Lessons From Target-Date Funds

You may or may not be a fan of target-date funds. But those one-decision investments, which adjust the mix of assets to become more conservative as the year of your retirement (or some other goal) approaches, can teach us all a thing or two about how to deal with challenging markets.

- Anne Kates Smith

Since target-date funds debuted in 1994, their assets have grown to $1.2 trillion, up sixfold from a decade ago. The funds are often designated as the default option in retirement plans.

Because of their diversification mandate, target-date funds will never be top performers. Something in the portfolio will almost always be hohum (or worse) when other parts are rising. Over the past five years—a strong bull market for stocks—even the funds with the highest allocation of stocks relative to bonds in the category (those with a target date of 2060 or beyond) returned an annualized 10%, compared with a 13.8% return for Standard & Poor’s 500-stock index.

Nor will target-date funds save you from getting mauled in a bear market. The funds faced sharp criticism after the bear market of 2007–09 put a serious crimp in the plans of savers on the cusp of retirement. The 2010 target funds of American Funds, T. Rowe Price and Fidelity lost 36%, 35% and 33%, respectively, during the slump.

Steady investing. What target-date funds do better than most other types of funds, a recent Morning star study shows, is save us from ourselves.