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Until now, diversification beyond U.S. stocks hurt performance, because consistently the best place to be was all-in on U.S. stocks.
Retirement savers in target date funds (TDFs) didn’t realize it, but diversification was hurting them. That trend came to an abrupt halt. Will diversification continue to help?
The SMART TDF Index is normative — the way TDFs should be. SMART is available on Morningstar Direct. The Industry is represented by the S&P TDF Index, which is an aggregation of all TDFs and therefore a consensus index of how TDFs perform. Most TDFs are concentrated in U.S. stocks and bonds and are risky at their target date, so they do not defend against sequence-of-return risk.
TDF participants may see a benchmark in their performance reports, but it’s not the SMART index. If they did see SMART, they’d see that they have lost more than this benchmark. And it’s gotten worse so far in April. “Liberation Day,” April 2, launched extensive global tariffs that generated a U.S. stock market selloff.
More to Come. It’s Not Over
The current correction started in March with a 5.5% loss and has extended into April with its 8% loss as of April 4. The year-to-date loss in 2025 stands at 12%. Fear is currently moving the U.S. stock market. The first few days of April have been terrible, with the S&P 500 Index losing $5 Trillion.
There’s more to the recent stock market collapse than tariffs. We’ve been living in the longest U.S. equity bull market ever. It’s been great, but it has made the stock market very expensive. As a result, it’s due for a correction. As shown in the following, when P/Es have been near current levels, subsequent 10-year returns have been negative.
Howard Marks observes, "It should not come as a surprise that the return on an investment is significantly a function of the price paid for it.”
And of course, there are concerns about the consequences of new tariffs that started in April. The previous Smoot-Hawley tariffs worsened the effects of the Great Depression, but that was 95 years ago.
Is this time different? This recent setback might be just a hiccup, but there are reasons to think that a real crash (defined as a loss greater than 20%) is brewing. Importantly, those near retirement cannot afford to take sequence-of-return risk because it threatens their retirement lifestyle. As shown in the following, even before April, some prominent firms were forecasting more disappointment ahead.
Fear and greed drive the stock market. CNN Business reports that very extreme fear is the current mindset:
Conclusion
This may be the beginning of the long-awaited U.S. stock market crash, but even if it isn’t those near retirement need to protect themselves from sequence-of-return risk that can ruin the rest of their lives. Only a few TDFs provide this protection, but they all should. Most notably, in addition to my SMART TDF Index, the $850 billion Federal Thrift Savings Plan (TSP) and the $50 billion Retirement Plan Advisor Group’s (RPAG) low-risk flexPath also protect against Sequence of Return Risk.
There’s precedent for safety near retirement that was set at the June 2009 joint hearings of the SEC and DOL. But that was 16 years ago, so that is mostly forgotten — until now. It’s time to fix TDFs.
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.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
