and 2050 funds have lost about 3%. Older beneficiaries have been more fortunate, but their results are more dispersed because TDFs vary most at the target date. The defensive TDF index reports a modest .4% gain for those who are currently retired, and a 1% loss for those nearing retirement in 2020 funds. By contrast, consensus indexes show retirees losing 1.5% and those near retirement losing about 2%.
These are not earth shattering losses, but they demonstrate how quickly things can change, in this case in the month of October.
The indexes shown in the exhibit are described in detail in an upcoming December issue of the Journal of Performance Measurement. Here are brief profiles:
- Morningstar Lifetime Allocation Indexes are normative (how things should be), modeled to maintain constant combined risk of human and financial capital. Human capital is the earning power from labor. Financial capital is investments. Morningstar TDF indexes were launched in 2009.
- S&P Target Indexes are consensus indexes, calculated by aggregating most TDF mutual funds on Morningstar. S&P TDF indexes were launched in 2008.
- SMART Target Date Fund Indexes are also normative, modeled to preserve savings through to the target date. A predecessor to the SMART indexes was launched in 2007.
This year has penalized investors who diversify beyond U.S. stocks because the U.S. stock market is the only asset class that has made a profit this year. One of the benefits of TDFs is diversification, but this benefit has detracted from performance this year. Diversification didn’t “work.”
October was simply a case of market jitters. There was no particular bad news, but there’s plenty to be worried about like Quantitative Tightening, tariff wars, the overpriced U.S. stock market, natural disasters, etc. Some will “buy the dip” but time will tell if October was just a passing blip or a first warning.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am a sub-advisor of the SMART TDF Index and the originator of the 1st and only Robo Analyst that integrates Age with Risk. Please visit my Blog at seekingalpha.com/...
Age Sage builds better asset allocation models that help Baby Boomers transition through the Risk Zone that spans the 5-10 years before and after retirement. Implementation of these models can be done for less than 6 basis points. Boomers are poised for a sucker punch that they’ll never shake off.