Aging Badly
Mike Zaccardi, CFA, CMT | May 16, 2022 04:26AM ET
This article was originally published at wreckage , perhaps the most disappointing performers have been target-date retirement funds (TDFs).
Many 401(k) investors are familiar with these shifts from a stock-heavy portfolio in the decades leading up to the targeted retirement date to owning more bonds in the years immediately before and after the target year. Normally, performance is pretty steady for TDFs close to their target date, thanks to their high bond allocation.
Not this year. The 10-year Treasury yield has nearly losses . Remember, higher yields mean lower bond prices. The rate surge has also driven down stocks, as the value of future profits is discounted even more steeply. That’s meant a double-whammy for folks in balanced mutual funds and TDFs.
TDFs came about in the early 2000s, but they have never seen a year like 2022, with both global stocks and bonds falling sharply. Vanguard Group’s TDFs are down between 10% and 15% in 2022. What about the past 12 months? Whether you look at the relatively low-risk Vanguard Target Retirement Income Fund (VTINX) or the most aggressively invested Target Retirement 2065 Fund (VLVVX), losses are uniformly around 6%.
Is it time to ditch your TDF? No way. If you’re like me—in your accumulation years—a TDF within your 401(k) or IRA continues to make sense so long as its annual expense ratio is under, say, 0.1% per year. What about those nearing or in retirement? You might consider tailoring your investment strategy, rather than sticking with an off-the-shelf target-date fund.
Why? Retirement expert Michael Kitces lower-cost individual index funds rather than owning a single TDF.
Another tip: In a regular taxable account, it’s better to hold plain stock index funds or, better yet, exchange-traded funds than TDFs. Many folks found this out the hard way while filing taxes this year. In late 2021, Vanguard’s TDFs paid out huge distributions that were taxable to those holding a TDF in a taxable account. That meant a hefty capital gains tax bill.
Faced with lousy returns from both stocks and bonds, this isn’t the time to abandon your long-term investing glide path toward retirement. But it might be a good opportunity to check you have the right funds in the proper account type. If that means selling a TDF in a taxable account, you’ll find your realized capital gain is smaller thanks to 2022’s market swoon—and perhaps you’ll even harvest losses that trim your 2022 tax bill.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.