Update on Target Funds

Just after the bear market of 2000, I published an article called “Do Lifestyle funds Provide Greater Security?” I talked about the fact that they were a new product that could be sold to investors by giving the incorrect perception that the value will not drop, and they would provide some means of safety.

That fact got shattered in a hurry as losses piled up big time as the bear struck and ravaged portfolios.

Lifestyle funds have since been renamed and are known as Target funds. The underlying problems have not changed as these funds again got clobbered during the 2008 market meltdown.

Kiplinger writes as follows in “The Best Target Funds:”

The bear market punished target-date retirement funds. From October 9, 2007, through March 9, 2009, funds geared for investors expecting to retire in 2010 tumbled 35% on average, while the average 2030 target-date fund plunged 51%. Meanwhile, Standard & Poor’s 500-stock index lost 55%.

The Department of Labor and the Securities and Exchange Commission are now examining whether target funds misled investors about their risks. We agree that some target funds deserve to be singled out for sanction. But others still look like good, one-decision retirement funds. Really.

First, let’s do some singling out. Oppenheimer’s 2010 fund was the biggest loser in its class, shedding 54%, according to Morningstar. The Oppenheimer fund recently had 63% of its assets in stocks. Only AllianceBernstein’s 2010 fund, with 65% of its assets in stocks, had a higher allocation among its peers. Allotting that much to stocks may be fine for some individuals approaching retirement, but a one-size-fits-all fund should steer a bit more conservatively (the average 2010 fund has 43% in stocks). What’s worse, Oppenheimer Core Bond, an ingredient in the firm’s target funds, plunged 36% in 2008. “Underlying funds made a big difference in performance of target funds,” says Greg Carlson, a Morningstar analyst.

Bear-market performance of 2030 funds clustered tightly. Leading the losers again was the Oppenheimer fund, which fell 57%. So did AllianceBernstein’s. But that’s only six percentage points worse than the average 2030 fund’s loss. Investors in these funds are presumably more than 20 years from retirement, giving them plenty of time to recover. That is especially true for those who have continued to invest regularly.

[Emphasis added]

This is the idiocy of it. Because you have presumably 20 years to retirement is now the justification for you to be able to afford losses because you have plenty of time to recover.

Nothing has been learned from the bear market of 2000 or from 2008. If this economy follows the direction of Japan, and we end up with a lost decade or two, these target funds will have a hard time making up those losses.

I am whistling the same tune over and over again: The only way to get ahead with your portfolio long-term is by not participating in severe market drops and ending up spending years making up losses.

Whatever investment approach you follow, you need have an exit strategy in place to guard against the unknown. Working without one can and will be hazardous to your financial health as history has shown.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
This entry was posted in Uncategorized. Bookmark the permalink.

Comments are closed.