- Depending on the target date, target date funds lost between 3% and 8% in 2018.
- For perspective, all major asset classes lost money in 2018. Asset class returns range from about zero to a loss of 14%. The S&P500 lost 5%.
- There is no standard for evaluating TDFs but there should be
2018 was a mildly disappointing year for most, including target date fund (TDF) investors. With $2 trillion and 20 million investors, TDF performance is a big deal. Good chance you are invested in a TDF and are wondering how you did last year. You probably lost money, but the more relevant question is how did you perform relative to what you should have expected. That’s what standards are for – to establish expectations. In the following we report on several candidates for a standard but caution that none are yet recognized as The standard – there is currently no standard for TDFs. For an in depth discussion of TDF standards, please see TDF Benchmarks.
Environment
TDFs are multi-asset fund-of-funds that typically hold the asset classes shown in the following exhibit. As you can see, all asset classes except U.S. bonds lost money in 2018. U.S. stocks, which lost 5%, are the predominant holding in most long-dated TDFs. but as discussed in the next section the average long-dated TDF lost more than this because they also hold some foreign stocks.
Target date fund performance
The following graph shows the performances of several potential standards: the median fund, the S&P TDF Index, the SMART TDF Index, the Big 3, and the Safe Landing Glide Path (SLGP) risk-preference family.
The average TDF, as measured by the S&P TDF indexes, lost 3% for current retirees, 6% for those who are retiring in 2030 and 8% for those who are retiring 31 years from now in 2050. The median fund lost a little more than the average fund. The Conservative SLGP and the SMART TDF Index performed best among Current funds because of their defensiveness, holding predominantly safe assets. All of the SLGP funds, plus the SMART Index, performed best among 2030 and 2050 funds because of their broad diversification that includes assets like TIPS, gold and real estate.
So what?
Without a standard, we are judging blindly. One or more of the potential standards shown above will make your performance look good, and one or more will make it look bad. Please choose your standard wisely. I advise you to develop objectives for your TDF and to choose your TDF and its benchmark because it comes closest to being likely to achieve your objectives. My personal objectives are (1) don’t lose money, especially near the target date and (2) make as much as you can, but don’t lose money.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Ron Surz
Ronald Surz is co-host of the Baby Boomer Investing Show and president of Target Date Solutions and Age Sage, Target Date Solutions serves institutional investors, namely 401(k) plans. Age Sage serves do-it-yourself individual investors. His passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book Baby Boomer Investing in the Perilous 2020s and he provides a financial educational curriculum.Ron Surz is president of Target Date Solutions, developer of the patented Safe Landing Glide Path, Soteria personalized target date accounts, and Age Sage do-it-yourself investing. He is also co-host of the Baby Boomer Investing Show.
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