Target-Date Funds Tank

Portfolio managers said they were increasing equity holdings to better serve shareholders, who would need big capital gains to support long retirements. But the shifts looked suspiciously like performance chasing -- buying hot assets -- a practice many fund companies claim to avoid.

Are the target funds done experimenting with different asset allocations? Not a chance. Now that the equity-heavy funds have dropped in the performance standings, you can bet that some funds will be shifting to greater doses of fixed income. "Once the dust settles, people are going to look around, and the composition of some portfolios is going to change," says Jeff Tyler, portfolio manager of American Century LIVESTRONG.

The weak showing of target funds is particularly distressing for investors who just started using the funds in the past year. Following the urging of financial advisers, many 401(k) participants switched from boring fixed-income choices to equity-heavy target funds. If you are one of the unlucky shareholders, should you abandon target funds altogether? Not yet. With their broad diversification, many target funds seem like sensible choices for the long term. But nervous investors should pick conservative funds that can survive whatever downturns the market delivers.