Target Date Funds Control Markets

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401(k) retirement plans represent $65 billion of inflows into the market each month. In 2003 the 401(k) market saw the introduction of the target date fund. These funds are diversified portfolio’s based on retirement age. As you get closer to the retirement age the risk model is more conservative. Today $.85 of every dollar goes into a target date funds which often times is allocated to index funds. Since 2020 401(k) plans have seen a spike in allocation towards these target date funds causing a systematic allocation process that the target funds perform when new money comes in.

Who buy at the top of the market?

Ever since I’ve been in this investment business, I have heard many of the gurus say, just invested in index funds because most active managers cannot beat their assigned benchmark. Warren Buffett has famously said, invest in the S&P 500. This perception that has been adopted by the average investor which has accelerated the growth of target date funds. No matter what the market is doing, target date funds allocate new assets, and often times into companies or indexes, such as large-cap growth, which continuously sustains the upward movement in companies that we’ve seen recently such as Microsoft, Apple and Nvidia.

So, how do you predict the direction of market?

One of the areas to consider tracking is the unemployment report. Unemployment continues to stay lower and hasn’t gone much higher in the last 24 months. Employees contribute to the retirement plans when they feel they have job security. Yet if that job security disappears they will then start cutting back on their 401(k) contributions. Remember $60 billion plus a month goes into 401(k) plans. The majority of that money is now going into target date funds. The tables turn when the security of employee’s jobs goes away as well as seeing people getting laid off. That is not happening as of right now, that we can tell, which supports the idea that markets will continue to go higher, fueled by the influx of 401(k) contributions. Until the day that unemployment starts to rise it is most likely that the stock market will continue it’s bull run.

Change in Delivery Times. I’ve decide to start sending out this email in the evening. I am making this change because I’d like to sleep a little longer (HAHAHA!).

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