What We’ve Learned About Target-Date Funds, 10 Years Later

A decade after target-date funds were damaged during the financial crisis, they have re-emerged bigger than ever as retirement investments. But they still have vulnerabilities.

“While 2010 target-date funds had been gradually shifting their allocations toward bonds, as they were designed to do, many were still holding 50% equity or more when the 2008 financial crisis hit,” says Nicole Tanenbaum, chief investment strategist at Chequers Financial Management, a financial-planning firm in San Francisco.

“The funds were down less than the stock market during the crash, thanks to their bond component, but the performance still took many retirement-ready individuals by surprise as they watched their portfolio losses balloon into double-digit territory,” she says.

.. A big factor in that growth was Obama-era legislation that encouraged employers to automatically enroll new employees in retirement plans and use target-date funds as the default for those who don’t choose their own investments. Previously, investors who were inattentive—a notorious problem with workplace retirement plans—simply accumulated cash, which doesn’t provide enough growth to build a nest egg that will last for decades.

It’s certainly a good thing” to use TDFs as the default, says Dennis Shirshikov, financial analyst at FitSmallBusiness.com, an advice service for small-business owners and managers. “This has brought a great deal of consistency to a retirement portfolio, especially since most investors with a 401(k) do not manage their investment actively.”

.. The biggest player is Vanguard Group with about $381 billion in TDF assets in 2017, 34% of the market, Morningstar says. Fidelity Investments had a 20.5% share, and the third-biggest player, T. Rowe Price ,TROW +0.27% had a 14.9% share.
.. Retirement experts have mixed views about TDFs’ value in a portfolio. Most say TDFs are better than not investing at all, or putting retirement savings in cash, but the funds can’t take into account each investor’s unique situation. Two investors the same age would get the same fund, even if they have different needs due to dependents, availability of other assets, life expectancy and risk tolerance.“In an attempt to simplify planning and saving for retirement—certainly a noble endeavor—the entire concept of target-date funds likely is a bridge too far,” Prof. Johnson says. “Individuals are unique, and one parameter, the anticipated retirement date, cannot and should not dictate the appropriate asset-allocation mix and the change in that mix over time.”

Retirement experts have mixed views about TDFs’ value in a portfolio. Most say TDFs are better than not investing at all, or putting retirement savings in cash, but the funds can’t take into account each investor’s unique situation. Two investors the same age would get the same fund, even if they have different needs due to dependents, availability of other assets, life expectancy and risk tolerance.

Another concern: The automatic investing strategy ignores changing conditions. Patrick R. McDowell, investment analyst at Arbor Wealth Management in Miramar Beach, Fla., says low bond yields in recent years have reduced TDF income after the target date, and increased the risk of losses on bondholdings if rates rise. (Higher rates hurt bond values because investors favor newer bonds that pay more.)

What’s more, he says, stocks and bonds have often moved in tandem in recent years, reducing the benefit from diversification, which assumes one asset goes up when the other falls.

..  He says he often recommends investors nearing retirement leave the target-date fund and buy a mix of stock and stable-value funds—which contain bonds insured against loss and are designed to preserve capital while generating returns similar to a fixed-income investment—to reduce danger from a potential market plunge.

.. Advisers also urge investors to examine the TDF’s “glide path”—its investing policy for shifting from stocks to bonds over time—and pick one that suits their willingness to take risk. Some fund companies provide more than one glide path to the same date, ranging from aggressive paths that rely more on stocks to conservative ones heavier on bonds.

“To” funds are designed to hit their final mix at the target date, often with little or nothing in stocks. They work best for investors who want safety because they expect to cash out or switch to another investment at the target date.

Why Foreigners Love Vladimir Putin’s Bond Market

Russian elections highlight the strange economic attraction investors have shown for the country’s financial markets

Nonresidents now hold one-third of domestic government bonds, compared with barely any six years ago.

.. And Russian bonds still look attractive, with a 10-year yield of just under 7%, while inflation has fallen well below the central bank’s 4% target. Conservative economic policy was part of the reason for Standard & Poor’s to upgrade Russia to investment-grade status in February.

But Russia needs change too. And here, continuity in leadership is part of the problem. The economy has emerged from recession and grew 1.5% in 2017, but much faster growth may be tricky: The central bank itself says structural reform is needed to boost growth beyond 1.5% to 2%. Russia’s population is shrinking and aging. Productivity is poor and state involvement in the economy is high.

One Cause of Market Turbulence: Computer-Driven Index Funds

In many ways, this stampede toward passive investing — in which people put their money into funds that track indexes and broader market themes as opposed to relying on human stock pickers — is uncharted territory.

.. the key question is how this transformed market holds up during a financial storm that lasts more than a few days.

.. Cheaply priced exchange-traded and index funds .. They now own close to 40 percent of stocks in the United States

.. BlackRock..  is the leading issuer of exchange-traded funds, with $1.3 trillion under management

.. The popularity of E.T.F.s has concentrated unparalleled financial power in BlackRock and Vanguard, the two biggest providers of index funds and E.T.F.s. Together, they sit on $10.5 trillion in assets and control 65 percent of the 1,700 exchange-traded funds that exist.

.. As the flows have grown in volume, much of these funds have gone toward index heavyweights like Amazon, Apple and Facebook, pushing their valuations ever higher.

.. Active fund managers — human stock pickers  .. because they are the ones who buy when others sell.

Silicon Valley Vs. Wall Street: Can the New Long-Term Stock Exchange Disrupt Capitalism?

Tech luminaries back new exchange that rewards shares with more voting power the longer investors own them

..  the voting power of shares increases the longer investors own them. Firms listed on the exchange would need to use such a structure, often called “tenure voting,” while abiding by numerous other rules, such as a ban on tying executive pay to the company’s short-term financial performance.
.. skeptics wonder whether the LTSE is just another way for tech founders and elite Silicon Valley investors to maintain control at the expense of other shareholders. One leading New York hedge-fund manager who asked not to be named called tenure voting “disgusting” and said it would enable managers to duck accountability.
.. The LTSE is funded by a range of venture-capital firms, led by Peter Thiel’s Founders Fund, Andreessen Horowitz, SV Angel and Greylock Partners, and individual investors including former Twitter Inc. CEO Dick Costolo, AOL co-founder Steve Case and Groupon Inc. founder Andrew Mason. The firm says it has raised $19 million from around 70 investors in all.
.. SEC Chairman Jay Clayton .. has voiced concerns about the nearly 50% drop in the number of U.S. public companies over the past two decades—a trend that is partly due to companies choosing to stay private for longer.
.. executives’ bonuses couldn’t be tied to financial-performance targets over periods of less than one year. If the executives are paid in company stock, the shares couldn’t fully vest for at least five years.
.. they would be barred from releasing quarterly earnings guidance
.. the voting power of his or her shares would grow over time, capped at 10 times the power of ordinary common stock after a decade.
.. The voting structure will depress the share price of any company listed on the LTSE, said Neal Wolkoff, former CEO of the American Stock Exchange. “Fewer people will want to buy into a company where there’s entrenched management,” he said.
..  In his view, tenure voting is better than the solution favored by some Silicon Valley firms: severely limiting the voting power of ordinary shareholders through two or more share classes.

Snap Inc., for instance, has a controversial multiple-class share structure in which shareholders who buy the company’s common stock listed on the New York Stock Exchange don’t get voting rights at all.