Do Target Date Funds & Managed Asset Accounts Make Sense?
Welcome to the fourth quarter of 2020. Our L.O.R.D.S. strategy is up 18.08% for the year, outperforming the 3 markets by 9.45%. All Fidelity Freedom Target Date Funds, which are similar to Managed Asset Accounts, are up on average only 2.91%.
About The Ever Popular Target Date Funds & Managed Asset Accounts
Target Date Funds and Managed Asset Accounts attempt to provide security to investors by diversifying investments across different asset classes. This results in them underperforming the market during upswings and going down less during downturns. While this sounds good in theory, unfortunately for many investors it ends up providing low returns in the long run while being down on average 27% of the years. Whether you look at the 2008 financial crisis or the worldwide economic shutdown this year, this type of strategy provides the same type of result on a monthly and annual basis. Your account would have gone up less initially, dropped off less at the bottom and greatly underperformed during the recovery. To understand what this means, compare the securely allocated Fidelity Freedom 2005 Target Date Fund to our L.O.R.D.S. Strategy. For every $10,000 invested from 2008 through today, you would have made $33,400 more in our strategy than the target date fund. Compare our strategy and the target date fund for this year alone and you would have made $1,397 more for every $10,000 invested. This is why the average person when they retire only has $167,000 saved for their retirement–because of low returns.
Target Date Funds & Managed Asset Accounts – A Deeper Dive
Target Date Funds utilize an age-based diversification strategy that is commonly used in Managed Asset Accounts (MAA’s). The goal is to provide greater security by investing more heavily into bonds and cash as the investor nears their retirement date and thereafter. We will look at the funds offered by Fidelity Investments.
The 2008 Financial Crisis is referred to as the greatest financial crisis since the Great Depression. During that time period, the Fidelity Freedom 2005 target date fund should have been allocated securely for a person who has already retired 3 years previously. Assuming a similar strategy, we can use the asset allocation of Fidelity Freedom 2015 in November of 2019 as a comparison for Fidelity Freedom 2005’s allocation during the 2008 crisis. It was allocated 48% international and domestic stocks with 52% bonds and cash.
In 2008, the average of the 3 markets (Nasdaq, Dow Jones and S&P) dropped by 37.64%. Fidelity Freedom 2005 dropped by 24.45%. In 2008, Corporate and Treasury Bonds increased about 10%. If we take the average of the above 3 markets as a proxy for the equities and the average of Corporate and Treasury Bonds as a proxy for bonds and cash, then Fidelity Freedom 2005 should have dropped only about 14%, not 24.45%.
Furthermore, to only drop by approximately 13% less than the markets is not the type of stability that you want to see. We want greater security from a fund that takes the same 2 years to get back to positive after this crash that our mutual fund based L.O.R.D.S. strategy did. In addition, the Target Date Funds then are far outpaced in returns by 2020 by both the L.O.R.D.S. Strategy and the markets. It has been born out over the last 25 years that Target Date Funds have low returns (6.35%), high down years (27%) and very little security. In our analysis, Target Date Funds and MAA’s do not make sense or for that matter much cents.
Sincerely,
Samuel Schaeffer