Monday, September 22, 2014

Retirement Funds Are Loading Up on Stocks Again (BusinessWeek)


Americans got a cruel shock in 2008 when the stock market fell, blowing a big hole in their retirement savings. It made people realize that having lots of stock right before they retire may not be such a good idea. But now portfolios have recovered, memories have faded, and soon-to-be retirees are embracing stocks again.
The move to stocks is not driven by performance-chasing investors—at least, not the ones you’d think. Target-date funds, the premixed portfolios that are managed according to an anticipated retirement year, account for about 20 percent of retirement plan assets, and fund managers are shifting investors out of bonds.
Overall, the mix of stocks and bonds in a target-date fund favors stocks for investors with years of future earnings ahead of them, then gradually increases the allocation to bonds as the target date gets closer. But there’s no consensus on exactly what the debt/equity split should be when people near retirement. The lack of clarity probably explains why fund providers keep changing their minds. The figure below,based on calculations (PDF) by investment research company Morningstar(MORN), shows how much the most popular family of target-date funds, the Fidelity Freedom Funds, has altered its allocation over the years.
 

In 2002, following the stock market bubble, the fund for someone five years from retirement was about 34 percent stocks. By 2006 it held about about 53 percent. In 2010 it had fallen again, to 48 percent. Today, Fidelity would put someone five years from retirement into a fund that’s 62 percent equities. Other companies, including Pacific Investment Management (Pimco) and J.P. Morgan Asset Management(JPM), are boosting the equity allocations in their target-date funds.
This latest rebalancing seems to be prompted by fears that bond prices are due to fall once the Fed raises interest rates. Equities might be more volatile, but they seem like a better bet right now. At the same time, no one really knows what’s going to happen. Others are forecasting an alternative scenario in which bond prices will stay high and stocks are overpriced. The disagreement—and the last 10 years—illustrates exactly why chasing market returns is a bad idea. If investors had stuck with the conservative 2002 strategy, they would’ve been spared big losses in 2008. If they had kept the more aggressive strategy from 2006 on, they would’ve seen bigger gains during the recovery.
From a long-term investor’s perspective the stock market is always risky and can fall at any moment. Five years of high returns doesn’t mean the stock or bond market is any more or less risky than it was in 2009. A target data allocation is supposed to achieve a well-balanced portfolio, not time the market.
There might be good reasons to change the allocations. If people are living longer and delaying retirement, increasing equity exposure for 60-year-olds is a sensible strategy. But basing it on market expectations defies tried-and-true investment advice. The target-date fund managers claim market forecasts are only part of the reason they’re shifting toward equity. They also cite increased risk tolerance. Unfortunately, most investors aren’t any better at timing when to worry about risk.

Schrager is an economist and writer in New York City. Follow her on Twitter: @AllisonSchrager.

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