| Are target retirement funds truly the "one | | | | On average, 2 bull markets + 2 bear markets = |
| decision" solution for people who aren't sure about | | | | 11 years: |
| how to invest their retirement savings? | | | | If you start with $10,000, and are lucky enough |
| You may own a target retirement fund if you're | | | | to invest at the beginning of a bull market, in 4.4 |
| in a 401(k) plan and you signed up but didn't pick a | | | | years your account is worth $24,950. Along |
| fund to invest in or you were automatically | | | | comes the bear market and 1.1 years later your |
| enrolled. Target retirement funds have become | | | | account is down to $17,323. The next bull market |
| the "default investment" in 401(k) plans and have | | | | takes your account up to $43,221 and the next |
| become popular with individual beginner investors | | | | bear market shrinks it to $30,009. That is a |
| as well. | | | | 200% return (($30,000 / $10,000) - 1) or an |
| This kind of fund is designed for those who lack | | | | annual average return of 18.18%. Not bad at all. |
| the experience or interest to make their own | | | | But consider how much bigger your account |
| investment decisions. The target fund is meant to | | | | would be if you missed just half of each of those |
| be a "one-decision" fund - it adjusts its | | | | two bear markets. Why half? Because no one is |
| investments to become more conservative as | | | | able to sell exactly at the top - at the highest |
| you grow older and closer to retirement. The | | | | price - or buy exactly at the bottom - at the |
| theory is great -- you don't have to do anything. | | | | lowest price. So let's say you sold too early and |
| But the theory is flawed. | | | | bought too late and cut the impact of the bear |
| If you're 25 or younger your target fund will have | | | | market down to -15.25%. |
| a date like 2050. At this distance from retirement, | | | | At the end of those 11 years - 2 bull markets + |
| the fund will be predominantly invested in stocks, | | | | 2 bear markets - your account would be worth |
| so an investor needs to understand market | | | | $44,714. Your bull market gain is identical. But |
| cycles or trends to make the most of this | | | | reducing your bear market loss to -15.25% results |
| investment. | | | | in an account value 49% bigger. That's a 347% |
| You face two problems and an opportunity. | | | | cumulative return or 31.55% average annual |
| The first problem is doing the wrong thing: Buying | | | | return. That's better than good. |
| high and selling low. This happens when you let | | | | This data began in 1942. You could argue that it |
| your emotions make your decisions for you. | | | | encompasses the entire post-war boom - and |
| In a market decline, for example, which happens | | | | baby boom - economy. That's true, and what |
| on the average every four and half years, | | | | that means is that future bull markets may not |
| investors are faced with seeing the value of their | | | | be as good and future bear markets may be |
| accounts fall with each monthly or quarterly | | | | worse. Which makes this advice more important |
| statement. Finally, you feel so much pain - you sell | | | | than ever. |
| just to stop the pain. You have locked in a loss, | | | | Some people would say that I'm recommending |
| real money, and now must start over again. | | | | market timing, which I'm not. The fallacy to |
| The second problem is doing nothing and riding out | | | | market timing is that you can predict what's going |
| the market's cycles. | | | | to happen. You can't. But you can follow market |
| Since 1942, the average bull market in stocks has | | | | cycles or the primary trend. It's going to change |
| lasted 4.4 years and produced a return of | | | | once every five years, on the average. Is that so |
| 149.5%. The average bear market has lasted 1.1 | | | | hard to keep track of? |
| years and produced a loss of 30.57%. So let's | | | | The bull and bear market data is courtesy of |
| consider: | | | | Bespoke Investment Group. |