All asset classes except gold and commodities have lost money so far this year.
So how have your 401k investments fared? This question usually depends on your risk and diversification, but it’s not so this year unless you manage risk with TIPS and cash.
Traditionally risk has been controlled with bonds, but not this time. U.S. bonds lost 9.6%, and foreign bonds lost 15.5%. Going forward, bonds will continue to lose money as the Fed takes the break from its ZIRP (Zero Interest Rate Policy).
Your loss
The following graph shows that target-date fund (TDF) performance provides a good barometer for what you should expect. Your losses can range between 2.9% and 11.9% depending on your investment horizon and how you control (manage) risk.
Here’s a breakdown of the results. The important message is that bonds are not protecting investments effectively.
- Industry is the S&P target date fund index composite of all TDFs. Most TDFs manage risk with bonds. At the target date (2020 fund in the graph) they are 50% in equities and 35% in bonds, so 85% in risky assets. All vintages had similar losses of about 11%.
- The Conservative, Moderate, and Growth funds are TDFs used by the National Retirement Savings Plan (NRSP) of the Office & other Professional Employees International Union (OPEIU), one of the largest AFL-CIO unions. They manage risk with Stable Value. The Conservative fund is 70% in Stable Value at the 2020 target date. The Growth fund is 30% in Stable Value, compared to 35% in bonds for the Industry. All 3 OPEIU risk levels protected more than the Industry, with the Conservative 2020 fund losing only 2.9% versus the Industry’s 9.6% loss, which is a 6.7% greater loss.
Conclusion
The end of ZIRP is just beginning because The Fed cannot continue ZIRP and fight inflation. ZIRP requires money printing that causes inflation.
Consequently, bond prices will fall as interest rates return to unmanipulated levels, so bonds are not a good risk control. Protect yourself accordingly.
Ron Surz is President of Target Date Solutions, a DBA of PPCA inc. He is also the author of Baby Boomer Investing in the Perilous Decade of the 2020s. He can be reached at Ron@TargetDateSolutions.com.
Ron Surz is CEO of Target Date Solutions (TDS), co-host of the Baby Boomer Investing Show (BBIS), and author of the book "Baby Boomer Investing in the Perilous Decade of the 2020s." TDS licenses target-date fund usage of Ron’s patented Safe Landing Glide Path® (SLGP) that actually protects beneficiaries as they approach retirement. Individual investors can follow the SLGP at Age Sage, an educational interactive website. The BBIS educates baby boomers on the risks and rewards in contemporary investing, and Ron’s book is a tour of these shows. He can be reached at Ron@TargetDateSolutions.com.
Excellent article with well-presented data. Kudos to Ron
Bravo, Ron! CAVEAT EMPTOR: plan sponsors and advisors beware!