There’s a reason why we often refer to target date funds as ‘target dated’ funds. These types of investments rely on portfolio construction techniques to decide what to own based on decades old dated data that is not really reflective of the much different globalized world we live in today.
For the last several years between 40% and 50%(1) of sales for companies in the S&P 500 have occurred outside of the US borders. What is a domestic stock and what is an international stock has become quite blurred, at least if you’re looking at where a company does business. Is a Ford car manufactured in Mexico using many Chinese parts a more domestic car than a Honda being built in Alabama that uses a large percentage of US made parts? This is a great analogy on how to think about stocks today. Is where a company is headquartered what makes it a foreign or domestic stock or is it where they sell their goods and services? To us, getting the diversification on where the companies in a portfolio do business is much more important than where they are located.
Unfortunately index funds and ‘target dated’ funds generally look at only where a company is domiciled, not where they do business. The reality is that companies domiciled in the US (which are part of US indexes) have been significantly more successful than those located in other countries for well over a decade. The MSCI ACWI ex. US Index, which captures the performance of 85% of the companies outside of the US, has only now reached the same place it was in 2008. One big reason for this is that these companies on average have seen hardly any profit growth. Since stocks are simply ownership in a company, a company really needs to be making more money for the stock to be worth more money. Government policies in other countries related to hiring practices and other matters, have made profit growth difficult for companies domiciled within them, an issue that is unlikely to reverse course anytime soon.
The largest two holdings across 401(k)s today are stable value/cash funds and target date funds(3). The problem with this is that the average target date fund has between 50% and 75% of their holdings(2) in either international stocks (which are now at the same level they were in 2008) or cash/bonds (which are on average paying interest rates that are less than half of what inflation rates have historically been). If your account value isn’t growing at all, or if it is growing less than what prices are increasing (inflation), you are falling behind. For too many people this is happening with far too large a part of their portfolios because they are allocated to ‘target dated’ funds. These types of investments often look only at what the average person who is a particular age should have owned over the last 50+ years. The issue is that no one is the average person and what worked well 50 years ago is unlikely to work well today. The world is much more globalized now and most bond funds have recently lost a double digit amount in just the last few months due to interest rates rising rather than gaining value from interest rates falling like was the case for decades.
Relying on a dated investment approach to create a portfolio that would work well based on how things use to be long ago rather than how they are today doesn’t make a whole lot of sense, in our opinion. The good news is that since we are independent, The Retirement Team (a financial advisor located in Topeka, KS) has the ability in most cases to help people get professional management on their 401(k)s with no additional external fee that doesn’t have this problem. We only get paid some of the mutual fund fee that would have otherwise normally all gone to the 401(k) provider to get you set up with a portfolio that is customized to your specific needs and situation. Our clients appreciate that their money is being optimized for their goals and today’s investment environment rather than for the average person and many yesterdays ago investment environment like far too many ‘target dated’ funds do. If this is something that interests you give our office a call at 785-228-0222 to speak with an investment advisor that can assist you with this in Topeka today.
Material discussed is meant for general/informational purposes and is not intended to be used as the sole basis for any financial decisions, nor be construed as advice to meet your particular needs. Please consult a financial professional for further information.
(2)https://www.morningstar.com/articles/969531/more-portfolio-lessons-from-target-date-funds
(3)https://www.nickmurraynewsletters.com/members/login.cfm?hpage=TargetDate-Funds-Generating-LongTerm-Destitution-for-Increasing-Millions-of-Americans-While-Making-Compliance-Departments-Feel-Good.cfm
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