A new survey of retirement investors finds what previous surveys also find. Investors want to be much safer near retirement than they are in target date funds (TDFs).
Investor risk tolerance is very low near retirement, exacerbating concerns about the current stock market bubble. The stock market bubble, coupled with low risk tolerance, are the two reasons that TDFs should be safer. Baby Boomers in TDFs should get out and move to safety.
TDFs are staying on a course that ignores the current bubble and investor preferences. Investors near retirement in TDFs are not getting what they need and want, so they need to take risk management back into their own hands and move to safety.
This article has two sections. First, I share a new study of retirement investor risk preference. Then I discuss current professional investor reactions to the stock market bubble and what this means for TDFs.
Part 1: Voice of Investor
A new investor survey conducted by Greenwald Research finds that people near retirement want much less risk than the risk typically found in target funds (TDFs). Investors want to follow the Safe Landing Glidepath, as shown in the following survey summary. That is the “voice of the investor.”
Boston College’s Center for Retirement Research sponsored the survey. The author of the survey report believes that the unwanted extra risk “is probably good for them,” suggesting that the risk in TDFs is somehow “right” despite investor preference, but is it?
What is the right risk for people near retirement?
One answer to this question is that the right risk is the risk that investors say they want. After all, it’s their money. But professional investors say non-professionals have no idea what they want, so professionals turn to an academic framework to determine the right level of risk. This framework is elegant in its integration of investment capital with human capital, as shown in the following.
As Human capital (present value of all wages) depletes, we rely more and more on our accumulated Financial capital (our savings). Makes sense.
Here’s the rub. The academic studies that professionals say they use are very safe at retirement, invested 70-80% risk free. Here are links to the most frequently cited academic lifetime investing studies. Please read.
| Academic Lifetime Investing Studies | Recommended allocation near retirement |
| Idzorek and Kaplan: Lifetime Financial Advice, 2/15/24 | 70% risk free |
| Ibbotson et al Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance 2007 | 80% Risk free |
The academic studies that TDF providers say they follow are much safer than actual TDF practice. The typical TDF is 90% risky at its target date, with 50% in equities and 40% in risky long-term bonds.
People actually do want what academics think is best for them
Some might say that the participants in this new survey are concerned about the stock market, so the results would be different if the stock market was not in a bubble.
But there have been many similar studies in the past pre-bubble with similar results like American Century, PIMCO, Mass Mutual and others. Regular people really do want what academics say they should want when they are near retirement—they want to be safe.
The disconnect between investor preference and TDF practice will create an uproar in the next stock market crash. Staying on the current course will do great harm, especially during the current stock market bubble.
I recently read an article by a respected asset manager that describes how he is navigating through the current stock market bubble, as follows: With this understanding of the growing risks, along with the potential for high short-term returns and the tools to navigate and limit downturns, we can continue to realize gains during strong bull markets and shift to a protective mode when a bear market begins.
This reminded me of a newsletter that consultant Jeffrey Slocum wrote years ago entitled “The Hubris of Physician Pilots” where he described the “doctor killer” aircraft—the high-performance V-tail Beechcraft Bonanza—that doctors crashed more frequently than anyone else. The Bonanza was a status symbol despite the fact that it was tricky to handle in certain conditions (like turbulence or stalls), requiring advanced skills that many novice pilots lacked.
The underlying issue ties into hubris: Doctors—smart successful people accustomed to high-stakes decision-making in medicine—overestimate their ability to quickly master flying without sufficient training or respect for the risks. Jeff’s message is clear: smart people can make dumb mistakes, like thinking you can get out of the way of a stock market crash.
Market timing, stay the course or risk management?
Yogi Berra said, “It’s tough to make predictions, especially about the future.” Numerous studies have documented the futility of market timing, and these studies have been used to make the case to stay the course by posing the question: Are investors best served by abandoning their long-term allocations to move to the safety, but limited return potential of cash? How can we best challenge the odds in the face of a stock market bubble?
Vanguard acknowledges the current stock market bubble and has recommended a safe 70/30 bond/stock mix for the next decade. Risk management chooses the limited return potential of cash over the potential for loss in the current market bubble. It’s the smart choice for Baby Boomers.
Target date funds stay the course
With $1.5 trillion in its target date funds (TDFs) Vanguard is the largest TDF provider, so it is the de facto standard. But its TDF has not altered its glidepath in line with its current safe asset allocation recommendation. The Vanguard asset allocation for those near retirement in its TDFs is 50/50 bonds/stocks, which is much riskier than its 70/30 recommendation. Most TDFs are 50/50 bonds/stocks at their target date because they are in general “me too” funds that follow Vanguard’s lead.
50/50 bonds/stocks is much riskier than:
- Vanguard’s current guidance
- Academic theory that TDFs say they follow
- Investor preferences
Baby Boomers need to manage their risk at this critical time in their lives. Moving to safety now is not market timing nor is it staying the course—it’s risk management. Those who remain in TDFs—as most will—are staying the course. This is not a smart decision.
Conclusion
Listen to the voice of the investor and embrace smart risk management.
Baby Boomers are in their Retirement Risk Zone when Sequence of Return Risk is a threat. Losses now can ruin the rest of their lives. It’s like airplane risk but with higher odds of disaster in the current stock market bubble. Baby Boomers need to get out of their TDFs now and move to the safety of Treasury bills and TIPS.
Now is not a good time for hubris or blind trust in a Qualified Default Investment Alternative. Don’t make the “doctor killer” mistake.
We need to ask ourselves why TDFs are so risky. TDF providers say it’s because people have not saved enough so they need the “medicine” of risk, but they also say that they follow academic theory. They can’t do both. High risk has worked for the past 16 years because it’s been the longest bull market ever, hence the comment that unwanted extra risk “is probably good for them,” because it has been—so far.
But Stein’s Law will hold—if something cannot go on forever, it will end. There will be a stock market crash that will change everything. Can $4.5 trillion in TDFs be wrong? Stay tuned. $200 billion in TDFs was wrong in 2008, but that’s been forgotten. This time there’s more than 20 times more money involved than there was in 2008.
EDITOR’S NOTE: The views expressed in this op-ed are those of the author and do not necessarily reflect the views of 401(k) Specialist.