Retirees and near-retirees probably don’t know it, but target-date funds are turning them into contrarians.
Until recently, TDFs’ possible market impact wasn’t even potentially an issue. Less than $8 billion was invested in TDFs and similar funds in 2000, for example. But today there is an estimated $5 trillion invested in TDFs, and they are now the 800-pound gorilla of the retirement investment world. A new study finds that they are having profound impacts on the behavior of the overall market.
The researchers estimate that, by buying stocks during that waterfall decline, TDFs offset 19% of the outflows from equity funds. They further estimate that this offset reduced the magnitude of the market’s decline by about a tenth. This may strike you as an unambiguously Good Thing, of course, but don’t forget that just the reverse will be the case when the stock market shoots up.