The Failure of Target Funds for Retirement:

Added: More discussion on the failures of target funds, and the reasons for them, can be found in later posts: Item #2:  Emerging Market Currencies and Bonds as Non-Correlated Asset Classes/Links to Performance Data on Target Funds & More on Their Many Failures

More on Failures of Standard Asset Allocation Models and Target Funds/Use of Volatility in an Asset Class to Make Adjustments to an Asset Allocation

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Sometimes, it is just necessary to admit that a model for asset allocation has failed.  You just have to stand back, take a hard look, and say that any asset allocation which produces a negative return over a 12 year period has failed as a model.  You would think that is an obvious point, but who is saying it other than me and a few other bloggers. 

This is a link to a chart for  the Fidelity Freedom 2010 target fund from April 1997 to the present.  Even for the early evening hour after a long day, somewhat close to an old geezer's bedtime, counting on the fingers of both hands, I come up with 12 years for this ugly chart. FIDELITY FREEDOM 2010 FUND Fund Chart - Yahoo! Finance  This would have been a fairly conservative choice twelve years ago, with a much larger bond allocation than a 2020 target fund which has about the same degree of ugliness to it. FIDELITY FREEDOM 2020 FUND Fund Chart - Yahoo! Finance

Part of the problem, besides the horrific stock performance, is the failure of the bond allocations for many of these funds to match the dumb Total Bond Market index.  In many cases, the bond funds have been positively correlated with stocks in a bear market when negative correlation would have been critical. 

 I do not want to limit my criticism to just Fidelity.  The same problem can be found wherever you go to find one of these funds. T ROWE PRICE RETIREMENT 2020- Yahoo! Finance

The Vanguard 2020 fund only has five years of data, but it is hardly reassuring either:VANGUARD TARGET RETIREMENT 2020 Fund Chart - Yahoo! Finance 

I made earlier a similar criticism of the Vanguard Asset Allocation fund, whose manager was boasting how well their asset allocation model had performed for the decade ending in October 2008, barely in line up to that time with the purchase of a ten year treasury.  Is that what these people call a successful asset allocation model, being 100% in stocks during 2008?  Wow, what can you say? VANGUARD ASSET ALLOCATION: IS VANGUARD PROUD? MORE ON VXD

A glide path type of allocation may work okay in a long term secular bull market for the major asset classes.  It would help if the bond mutual funds would not go down 25% in a year when stocks tank and the bond index is positive.   But, it is easy to see the problem.  The experts apparently want me to accept as a success an asset allocation formula that would leave me worse off after 12 years, with most dividends reinvested to buy shares that are also deeply under water.  So, just speaking for myself, and maybe I am becoming too ornery in old age, I am not inclined to call an asset allocation model that fails for 10 to 15 years a success, maybe I am just being ornery, but I just do not get it.  But, then, the Masters of Disaster at AIG's Financial Product Unit in London were rewarded with hundreds of millions of dollars for destroying the largest insurance company in the world, so maybe I just do not understand the meaning of success anymore.  Maybe in the Wall Street Newspeak, Success is just a form of miserable failure.