Surz: Baby Boomers in TDFs Need to Get Out – NOW
As I have been warning, there are at least four reasons that Baby Boomers should move to safety now and Vanguard recently added a fifth reason with its recommendation to allocate 70/30 bonds/stocks in the next decade.
Baby Boomers in target date funds (TDFs) are invested 50/50 stocks/bonds near retirement, and most of the bonds are long term, so risky. I say TDFs are 90% risky near retirement and that they should be much safer because:
- Academic theory is 80% risk-free at retirement. TDFs say they follow this theory that integrates human capital with financial capital, but they do not.
- Surveys of Baby Boomers report that they want protection near retirement, and think they are protected, although they are not.
- Retirement researchers recommend protecting against Sequence of Return Risk in the Retirement Risk Zone that spans the 5 years before and after retirement. Baby Boomers will spend this decade in the Retirement Risk Zone.
- The USA Stock Market is Expensive as Ever. Remember Stein’s Law: “If something cannot go up forever, it will end. If it ends in this decade, Baby Boomers in TDFs will be crushed.
The Fifth Reason: Vanguard Appraisal of Current Market Conditions
You would think that when Vanguard speaks people would listen, but a recent recommendation for a safe asset allocation has gone unnoticed. Baby Boomers should not ignore it. Vanguard speaks regularly on its Time Varying Asset Allocation (TVAA) recommendation. The most recent recommendation is for a very safe 70/30 bond/stock mix.Here’s what Vanguard says about the TVAA:
The Time Varying Asset Allocation (TVAA) strategy is built on the framework of the Vanguard Asset Allocation Model (VAAM), driven by forecasts generated by the Vanguard Capital Markets Model® (VCMM). The TVAA provides a model portfolio that optimizes for higher expected risk-adjusted returns over the next decade. The TVAA is not intended to be a tactical tool used in pursuit of short-term gains. It is better thought of as a dynamic allocation based on long-term risk-return relationships, driven by current market conditions.
The TVAA is not market timing. It’s an appraisal of current market conditions that will impact investment returns in the next decade. In other words, Vanguard’s risk and return expectations for the next decade favor the safety of bonds over the potential growth in stocks, as Morningstar explains in How Vanguard defends a super-conservative strategy that has proved surprisingly controversial.
Historical evidence suggests that future stock returns are low when current stock prices are high. The current condition is called a Minsky Moment.
Conclusion
Vanguard’s TVAA guidance is for everyone. For Baby Boomers, it reinforces the need to protect in TDFs that I have been warning about. But there is little sign that TDFs will change, so Baby Boomers need to protect themselves and get out of TDFs now. They need to not default and to move to safety, following Vanguard’s guidance toward 70/30 bonds/stocks. They won’t get a chance to do this later.
I’ll add my opinion that the 70% should be very safe—in T-bills and Treasury Inflation-Protected Securities (TIPs). That’s my warning and I’m sticking to it. Beware the “Revenge of the Baby Boomers.”
Ron Surz is president of PPCA Inc and its DBA Target Date Solutions (TDS), co-host of the Baby Boomer Investing Show (BBIS), creator of Soteria SaaS, and author of the books “Fixing Target Date Funds” and "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.
Ron can be reached at Ron@TargetDateSolutions.com.
