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Wednesday, January 11, 2012

Target Date Fund Performance

Target date funds are, IMHO, a pretty good product for people who need to invest but don't want to invest the time to learn the basics of investing or get professional investment advice.  This article, "Target Funds Miss Their Marks - Again," by Sarah Morgan in the Wall Street Journal may cause people some pause in this regard.  Ms. Morgan reports that funds within 4 years of target date returned -0.4% for 2011, which was not good.  Most conservative funds that I have looked at returned between 2% and 4%. In her article, Ms. Morgan points out that the S&P 500 returned roughly 2% and the Barclay's Aggregate Index (the bond market) returned approximately 8%.  Thus, a 50/50 weighting would have achieved in the neighborhood of 5%.

The culprits in 2011 were basically international and small cap.  See Biz of Life for a comprehensive listing of ETF sector returns.

Also, if you were accumulating, as you probably were since you were 4 years from target, i.e. retirement, you took advantage of the strong 4th quarter in your dollar cost averaging.  In other words, systematically contributing to your 401(k) or 403(b) during the down phase in 2011 really paid off. Bottom line:  your return probably exceeded the -0.4% return on the target date fund.


  1. Yet another example of why you shouldn't stop investing based on market conditions *and* have proper diversification. The inverse co-relation between stocks and bonds played out very nicely in 2011.

  2. Target date funds are notorious for underperforming the benchmarks and just not being a very good investment in general.