What constitutes a calendar year? By definition, it is the orbital period for the Earth around the sun, or approximately 365 days (or technically 365.25 days for any astronomers out there). In the investment world, a calendar year is, for better or worse, a time period that many default to when examining the performance of various asset classes and investment strategies. Not surprisingly, we feel a 365-day period is an unnecessarily abbreviated lens into the outcomes for American savers, who will, on average, accumulate their wealth over 40-plus years and then live off that portfolio for 20 years or more in retirement.

Another, perhaps shortsighted, tendency of some market participants is to view a wide landscape of investment strategies through the lens of the S&P 500 Index. While this is entirely appropriate when measuring the efficacy of a U.S. large-cap core equity strategy, its usefulness as a gauge of investment success quickly evaporates when the underlying portfolio holds assets outside of this relatively narrow slice of the global investment opportunity set. With this combination of relatively short performance measurement horizons and over-anchoring to the S&P 500, we believe it’s worthwhile to examine and unpack what exactly played out in calendar 2018 and tie that back to what truly matters for retirement investors over the long run.

In the exhibit below, we show the quarterly and full-year returns of the Target Retirement 2060 Fund (90% global stocks/10% global bonds), the Target Retirement Income Fund (30% global stocks/70% global bonds), the S&P 500 Index and, for good measure, the S&P 500 Information Technology Sector Index. This last addition is motivated by the fact that in 2018, the tech sector and, in particular, the largest handful of companies in the tech sector, were among the primary drivers of returns for the S&P 500 in the first nine months of the year and, not surprisingly, the largest detractors from its performance in the fourth quarter. At the end of 2018, the tech sector represented more than 20% of the S&P 500 (versus 8% in the FTSE Global All Cap ex-US), and Microsoft, Apple, Amazon, Alphabet (Class C and A), and Facebook represented six of the top ten holdings in the index.

Source: Standard & Poor’s, Vanguard. As of December 31, 2018.

As depicted above, the first quarter of 2018 was, on the whole, relatively muted for our Target Retirement Funds and the U.S. equity market overall. Beginning in the second quarter and then accelerating into the third quarter, we observe the performance of large-cap U.S. stocks—and particularly tech stocks—meaningfully break out in a positive direction. By design, our Target Retirement Funds participated in this pocket of market strength, but naturally to a more modest degree than an index that is purely U.S. large-cap equities, given our product’s extensive diversification across both global stock and bond markets. Holding non-U.S. equities was a performance headwind in 2018, as international markets underperformed.

These purposeful, long-term design decisions caused our Target Retirement Funds to appear to “lag” the S&P 500 during this particularly exuberant period for U.S. large cap stocks. Not surprisingly, this dynamic flipped in the fourth quarter, with well-diversified portfolios—including our Target Retirement Funds—demonstrating their ability to protect value in a sharply down equity market. This downside protection is somewhat hidden in the calendar 2018 returns of the Target Retirement Funds versus the S&P 500, as the return differential is largely driven by the very narrow market leadership of U.S. tech stocks in the second and third quarters of 2018.

While the tech sector has been a large driver of overall U.S. stock returns over the past few years, history tells us that this will not always be the case and that a prudent, well-diversified strategic asset allocation will—over the long run—protect investors from the most extreme ups and downs of the market in a way that it is not overly dependent upon skill or good luck. When we zoom out beyond 2018, we see that the Target Retirement Funds have executed against this principle over the 15-plus years they have been serving retirement investors.

Details on our Target Retirement Fund lineup including long-term returns and historical product performance can be located on the individual product pages.


  • Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.
  • All investing is subject to risk, including possible loss of principal.
  • Diversification does not ensure a profit or protect against a loss.