How Have Target Date Funds Performed Lately?
Target date funds are often promoted as retirement investments that you can hold for the long term. You start with an asset allocation between stocks, bonds, and cash that the mutual fund company deems appropriate for your age, then the fund gradually shifts the allocation to more conservative investments as you age.
You're supposed to buy and hold target date funds for some time -- and even stay invested when the stock market tanks. Indeed, a recent study showed that fund participants who stayed the course during the 2008-09 downturn had the highest account balances by June 30, 2011 compared to investors who reduced their equity allocations and/or stopped contributing during the downturn. Another study found that most participants in target date funds continued investing in them during and following the 2008-09 downturn.
One possible investing strategy you could adopt to help you stay the course is to invest in a target date fund and then not pay attention to the latest financial news. If that sounds like something you might do, don't read the rest of this post! (And don't worry -- most likely your funds are surviving the current market fluctuations).
But for the rest of you who just want to know how your funds are doing, let's take a look at the performance of a few target date funds from Fidelity, T. Rowe Price, and Vanguard -- funds that are very popular with 401(k) plans.
The following graph shows the year-to-date returns as of August 31, 2011, for three different target date retirement fund groups: funds that generate income during retirement, funds with a retirement date of 2020, and funds with a retirement date of 2030.
The chart above shows modest gains for the retirement income funds -- these funds are appropriate for people in retirement. The 2020 and 2030 target retirement date funds all show small losses. The year-to-date returns (or losses) are the net result of gains leading up through early July, and losses thereafter through August.
The chart below shows the specific amount of losses during the month of August.
When you look at the two charts, the Vanguard funds were the overall winners, which is consistent with my post last year, The Best Target Date Funds. With small gains or losses, the minimal fees charged by Vanguard are one good reason why these funds beat the other funds.
While the returns so far this year certainly aren't good news, target date fund investors aren't getting hammered, either. Hopefully, after seeing evidence of that, you'll feel good about staying the course with your investment strategy.
You might feel even better when you consider that all the retirement income funds shown in this post are still above their previous highs before the 2008-09 downturn. Earlier this year, the 2020 and 2030 funds were also above their pre-crash highs, but the July - August downturn pushed them below these levels.
One word of caution: Target date funds other than the ones shown here may generate different results. (As a few of my prior posts showed, there are target date funds with high expense loads and poor performance.)
Make sure you look under the hood of any target date fund you're considering: Learn about the fund's asset allocation, historical performance, and the fees that reduce investment returns. You'll thank yourself when you retire, knowing you've done everything in your power to achieve a prosperous retirement.
More on MoneyWatch:
- Target Date Funds Help You Stay the Course and Invest Successfully
- Study: 401(k) Investors Who Stayed the Course in 2008-09 Were Big Winners
- The Best Target Date Funds - Part 1
- The Best Target Date Funds - Part 2
View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops
and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.
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