Sigh … How many more times are we going to see articles like this, involving great wailing and gnashing of teeth over target date fund performance … in 2008?
Below you’ll see a summary of unvarnished data from Morningstar, showing the 3-year cumulative performance of all share classes of target date funds for which Morningstar has published 3-year returns and current assets.
The colored circles in the chart are weighted by the assets invested in these funds; the bigger the circle, the larger the fund. Although many of the circles are in negative territory, that’s primarily the case for funds with target dates of 2016 and beyond. And even where performance was poor, it was nowhere close to the –40% (or worse) returns many investors experienced during the depths of the 2008–2009 downturn.
As these data show, for those near and in retirement, target date funds have in general enabled investors to maintain and grow their wealth through the worst markets in 50 years.
Cumulative total net returns, 3 years ended December 31, 2010
Target date and retirement income mutual funds, weighted by fund net assets
Source: Morningstar. Includes all share classes of target date and retirement income mutual funds in the Morningstar database with 3-year returns and net assets as of December 31, 2010.
The bottom line is simple: In order to sell papers, get clicks, or find a way to get our attention, investment publications continue to highlight outlying results that reflect reality only as experienced by a tiny minority of investors. While obviously the worst performers should have to face scrutiny—and have a significant amount of explaining to do—using their atypical results as an excuse for frightening plan sponsors and inciting politicians and regulators is only likely to raise costs and complication for most investors, making everyone worse off.
Sadly, I know the answer to my opening question: We’ll see a lot of these articles until the writers can find a statistic juicier than –41% to sensationalize.
• Investments in target date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
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