Young And Old Workers Need To Assess Their Risk Tolerance Now

Young And Old Workers Need To Assess Their Risk Tolerance Now


As the stock market has been and will continue to be volatile, and young workers who have all their retirement funds tied up in long-range TDFs (target-date funds) have been the hardest hit.

The average 25-yr-old fully invested in a Y 2060 TDF series saw a 10% decline in account value from the market’s recent high through last Monday’s close, close to the 11% decline of the S&P 500 over that frame.

Meanwhile, the average 65-yr-old set to retire this year and invested in a Y 2015 TDF series saw a 5% decline.

The experience of watching market value shrink is an eye-opener to new investors who might not have thought about their risk tolerance before, this market has not seen a correction since June 2012.

TGF’s are designed to adjust an investor’s risk as retirement age approaches, through what is called a glide path. The farther out the fund’s end date, the higher the stock allocation. Investors in 2060 funds have equity exposure ranging from 83 to 94%. In the Y 2015 funds, aimed at workers who will be retiring very soon, average equity exposure is 42%.

The popularity of these funds in retirement plans is growing.

Vanguard reports that 88% of the 401(k) plans it serves offered TDFs last year, + 17% from Y 2009. Four out of 10 plan participants are wholly invested in a single TDF, Vanguard says, and 64% of participants use them to some extent.

Many young workers are now automatically enrolled in 401(k) plans and put into a default allocation that typically is a target-date fund. For the most part, they do not have a choice.

On the Northside

For young and inexperienced investors, these funds seem to have handcuffed the worst investor behaviors, like frequent trading. Asset-weighted average investor returns in TDFs are 1.1 percentage points higher than the funds’ average total returns, according to a Morningstar study published earlier this year.

Sometimes, ignoring your investments can be a good thing, as a participant is less likely to pull out money out after it loses 10%, and then is still invested when the the market rebound.

The Big Q: How will younger auto-piloted investors – now experiencing their 1st wild market swings, meaning handle the volatility?

The industry is defaulting Millennials 90% into stocks without ever finding out what their tolerance for risk is, and this current volatility will lead to adverse outcomes for young investors.

The financial industry is taking people who do not need to be that aggressive and giving them more risk than they can tolerate.

Last week there was lots of selling out of TDF’s.

Aon Hewitt administers more than 500 defined-contribution plans covering more than 5.7-M workers in the United States. the firm reports that trading activity on last Monday was 7X the normal level, and it was one of the highest trading days on record, and 30% of last Monday’s selling came from TDFs, that equal to the share that came out of large US equity funds.

That tells me that people are looking at TDF’s the same as any other investment now.

Default investor options for 401(k) plans, which are regulated by the US Department of Labor under the Employee Retirement Income Security Act, are not limited to TDF’s. The Labor Department also allows balanced funds and managed funds, which give workers professional 1 on 1 portfolio guidance.

Managed accounts also give workers a human being to talk with when things get volatile, but only 3% of plan sponsors pick managed account services as a default option, according to the data.

TDF investors should assess their comfort with risk. If not comfortable with the risk, then consider shifting to a closer-date target series with less equity exposure.

Young people should pay close attention to this aspect of default investing and make the change when things are down 10 not 40%. Things can get worse, and that is when people make non-rational, emotional decisions.

HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Bearish (-0.31) Bearish (-0.47) Neutral (-0.23) Neutral (-0.22)
HeffX-LTN Analysis for DIA:  Overall Short Intermediate Long
Bearish (-0.38) Very Bearish (-0.59) Neutral (-0.19) Bearish (-0.38)
HeffX-LTN Analysis for QQQ:  Overall Short Intermediate Long
Bearish (-0.28) Neutral (-0.24) Bearish (-0.40) Neutral (-0.21)

It is your money, and your responsibility.

Stay tuned…


Paul Ebeling


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