(Photo: Silvan Arnet/Unsplash)
Millions of American workers have invested in target-date funds in their 401(k) accounts. And why not? They’re quick, and they’re easy, providing instant diversification and the benefits of a professionally designed investment portfolio tailored to meet your changing needs as you inch closer to retirement.
Unfortunately, millions of target-date fund investors just discovered that even funds designed for people retiring in 2020 provided no shelter from the investment storms.
According to Morningstar, as of May 19, the average 2020 target-date fund lost 11.6% of its value since the start of the year.
“If you recently retired or are near retirement and you had your money in a target-date fund designed for people retiring about now, bad luck,” writes columnist Brett Arends.
In an interview last week that appeared in MarketWatch and Morningstar, Mari shared with Brett the dilemma facing target-date investors.
“While target-date funds are a good, simple, one-stop-shopping solution for many investors, they cannot hide from what is happening in the markets,” explained Mari. “A target portfolio is just a mix of stocks and bonds. Unfortunately, so far in 2022, stock markets are down and bond markets are also down.”
It’s unusual for stock and bonds to lose value at the same time. Usually, high quality bonds are considered a less-risky investment that will hold up well in market downturns. After all, that’s what they did in the dotcom bust and the 2008 financial crisis. By mixing stocks and bonds in a target-date fund, the fund designers hope to capture moderate growth without the gut-wrenching volatility of a pure stock portfolio.
The good news for target-date fund investors? Most people hold these funds in their 401(k) or retirement accounts as long-term investments, and are prepared to hold on tight to weather the inevitable short-term ups and downs. While they are not immune from market declines, the funds are crafted to lower the risk level as the owners get closer or into retirement.
And don’t forget there is a silver lining to climbing interest rates. Higher rates mean higher income for investors. As Arends notes in his article, bonds have fallen from their highs earlier this year, and now offer much more attractive interest rates and income flows, leading to potential performance improvements in the future.
No comments yet.