This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

'Target' Mutual Funds Prove Their Worth

Stocks in this article: MFSAX OTTAX FFFCX

NEW YORK ( TheStreet) -- When target-date mutual funds recorded big losses last year, shareholders complained bitterly and legislators called for increased regulation. Some financial advisers argued that target-date funds had failed altogether.

But lately the funds have stormed back. Many have demonstrated they can perform their mission, providing sound investments for retirement savers.

Each target-date fund is designed to serve people who will be retiring near a certain date, such as 2020 or 2030. The funds include diversified portfolios of stocks and bonds. As the retirement date approaches, the portfolios automatically become more conservative, shifting away from stocks and into bonds. The aim is to protect retirees from suffering sizable losses.

The broad diversification should help to stabilize the funds. But as the markets tanked in 2008, many funds lagged behind the S&P 500 Index. Critics contended that target-date portfolios suffered large losses because they were poorly designed.

In fact, much of the underperformance can be attributed to big stakes in foreign stocks. Target 2040 portfolios currently have 27% of assets in overseas stocks, and 2010 funds have 13% abroad, according to Morningstar. In 2008, foreign stocks trailed the U.S. While the S&P 500 lost 37% of its value for the year, European funds dropped 49%, and diversified emerging market funds declined 54%, according to Morningstar.

Is it a mistake for target funds to hold foreign stocks? Hardly. Foreign stocks have soared lately, outpacing the S&P 500. That explains why target 2040 funds have returned 30% this year, outdoing the S&P 500 by 5 percentage points. As recent results have demonstrated, investors should hold foreign stocks because they sometimes outperform Wall Street and provide diversification.

1 of 3

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs