The professionals are in charge, and they may just protect you from yourself.
Investment pros now control how much stock everyday investors own to a much greater extent than they did when the bottom fell out of the markets in 2008. The big reason: the rapid growth of target-date funds and similar vehicles, which most people set and forget — and suddenly remember when the market goes bonkers.
These vehicles divide your money between stocks and other investments and adjust that mix as the calender pages flip closer to retirement.
The growth of these funds is staggering: The amount of workplace retirement plan money in target-date funds just passed $1 trillion, accounting for 21 percent of the total, according to an analysis from BrightScope and the Investment Company Institute. That’s up from $185 billion in 2009. And 59 percent of new contributions into workplace retirement plans last year went into these types of funds, according to a report from Vanguard.
The coronavirus outbreak has sent share prices plunging, but the managers in charge of these funds are all-in on the long term.
Last month, T. Rowe Price announced that it was increasing allocations to stocks for some investors. (Stop snickering — the change is being phased over two years, so the fact that the past month’s stock market chart looks so grim does not mean its customers have suffered.)
All the big managers of target-date funds now have many years of historical data to work with. When they make changes — and they don’t do it very often — they are often aiming to get all of us to save and invest with the long run in mind.
And they do it all with an investment vehicle custom-built to keep people from doing dumb things with their life savings.
The What and Why of Target-Date Funds
Lest we forget, we are all guinea pigs in an enormous experiment that would be laughable if it did not involve a substantial portion of our net worth. The truth is, we’re just making it up as we go along with 401(k)’s and similar workplace retirement plans.
Pension fund managers used to control our retirement savings, and we’d get a guaranteed check for life. Those guarantees were expensive, so corporations decided not to make them anymore. That’s how many of us ended up with 401(k) plans, where workers decide how to invest the money and there are no guarantees.
There were many problems in the early days. Lots of people bought too much stock and then sold at the wrong time. Or they stayed in cash out of fear, and couldn’t even keep up with inflation.
“We’re putting it all in your hands and saying that we want you to be an asset allocation expert and maybe an economist,” said Jerome Clark, a T. Rowe Price target-date portfolio manager. “People just don’t have the expertise or the time.”
Target-date funds are supposed to solve those problems. The fund managers bring the expertise, and you need only make time to name the amount you’re saving and your retirement year (or a 529 plan that uses the funds the date your child will start college, after the requisite gap year).
The fund managers create an asset allocation of stocks, bonds, cash and sometimes real estate or commodities or other investments. Then, they decide what fraction of your money ought to be in each, and make sure it stays that way as the markets gyrate. Finally, they change those ratios as you get closer to — or farther into — retirement or taking money out for tuition.
$1 Trillion! How did that happen?
It was automatic, actually.
Among the many known failures of the 401(k) experiment is this: In the early years, putting money into a 401(k) was a choice. We don’t yet know how many people are going to run out of money in the 2040s because they didn’t save enough in the 1980s, but there will be some.
To keep even more people from running out of money, many employers and the companies that help them have cooked up several strategies. First, sign everyone up. Second, raise the amount they save by, say, a percentage point each year. Workers can put a stop to either one of these things, but most don’t.
Then, the default: Rather than putting people into low-risk investments, channel their savings into target-date funds that correlate with their age. Once the federal government blessed this move, assets flooded the funds.
How to Set the Stocks
The target-date allocations at Charles Schwab, Fidelity, T. Rowe Price and Vanguard are not all alike. But their fund managers share a common goal: When you itch to make drastic portfolio changes (say, this very weekend!), they want to stop you.
We humans have a natural tendency toward greed and fear. That can lead us to buy more stock when prices are rising and sell when we see lots of red lines pointing downward and want to avoid the pain. These are also the worst possible instincts investors can have.
The target-date gurus at Charles Schwab, who haven’t made substantial changes to their stock-bond allocations since 2008, fielded my questions about the here and now with some degree of practiced weariness.
Jake Gilliam, head client portfolio strategist for the group that includes target-date funds, is old enough to remember 2006, when the stock market was a rocket ship and people were telling him that his funds did not take enough risk. He remembers 2008, when people asked why his funds were taking so much risk. And he remembers 2018, when the ever-climbing S&P 500 had people once again questioning whether his funds were aggressive enough.
“We have been here before,” he said. “I’ve seen the full cycle twice now.”
Mr. Clark at T. Rowe Price watched how all of us reacted to the stock market fiasco a decade ago, and he has the receipts. Non-target date investors were four times more likely to make a portfolio move during extreme market conditions. Put another way, target-date investors mostly avoided the two worst outcomes: selling low and staying on the sidelines during the market rally. That’s probably because their portfolios were just conservative enough that their balances didn’t move as violently as the U.S. stock market did.
That brings us to T. Rowe Price’s recent decision to raise the stock exposure of its youngest and oldest investors — but not the ones closest to retirement.
Why exclude those closer to age 65? Well, they tend to feel the biggest feelings as they’re moving from earning a salary and saving money to spending it and perhaps not earning at all. Strong emotions like that could lead them to cash out, which would have been a very bad thing to do in, say, 2009. So T. Rowe Price decided not to increase their stock allocations — for now, at least — lest they do something rash.
There are Always Caveats
Target-date funds check a lot of boxes. They’re automatic, they’re built for the long term and they’re usually managed in a thoughtful manner.
But they’re far from perfect.
Many function as mutual funds containing other mutual funds, which can mean layers of fees. The “stock” allocation might not be to your taste — it could contain too much or too little exposure to international companies or smaller businesses.
The stock mix can vary in other ways, too. It might be every stock in a particular index, or a smaller number of stocks that managers pick in hopes of generating higher returns. The latter is very hard to do over time, and trying to do so costs more in fees than simply creating an index fund.
Ask your fund company about all of that. Just don’t expect the fund managers to have much to say today that is all that different from last month or last year.
Their goal remains the same, said Andrew Dierdorf, a portfolio member for Fidelity’s target-date operation. They want you to behave yourself.
“One of the things we’re always thinking about, in good times and challenging times, is getting the investor to stay invested so they can achieve their long-run objectives,” he said.
https://news.google.com/__i/rss/rd/articles/CBMiUWh0dHBzOi8vd3d3Lm55dGltZXMuY29tLzIwMjAvMDMvMDcveW91ci1tb25leS90YXJnZXQtZGF0ZS1mdW5kcy1zdG9jay1tYXJrZXQuaHRtbNIBVWh0dHBzOi8vd3d3Lm55dGltZXMuY29tLzIwMjAvMDMvMDcveW91ci1tb25leS90YXJnZXQtZGF0ZS1mdW5kcy1zdG9jay1tYXJrZXQuYW1wLmh0bWw?oc=5
2020-03-07 17:15:20Z
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