Target Date
Don't Trade Tomorrow for Today
Target Date Investing Through Volatility
The coronavirus pandemic has unsettled markets and investors around the world. Through this time of uncertainty, our experienced target date team is staying grounded and focused on delivering successful retirement outcomes. Taking this long-term approach is critical, especially for investors in target date portfolios, which are meant to help prepare for and achieve an important long-term goal: a secure retirement.
Short-term focus comes at a high long-term price
Our target date strategic design and investment process have led to strong outcomes over the long term, inclusive of the impact of short-term market disruptions such as the 2008–2009 global financial crisis and the coronavirus pandemic. That success is predicated, in part, upon a balanced view of the myriad risk factors—both short and long term—impacting retirement investors. And while reducing volatility can potentially mitigate a short-term downside experience, it can also lead to lower expected returns over time and elevated longer-term risk to sustainable retirement income.
To illustrate this point, consider the experience of two plan participants who invested $100,000 within target date solutions in 2002 (Figure 1). The first participant invested in the T. Rowe Price Retirement 2020 Fund and the second in an investment designed to track the S&P Target Date 2020 Index. As of December 31, 2020, in the midst of the coronavirus pandemic, the participant invested in the T. Rowe Price Retirement 2020 Fund would have accumulated over $93,000 more.
(Fig. 1) Despite Recent and Historic Periods of Volatility, Our Approach Has Led to a Better Outcome
Following market downturns, a participant invested in the T. Rowe Price approach would have seen their balance fall from a higher peak. As the market recovered, the T. Rowe Price investor would have had over $93,000 more in the account.
Performance data quoted represents past performance and is not a reliable indicator of future performance. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. To obtain the most recent month-end performance, visit troweprice.com.
Source: S&P Dow Jones Indices LLC
The case for a consistent, long-term orientation to target date investing is further illustrated by a simple question with a powerful answer: Would you rather lose 10% of $1,000,000 or 5% of $900,000 (Figure 2)?
The math makes the answer clear. And that answer is broadly understood by plan sponsors, 60% of whom agree that the cost of mitigating downside risk and portfolio volatility is a reduced expected withdrawal amount (e.g., income) throughout retirement.
(Fig. 2) Putting Loss Into Perspective
For illustrative purposes only and does not represent the performance of any product.
The prudence of a long-term focus is also accentuated by the relative duration of bull and bear markets. Since 1958, the average monthly duration of bull markets is four times longer than that of bear markets (Figure 3). The average price appreciation of 148% for the S&P 500 Index during those bull markets also exceeds the average price depreciation of -31% for the S&P 500 Index during the applicable bear markets.
(Fig. 3) S&P 500 Cumulative Price Return in Bull and Bear Markets
