Questioning Your Asset Allocation During a Sharp Market Downturn
Q: I have retirement money in the Vanguard Target Retirement 2015 Fund. Not surprisingly, as each day the market went down further, I wish I had moved it into something less volatile the day before, such as the Target Retirement Income fund, bonds, or even a money market fund. But I haven't. Should I be doing something different, given the prospect of millions of people unemployed and a major recession? I can probably survive without drawing on it, perhaps even until I am 72 (in five years), when requirement minimum distributions will begin. Also, would the answer change if the money were in, say, a 2040 fund - I have young friends in that position whose money has decreased dramatically?
A: The Vanguard Target Retirement 2015 fund is invested approximately 65 percent in bonds with 35 percent in global equities. It was down more than 13 percent at its low point (March 23rd, 2020) for the year after the steep sell-off on. As of March 31st, 2020, thanks to the stock market rebound of late, it is down just 7.5 percent now on the year. The fund has produced average annual returns of 6.0 percent over the past ten years ending 3/31/20 so the fund has done well for you over the long-term.
For someone your age – 67 years old – that’s not an aggressive fund. When evaluating funds for your retirement, remember that the short-term and day-to-day fluctuations aren’t what matters. That said, you chose this fund, which is mostly in bonds, over stock focused or all stock funds because those would be more volatile. Many all stock funds dropped over 30 percent during the recent Coronavirus pandemic induced decline.
As for a recession, the definition of that is at least two consecutive quarters of negative changes in economic output for the economy in question (in this case, the U.S.). Based upon the number of hard hit industries that have been most affected by asking many people to stay home - such as travel, restaurant, many retailers – yes, millions of workers have been let go, the unemployment rate will spike and the economy will be in a recession.
As for younger investors in more aggressive Vanguard Target funds such as the 2040 fund, that fund is invested about 82 percent in global stocks with the remaining 18 percent in bonds. Through March 31st, that fund was down 18.3 percent on the year. Over the 10-year period ending 3/31/20, this fund has produced average annualized returns of 7.2 percent per year.
Please keep in mind that these types of retirement funds are intended for investing for the longer-term – that is for the years and decades ahead. If you focus on the short-term – as in recent performance over weeks and months, you will inevitably see stock market corrections (10 percent or greater declines) as well as more severe downturns. Bonds don’t fluctuate in value like that and the significant bond holdings in your fund have greatly dampened the fund’s volatility but also somewhat reduced your long-term returns.