Target-Date Funds Tank

The funds aim to offer investors a simple solution, but shopping for the right choice is complicated. Some portfolios are much more aggressive than others. Conservative choices have big stakes in bonds and cash, while riskier portfolios invest heavily in foreign shares.

The asset allocation plays a big role in determining returns. Cautious funds fared best in the recent downturns. At the mild end of the spectrum is American Century LIVESTRONG 2015 (ARFAX Quote), which outdid the S&P in the third quarter, losing 6.54%, according to Morningstar. American Century had 50.3% of assets in fixed income, 39.5% in U.S. stocks, and only 9.6% in foreign stocks. At the other end of the risk spectrum is AllianceBernstein 2015 ( LTEAX Quote), which lost 12.11% in the quarter. The relatively aggressive fund had 26.8% in fixed income, 45.3% in U.S. stocks and 27.3% in foreign stocks.

Fund companies like to say that you can buy a target fund and forget about it. But shareholders need to keep an eye on their investments because the asset allocations can shift. When target funds began appearing early in this decade, many had heavy weightings in fixed income. Then stocks rallied in 2003 and delivered gains for five consecutive years.

Target funds with bigger stock allocations began outdoing their more cautious peers. After falling in the standings, some funds increased their stock allocations. By 2007, the average target fund had 68% of assets in equities, compared with 55% in 2002. Fund companies had increased equity allocations just in time to be clobbered by the downturn of 2008.