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Not the March Madness We Expected

We truly are living in historic times and, from our family to yours, wish nothing but the best as everyone’s health and safety is all that matters right now. The Novel Coronavirus (COVID-19) has rapidly shut down our economy and put everyone’s health at risk. We recognize that the emergence and spread of the virus has created global uncertainty causing markets to react strongly, which can be unsettling for anyone.

Will McGough

By Will McGough on March 20, 2020



We truly are living in historic times and, from our family to yours, wish nothing but the best as everyone’s health and safety is all that matters right now.  The Novel Coronavirus (COVID-19)  has rapidly shut down our economy and put everyone’s health at risk.  We recognize that the emergence and spread of the virus has created global uncertainty causing markets to react strongly, which can be unsettling for anyone.

 

With this uncertainty in mind, let’s take a look at the most popular retirement investment vehicle, the Target Date Fund (TDF)

 

First, remember that TDFs follow a glide path, which is their prescribed asset allocation over time. The asset allocation is generally a mix of Equity and Fixed Income investments that become more conservative over time; i.e. more fixed income as the target year approaches.

 

Investors with long time horizon are typically invested in a 2050+ TDF, which based upon our research range in exposure from 70/30 (i.e. 70% equity, 30% Fixed Income) to 100% Equity.  Also remember, that most investors only have access to just  one target date series in their 401k plan.  The range of exposure is across the industry and includes basically, all the choices available to advisors and 401k plan sponsors.

 

Investors closer to retirement are in a TDF that has a vintage closer to today, for example 2020 funds.  These funds range in exposure from 10% equity and 90% fixed income all the way up to 60% equity and 40% fixed income.  This is where the industry disagrees most.  See our post Control Tower, Cleared to Land? for more information on this.

 

For the year, from 12/31/19 thru 3/16/20, using the MSCI World Index as an equity proxy and the Bloomberg Barclays U.S. Aggregate Bond Index as a fixed income proxy we have equities down 28.15% and fixed income up 3.25%.  If we apply this to the glide path exposures across the industry based on our research, we get the following results:


Chart Source: Stadion

 

The key on the right shows the return, best at 0.21% (basically 10% equity and 90% fixed income) to worst at -27.95% (basically 100% equity).  As you can see, the glide path asset allocation makes a difference.

 

If we switch our view to actual TDF Vintages, of which we have annotated a few of the key ones on the chart above (2020,2030,2040,2050,2060, and assumed Income at -8 glide path year), we can see the return dispersion over the same period across the industry.  Note that the vertical Y axis is now return instead of glide path equity and the horizontal X axis is now TDF vintage instead of glide path year.

 


Chart Source: Stadion

 

We have also included the S&P Target Date to Retirement Index as the black line.  Their indexing approach is very much a consensus based one, which tracks the average asset allocation of respective TDF Vintages.    All the “dots” represent TDF Vintages in their respective column.  Some insights:

  • 2050-2060 see almost down 30% as the max loss, with more conservative TDFs down between 22.5-25%, with a few outliers above
  • Income TDFs range from down 5% to about 15%, with a few outliers below.

 

As best said by Stadion’s own Brad Thompson:

 

We recently crossed the 11-year anniversary of the bull market that started on March 9th, 2009.  If you had invested in the S&P 500 on that day in 2009, your investment would still be up 409.25% on a total return basis despite the market declines we have experienced in the past three weeks. 10, 20, or even 30 years from now this market correction or whatever you want to call it will look like a bump in the road on market chart just like the many bumps we have traveled over the years. On March 9th, 2009, no one knew if the preceding bear market was over or not. No one rings a bell and says the bear market is over.

 

Bull and Bear markets can be tricky things.  Over our collective time saving for, and living in, retirement we should come to expect each  on average every 4 to 5 years (using data since 1929).  Most of us have the good fortune of having both hindsight and experience, in that we have witnessed major market corrections.  With history on our side, we stand confident that the United States, the markets, and the non-emotional investor will recover.

 

In closing we would encourage you to keep the proper long-term perspective, keep your short-term emotions in check, and realize that no matter what you are reading and hearing, the future is bright.

 

 

Will McGough

Author: Will McGough

Chief Investment Officer of Retirement Will McGough joined Stadion Money Management in 2003 and currently serves as Chief Investment Officer of Stadion’s Retirement investment strategies which comprises oversight of Stadion’s risk-based, target date, and managed account strategies. He is a member of the Investment Committee and Senior Management team, and serves as as Stadion’s Chief Investment Officer, Retirement. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Will received his BBA in Finance from the University of Georgia and also holds the Chartered Financial Analyst designation. Will is a member of the CFA Institute, the CFA Society of Atlanta, the American Association of Professional Technical Analysts, National Association of Active Investment Managers, the UGA Alumni Association and National Eagle Scout Association.

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Will McGough
Written By:

Will McGough

Chief Investment Officer of Retirement Will McGough joined Stadion Money Management in 2003 and currently serves as Chief Investment Officer of Stadion’s Retirement investment strategies which comprises oversight of Stadion’s risk-based, target date, and managed account strategies. He is a member of the Investment Committee and Senior Management team, and serves as as Stadion’s Chief Investment Officer, Retirement. He provides thought leadership for Stadion’s participant level, customized retirement solutions, in order to ensure that its glide path technology and asset allocation are able to support all intermediaries in the defined contribution ecosystem. Will received his BBA in Finance from the University of Georgia and also holds the Chartered Financial Analyst designation. Will is a member of the CFA Institute, the CFA Society of Atlanta, the American Association of Professional Technical Analysts, National Association of Active Investment Managers, the UGA Alumni Association and National Eagle Scout Association.


The MSCI World Index is an unmanaged free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

 

The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented

 

The S&P Target Date To Retirement Income Index is designed to represent a market consensus of asset class exposure and glide path across the universe of “to” target date fund managers. The index is designed to help defined contribution plan sponsors screen, select, and monitor appropriate target date funds.

 

There is no guarantee of the future performance of any Stadion account. Material has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Results based on available universe of Target Date Fund Series, which includes registered mutual funds, and non-registered collective investment funds and insurance accounts. Collective investment funds and insurance accounts are only available for investment to qualified retirement plan assets such as 401(k) plans. The commentary, analysis and opinions expressed are those of Stadion’s investment Team. The commentary, analysis and opinions referenced are as of the date of publication and are subject to change without notice. This material is for informational purposes only and should not be considered investment advice.

 

This is not a recommendation to buy or sell a particular security. The investment strategy or strategies discussed may not be suitable for all investors.

 

The opinions expressed are those of the Stadion Money Management, LLC (“Stadion”) Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed. This is not a recommendation to buy or sell a particular security. This material is for informational use only and should not be considered investment advice.

 

Investors must make their own decisions based on their specific investment objectives and financial circumstances. Stadion Money Management, LLC (“Stadion”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Stadion’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.

 

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