What did target date funds do in 2008 crash?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Posts: 7
Joined: Wed Apr 10, 2013 10:11 am

What did target date funds do in 2008 crash?

Post by daveh1983 » Sat Apr 13, 2013 9:46 pm

Reading about AA and re-balancing makes me wonder how target date funds handled the 2008 crash. These funds keep a certain AA depending on how far from retirement date you are.

From what I understand the Boglehead strategy would have been for those funds to keep buying more and more cheap stocks to preserve their desired ratio, even though the value of the fund shares itself would have been declining with it.

This would mean that passive investors who held onto these funds should have made quite a lot of money on this as the stocks rose back up and they started selling back into bonds for higher prices than they bought?

If this works out how I thought then I see now how powerful it is to maintain the AA through thick and thin.

User avatar
Posts: 2867
Joined: Sun Dec 09, 2007 7:12 am

Re: What did target date funds do in 2008 crash?

Post by G-Money » Sat Apr 13, 2013 9:57 pm

I don't know of any target date funds that changed course in the midst of the crash in 2008. So, yes, these funds would have kept to their designated pre-crash AA throughout. You can see how they performed by entering some target date fund tickers at Morningstar. You'll see graphs and tables showing exactly how these funds did in 2008 and each year thereafter.
Don't assume I know what I'm talking about.

Posts: 89
Joined: Fri Jan 20, 2012 11:56 am

Re: What did target date funds do in 2008 crash?

Post by johnkidding » Sat Apr 13, 2013 10:52 pm

The one thing I'm also curious about is because these funds rebalance DAILY, how does that affect performance compared to someone who rebalances say within 5% bands. Wouldn't this second investor get some kind of "momentum" bonus?

Please forgive my lack of understanding on this one... For some reason daily rebalancing is harder to wrap my head around than other more periodic schedules.

User avatar
Posts: 707
Joined: Wed Jan 23, 2013 2:04 am

Re: What did target date funds do in 2008 crash?

Post by Garco » Sat Apr 13, 2013 11:17 pm

I'm sure there are other analyses, but this paper appears to be informative: http://papers.ssrn.com/sol3/papers.cfm? ... id=1936012. Title: "The Global Financial Crisis and the Performance of Target-Date Funds in the United States"

User avatar
Posts: 3118
Joined: Thu Apr 26, 2012 10:16 pm

Re: What did target date funds do in 2008 crash?

Post by JamesSFO » Sat Apr 13, 2013 11:17 pm

Why not pick one and look at 2008 navs on yahoo, google or Morningstar? Many are close to 90% stock...

I think the constant rebalancing is a bit of a red herring here since they can often rebalance purely with new money/new contributions. I also would bet that some days they close unbalanced because they don't constantly sell stocks for bonds or vice versa. As with any indexing strategy there is some "secret sauce" so to speak in just how you prevent yourself from being yoyo'ed every second of the day especially as you get new capital.

User avatar
Advisory Board
Posts: 37048
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: What did target date funds do in 2008 crash?

Post by nisiprius » Sun Apr 14, 2013 7:17 am

They crashed.

I'm pretty sure it was all of 'em, every fund company, no exceptions, and I'm pretty sure each and every one of 'em crashed by an amount directly related to their stock allocation, by exactly the amount you'd expect. Since stocks crashed about -50%, take the stock allocation, divide by 2, and that's the crash amount you'd expect. Since for younger investors most of these funds had 80-90% stocks the expected crash amount would be a fall of 40-45%. (Now, perhaps you are someone who would panic at -50% but sleep soundly through a -40% drop, but not me...)

I'm pretty sure it's just as simple as that.

To explore for yourself, see http://www.bogleheads.org/wiki/How_to_u ... wth_charts and just try plotting a few, setting the starting date to 12/31/2007.

For example, consider someone who was 35 in 2008. I'm picking 35 because that's someone who was old enough to have had enough savings for a crash to really hurt, and old enough for the supposed de-risking of these funds to have started to take effect. I haven't look at this yet and I am not intentionally cherry-picking funds. I'm going to look at Vanguard, Fidelity, T. Rowe Price, and, let's see, what's one I've never looked at... does American Funds do target dates? And I'll use a target date of 2008 - 35 + 65 = 2038, round to 2040.


In those four funds, the one that fell the most dropped -48%. The one that dropped the least fell -44%. And Morningstar's "category average" fell -48%.

I also threw in Vanguard Total Stock Market Index Fund, which dropped an amount that rounds to -48%. Notice that although it did drop more than any of the target-date funds, you can't pick it out visually--it's all just part of one big smoosh.

No point, really, in trying to find out why American Funds dropped the least. I'll bet a nickel it was just because they had the most conservative allocation.

The big truth of the matter is that the stock market crashed to half its former value and most young 401(k) savers in target retirement funds saw the number printed in their statements roughly halve. The joke, "my 401(k) is now a 201(k)" was quantitatively correct.

The big points, which can't be nailed down and must be guessed at, are these.
  • What did the holders of these funds in 401(k) funds expect?
  • Did they believe that these funds would offer meaningful protection against a crash, due to their "professional management" and "diversification?"
  • If you'd said, "Is your retirement money in stocks," would they have said "almost entirely, yes," or would they have said "O no, certainly not, it's in a target retirement fund?"
  • Granted that the fund companies were surely careful to word what they said and said nothing inaccurate, did they nevertheless fell short of their responsibilities to educate their 401(k) participants and make sure they understood what they were buying?
  • Are these rhetorical questions?
My challenge: can you find a year-2040 retirement fund that fell so little in 2008-2009 that it would separate itself clearly from that pack--enough less that it would matter, psychologically, to someone hold it?
Last edited by nisiprius on Mon Apr 15, 2013 6:44 pm, edited 3 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
Posts: 5879
Joined: Tue Mar 06, 2007 11:21 pm
Location: Tennessee

Re: What did target date funds do in 2008 crash?

Post by bottlecap » Sun Apr 14, 2013 7:22 am

I don't think they rebalance daily.


User avatar
Posts: 4617
Joined: Sun Feb 25, 2007 8:55 pm
Location: Southern California

Re: What did target date funds do in 2008 crash?

Post by CABob » Sun Apr 14, 2013 3:34 pm

bottlecap wrote:I don't think they rebalance daily.

I'm not sure that daily rebalancing really describeswhat happens. My understanding is that the funds rebalance constantly but using the new contributions and withdrawals to the extent possible. This may in fact be pretty close to daily. I have also seen that a fund may have a small amount of cash in the account and the allocations may be off by a fraction of a percent at times.

Posts: 793
Joined: Wed Dec 02, 2009 8:34 pm
Location: Calabash NC

Re: What did target date funds do in 2008 crash?

Post by gwrvmd » Sun Apr 14, 2013 6:25 pm

Anothern point from the Nisipris graphs: T Rowe Price is the most aggressive (Highest % stocks) and if you look at the 2013 section of the graph, it is benefiting most from the 2013 stock advances....Gordon
Disciple of John Neff

Post Reply