Institutional Investor just published an article titled “Where Does The Market Chaos Leave Target Date Funds?”
I don’t need to tell you what you already know—that recent weeks, months and even the past few days have been highly volatile. The article, which came out on August 10th, raises an interesting point: The main motivation for Target Date strategies is a long-term “buy and hold” approach that investors expect to be sufficiently diversified to weather any sharp declines in any particular asset class—just like we all saw just this week.
This is, in fact, the very definition of diversification.
If part of the motivation for Target Date strategies is to provide long-term ‘buy and hold’ portfolios for investors, we would expect these strategies to be sufficiently well diversified to mitigate big declines in any individual asset class.
Investors in the Broad Market Seeing Red
Using market data (through August 9th) we see that the S&P 500 Index has returned -6.7% for Year-To-Date (including dividends) and has a three-year annualized return of -1.11% (including dividends).
However, we need to remind ourselves that the S&P 500 Index represents basically one major asset class which is large cap domestic equities.
Target Date Strategies: Providing a Safe Haven in the Storm
From my perspective, the Target Date Fund strategies—and specifically, the line-up of Target Date Folios I helped to design more than 3.5 years ago—are doing exactly what they are designed to do: Take advantage of market run-ups when times are good and provide the proverbial “shelter from the storm” when times are bad.
In the face of a massive run-up in volatility and decline in both domestic and international equity markets, the Target Date Folios are maintaining positive 3-year returns:
Target Date Folio Performance (through 08/09/11):
- Every Target Date Folio—from the most conservative 2010 Folio to the most aggressive 2045 Folio—has positive 3-year returns.
- The 2010, 2015, 2020, 2025, 2030, and 2035 Conservative Target Date Folios have 3-year annualized returns of 4% and above.
- The 2010, 2015, 2020, 2025, 2030, 2035, 2040, and 2045 Conservative Target Date Folios have positive YTD returns
- The 2010 Moderate Target Date Folio has a 3-year annualized return of 3.7%
- The 2040 Aggressive and 2045 Aggressive Target Date Folios have under-performed the S&P 500 for the YTD but still have positive three-year annualized returns of 1.5%.
- If we eliminate the Aggressive Target Date Folios, the worst YTD performance for any of the Target Date Folios is -3.1% for the 2045 Moderate Folio (but this Folio has a 3-year annualized return of 1.8%).
In answer to the question posed in the title of the article from Institutional Investor, I would say that the “market chaos” very clearly demonstrates the value proposition of well-designed Target Date strategies, specifically Target Date Folios.
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