If you recently retired or are close to retiring and you now have money in a goal-date fund designed for retirees, unfortunately.
So far this year, the “target” is you.
Morningstar tells me that the average “2020” target-debt fund has lost 11.6% of its value since the beginning of the year. This kind of portfolio loss is painful enough for young people who are still saving money for the golden years that are to come. But for someone who has just stopped working, and who is at the top of the savings list, this is no joke.
“While target-debt funds are a good, simple, one-stop-shopping solution for many investors, they can’t hide from what’s happening in the market,” explains Marie Adam, asset adviser at Boca Raton, Fla. Mercer Advisors. “Remember a target portfolio is a mix of stocks and bonds. “Unfortunately, so far in 2022, the stock market is down and the bond market is down.”
The immersion in the value of these funds is not because of their effectiveness but because of their basic strategy. These funds are usually transferred from “risky” stocks to “safe” bonds as you approach retirement. And this is generally understood, because bonds are generally safe. Uncle Sam will pay his bills, so if you own Treasury bonds you will get interest and principal. Blue-chip corporations usually do that.
The real problem? Simple when it comes to investing, It’s a matter of price.
Bonds became so expensive earlier this year that the 10-year Treasury note TMUBMUSD10Y,
Sported yield (interest rate) only 1.6%, 30-year Treasury bond TMUBMUSD30Y,
Yields only 2%, and all “inflation protected” Treasury bonds VAIPX,
There was, of course, a guarantee of losing purchasing power, no matter how long you had them.
Money managers will tell you that back in the 1920s, 10-year Treasury notes produced an “average” annual return of 5%. And they are right. Because those bonds have an average interest rate, well, about 5%.
How do you get 5% annual return from your bond when it has only 2% interest rate? You can’t Good luck trying.
Back in the 1920s, on average, you earned about 2.3% more than the inflation rate on 10-year Treasury notes. How can a bond offering 1.6% interest lose 2.3% inflation per year? Answer: Only if inflation is really negative, year after year – something that only happened during the Great Depression.
(And if that happens, however, good luck with your stocks.)
Treasury bonds have become so expensive that instead of offering the “risk-free return” that investors usually want, they are basically offering “return-free risk”. The interest rates were so much lower than the conventional rate of inflation that these bonds were going to cost you money in terms of actual purchasing power. Meanwhile, if the Federal Reserve decides to start raising interest rates, existing bonds are set to decline.
After all, who wants to lock in 1.6% interest for the next 10 years when the money market will now pay you 3% per year?
Not surprisingly, the US bond market index AGG,
Decreased by about 10%, 10 year Treasury note IEF,
11%, and supposedly super “safe” long-term treasury bond EDV,
About 30%. Even inflation-protected Treasury bonds TIP,
Decreased by about 7% on average.
The only surprise about this year’s bond route is that it took so long. Maybe in time the Fed will reverse the strategy and launch another round of “quantitative easing.” There again, maybe not.
Here’s the good news for those who are stuck in a target-debt fund: Open investment opportunities are better for retirees.
For example, this year’s bond route has raised interest rates. The 10-year note now yields about 3% and long-term treasuries yield more than 3%. (Bonds are like lead: prices rise when yields or interest rates rise, and vice versa.)
It is still depressing compared to inflation, currently running above 8%, but at least it is better than before. (And inflation by the bond market is expected to return sharply soon.)
LQD, better to look at investment-grade corporate bonds,
The average interest rate is close to 5%, according to the Federal Reserve.
Inflation-protected TIPS bonds now pay more than inflation. Long Term Tips Bond LTPZ,
Official inflation is guaranteed to lose 0.6% per annum for 30 years.
Perhaps the best news for retirees facing a crisis is that the annual rate, following the yield on corporate bonds, has jumped sharply so far this year.
Annuities are contracts issued by insurance companies that promise to pay you a certain amount each year until your death, whether tomorrow or by 2100. It is a difficult product for them as they try to reduce the maximum retirement income from their savings. The annual payout rate for a 70-year-old woman has increased by almost 10% in less than a year. They can still go higher কেউ no one knows কিন্তু but they’re worth a look.