YTD Asset Class Performance Shows Shift From U.S. Stocks

Consequently, diversified target date funds are winning this year. Most TDFs are concentrated in U.S. stocks and bonds. Below, I use target date funds as a barometer of performance broken out by risk tolerance and investment horizon.

Diversification of Target Date Funds

As shown in the following graphic, most target date funds are concentrated in U.S. stocks and bonds. In contrast, Soteria — a family of glidepaths, with the conservative path following the SMART Index, which is broadly diversified and very conservative near the target date, with 70% in T-bills and intermediate TIPS — is broadly diversified into alternatives and TIPS, as well as the usual stocks and bonds. You need to think outside the U.S. stock box this year to include diversification into asset classes like gold and non-U.S. stocks.

Now What?

The markets are beginning to shift. U.S. stocks are becoming less attractive as they become even more expensive, and other asset classes like gold and foreign stocks have taken the lead this year. Several articles have documented the fact that the U.S. stock market is currently very expensive, potentially in a "bubble" that is likely to bust as it has in previous Minsky Moments. Your reaction to this bubble threat is driven by several factors that determine your risk tolerance, like your age, investment horizon, and your gut. It's much more than "Do I feel lucky today?"

Fear and greed are powerful motivators. Warren Buffet advises “to be fearful when others are greedy and to be greedy only when others are fearful.” Bubbles keep expanding when others are greedy. Young people with a long horizon can be greedy because they can ride out the next correction, but older people have a much shorter horizon and less risk capacity.

As I've written previously in articles like "Revenge of the Baby Boomers," older people near retirement should consider moving to safety while they are currently in the Retirement Risk Zone that spans the five years before and after retirement. That period is when they are exposed to the most sequence of return risk.

How are you reacting? Is there a bubble? Are you fearful or greedy?

Conclusion

The benefit of diversification is better risk-adjusted returns, but we usually see unadjusted returns. As a result, diversification appears to have been unrewarded in the previous 15 years. However, now we can see the benefit this year, even in unadjusted returns. And there’s more to this story than just diversification.

Buddha said, “Impermanence is eternal.” Investment markets are changing, and so far this year, the U.S. stock market has given up its dominance. This would not be interesting if it weren’t for the existence of the current bubble. That bubble is leaking, so be worried — especially if you’re a baby boomer.

Ron Surz is president of Target Date Solutions, developer of the patented Safe Landing Glide Path and Soteria personalized target date accounts. He is also co-host of the Baby Boomer Investing Show. Surz’s passion is helping his fellow baby boomers at this critical time in their lives when they are relying on their lifetime savings to support a retirement with dignity, so he wrote a book, “Baby Boomer Investing in the Perilous 2020s,” and he provides a financial educational curriculum.

For anyone who relies on TDFs — or advises those who do — Surz’s new book is a must-read guide to understanding the risks, solutions, and future of a secure retirement.

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