Target maturity funds take hit, too

Investors who bought a target maturity fund aimed at retirement in 2020 are probably wishing they had an extra decade. The average 2020 fund has fallen 26 percent this year through Wednesday, versus 31 percent for the Standard & Poor’s 500-stock index with dividends reinvested.

Clearly, a 26 percent tumble trumps a 31 percent fall. But target maturity funds were sold as a widely diversified alternative for investors who didn’t have the time or inclination to run their own portfolios. And funds aimed at those who plan to retire in 12 years clearly call for a diversified portfolio. People who bought target 2020 funds were probably hoping for somewhat greater protection on the downside than what they got.

What went wrong? Some funds positioned themselves too aggressively and got badly spanked. But even highly diversified funds have been clocked, making the melancholy point that sometimes, nearly everything falls at once.

In theory, target maturity funds are a good idea. The funds start their lives loaded with stocks, which typically have the best long-term returns. As the fund’s target date approaches, the manager shifts its assets into more sedate investments, such as bonds and money market securities.

The big difference between most target maturity funds is the so-called glide path – the rate at which the fund reduces its stock holdings and increases its positions in bonds and cash. A more aggressive fund will have a short glide path, keeping its stock holdings relatively high until the target date is nigh. A more conservative fund will start paring back its stock holdings relatively early.

Not surprisingly, many of the 2020 funds hit hardest had heaping helpings of stocks. Oppenheimer Transition 2020 fund, for example, had 61.5 percent in U.S. stocks and 20 percent in foreign stocks, for a total allocation of 81.5 percent in stocks. The fund plunged 34.5 percent this year through Wednesday.

You shouldn’t draw the conclusion from these funds’ poor performances that diversification is bad, or that you would be better off keeping your savings under the floorboards. Sometimes, bad markets happen to good people. But you should take a close look at target allocation funds – and, perhaps, split your retirement among two or three, just to be on the safe side.