Until this year, risk was being rewarded over the past 15 years. It is the longest bull market—it’s great. But if something cannot go on forever, it will end, and then we’ll learn the reasons that prudent protection matters. Until now, “Risk On” handily won the performance horserace because US stocks outperformed the world with a 14.4% return, but that has reversed so far this year, with US stocks delivering a worst return 4.5% loss.
Of course, one quarter is way too soon to give a win to “Risk Off” but it is motivation for discussing a world when US stocks experience significant losses.
Understanding the ‘Risk On’ and ‘Risk Off’ TDF Landscape
There are 2 distinct groups of TDFs that differ substantially in Risk (prudence).
Most TDFs—the “Industry”—are “Risk On.” They are concentrated in US stocks and bonds, so undiversified, and they’re 90% in stocks and bonds at the target date, so risky, especially in regard to sequence of return of risk. The Industry is “Procedurally Prudent” because it is the common practice majority, and it is dominated by an oligopoly of marquee names like Vanguard, Fidelity and T. Rowe Price.
But a few TDFs are “Risk Off” that is diversified and safe, including my Soteria system that tracks the SMART glidepath, the Federal Thrift Savings Plan and RPAG’s low risk flexPATH. This Risk Off TDF group is “Substantively Prudent” because it protects participants. Sometimes common practice is not best practice, leaving room for improvement.
For an explanation of why the two groups co-exist, please read Elucidations. There are justifications for both Risk On and Risk Off. You be the judge as to which is better for participants.
Here are up-close comparisons of the 2 groups at the endpoints of their glidepaths.
As Risk On fades, performance success has moved toward Risk Off so far in 2025. As the US stock market slid from first place into last, TDF performance went from “Industry wins” to “Safe group wins” as shown in the following.
Most are taking the position that the US stock market will recover, and all will be well again, but those near retirement might not recover from the next stock market crash, which is long overdue. Baby boomers cannot afford investment risk at this time in their lives.
In the 1929 crash the stock market lost more than 80% and it took more than 15 years to recover from that devastation. But let’s not focus on the worst case. Take the most recent crash in 2008, and revisit what happened to TDFs back then.
Those near retirement in most TDFs lost 30% or more. It was horrible, prompting the first and only joint hearings of the SEC and DOL in June of 2009. But nothing changed: lessons not learned. With perfect hindsight, leaving Risk On worked very well for the next 15 years, but a few things have changed recently:
- As a result of a fantastic 15 years, the US stock market has become very expensive, so it is due for a correction
- Our 78 million Baby Boomers were not in the Risk Zone in 2008, but they are now. Losing 30% now will be devastating to them.
- There was only $200 billion in TDFs in 2008. Now there’s $4.5 trillion, so TDFs are 22 times more important.
“When Risk On Fades, TDFs Face the Prudence Test” is the title of this article. That test is near. History does repeat. Baby Boomers beware.
Final Thoughts
The US stock market is struggling in 2025, but it has not yet crashed, losing more than 20%. This follows two consecutive years with performance above 20%, driving up the prices of stocks. Tariffs are adding concerns to the overvalued condition, so it’s reasonable to expect more losses to come. When the next crash happens, Risk Off TDFs will demonstrate the importance of prudence. Unfortunately, most participants in TDFs will suffer the consequences of Risk On.
Baby boomers will suffer most because they are in the Retirement Risk Zone. Forewarned is forearmed. Baby Boomers in TDFs need to get out now, and move to safety, unless they’re in one of the Risk Off funds.
The Industry is not following the academic lifetime investment theory that it says it follows. If it did, it would be Risk Off, especially at the target date.
Ron Surz is president of PPCA Inc and its DBA 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.
Ron can be reached at Ron@TargetDateSolutions.com.