How target date funds manage volatility

BlackRock |Apr 9, 2020
Younger participants
With a longer time horizon, younger participants can afford greater exposure to the drawdown – as long as they remain invested and stay positioned for any market rebound.
Retirement age
A more conservative allocation and consistent growth exposure after retirement is intended to protect the long-term spending stability that retirees want.
Quality fixed income
High-quality fixed income exposure, with a lower correlation to equities, is a key component of managing volatility for older participants.

Working from home, still on the job

LifePath co-head Nick Nefouse reminds us that while the coronavirus and today’s work-from-home mandate are unprecedented, market volatility is not. In this brief video, he reports from his home office on how LifePath is designed to manage volatility across the glidepath.

  • Hi, I’m Nick Nefouse, co-head of LifePath.

    We wanted to bring this video to you from home, because I think a lot of us are working from home now given what’s going on in the country. I think about 90% of BlackRock is actually working from home. So, we figured this video would be best from our home office.

    The first thing I want to talk about is the unprecedented events that are happening around the world right now. While the events that are leading to this, the coronavirus, are unprecedented, market volatility is not unprecedented.

    If we think just over the last twenty years, we’ve had significant market volatility happen as early as a few years ago. In 2018, when we got a big sell off in the markets. We had 2015 and 2016 with the Chinese FX reserves. Go back to 2011 with the Greek debt crisis. A lot of people don’t even remember in 2010 the U.S. debt was downgraded. Then of course, the big financial crash in 2008.

    So, we certainly can’t predict pandemics around the world, but what we can predict is there’s going to be more bouts with volatility. That’s one thing that’s very important about LifePath. LifePath’s been around for almost 27 years now. So, there have been many periods of volatility. This goes into the philosophy of how we build our portfolios.

    So, when talk about the portfolios, we think about two things. We think about our young investors and we think about our older investors. For our younger investors, they’re heavily weighted in growth assets, 99% in growth assets. While in a market environment like this, that may sound scary, there’s two assets that our young investors have that other people don’t.

    The first one’s obviously a very long time horizon. People in their twenties now aren’t going to be retiring until the 2060, 2065 period. So, there’s a lot of time to make up any losses in the market. But more importantly than the time horizon is the savings rate. Individuals that are young now are going to be buying into a less, to a lower cost market. So that dollar cost averaging helps them over and over again.

    Now for our older investors it's very different. What we have to be worried about for our older investors is that there is not a long enough time horizon to make any losses, and there’s not enough savings. We have to protect our older investors differently. That’s one of the reasons why LifePath has a more conservative landing point at about 40% equities when you’re about 65 years old.

    So, for our younger investors it’s about staying in the market, continuing to save, and waiting. For our older investors, LifePath Retirement vintage has done a very good job protecting assets.

    Now if we move on to our asset allocation, one of the hallmarks of our asset allocation is our high-quality fixed income. People love to talk about why you shouldn’t be in high-quality fixed income in a bull market. But this is the time you should be very happy to be in high-quality fixed income. Because the point of fixed income is that it's supposed to protect you from your equities when your equity markets are down. High yield and emerging market debt has a high correlation to equities. It’s why we don’t own those.

    So, for our retirees, it's not only the glidepath, the more conservative glidepath, it's also the assets that you select within the portfolios. We want to make sure these are more conservative.

    From all of us at LifePath, we want to thank you for tuning in very quickly for this. We’ll try to bring you more videos like this as the days move forward. Good luck and be safe.