All asset classes except commodities lost money in the first half of 2022. US equities lost the most, falling more than 21%.
So how have your 401(k) investments fared? The answer to this question usually depends on your risk and diversification, but not this year unless you manage risk with cash.
Traditionally, risk has been controlled with bonds, which did not hedge this time, with US bonds losing 10% and foreign bonds losing 17.7%. Going forward, bonds will continue to lose money as the Fed rein in its ZIRP (Zero Interest Rate Policy).
The performance of target date funds (TDFs) provides a good barometer of what to expect, as shown in the following chart. Your losses can vary between 4.6% and 19.9%, a difference of 15%, depending on your investment horizon and how well you control (manage) risk.
Here is a breakdown of the results. The important message is that bonds do not protect.
- Industry is the S&P target date fund index composed of all TDFs. Most TDFs manage risk with bonds. At maturity (2020 funds in the graph) they are 50% in stocks and 35% in bonds, therefore 85% in risky assets, losing 13.6%, protecting themselves with a meager 5% against the loss of 18 .8% of 2060 funds.
- The Conservative, Moderate and Growth the funds are TDFs used by the National Retirement Savings Plan (NRSP) of the Office and Professional Workers International Union (OPEIU), one of the largest unions in the AFL-CIO. They manage the risk with a stable value. The Conservative fund is at 70% stable value at the 2020 target date. The 2020 Conservative fund lost 4.6%, protecting itself 14% against the 2060 fund’s 19% loss.
The Growth fund is made up of 30% stable stocks, against 35% industrial bonds. SIEPB’s 3 levels of risk have protected more than the industry in their 2020 funds.
The end of the ZIRP has only just begun because the Fed cannot continue the ZIRP and fight inflation. ZIRP requires the printing of money which causes inflation.
The Fed is trapped in the cycle shown below. Many say the Fed will abandon the fight against inflation because it hurts stock prices. That’s what happened in 2013’s “Taper Tantrum”.
What do you think the Fed will choose – fight inflation or refuel the stock market bubble? In his “Beast on Wall Street” book Dr Robert Haugen explains that the stock market crash of 1929 was the cause of the Great Depression, rather than a leading indicator. In other words, fears of a recession should focus on the US stock market.