Even target maturity funds have gotten spanked by bear market

— -- When people think of time travel, they usually want to journey back to 1977 so they can tell their sister to give that nice Billy Gates a break and go see Star Wars with him. These days, however, investors are probably hoping for a kind of Rip Van Winkle machine that will let them sleep a decade or so until their retirement savings recovers.

Investors who bought a target maturity fund aimed at retirement in 2020 sure could use an extra decade. The average 2020 fund has fallen 26% this year through Wednesday, vs. 31% for the Standard & Poor's 500-stock index with dividends reinvested.

Clearly, a 26% tumble trumps a 31% fall. But target maturity funds were sold as a widely diversified alternative for investors who didn't have the time or inclination to run their own portfolios. And funds aimed at those who plan to retire in 12 years clearly call for a diversified portfolio. People who bought target 2020 funds were probably hoping for somewhat greater protection on the downside than what they got.

What went wrong? Some funds positioned themselves too aggressively and got badly spanked. But even highly diversified funds have been clocked, making the melancholy point that sometimes, nearly everything falls at once.

In theory, target maturity funds are a good idea. The funds start their lives loaded with stocks, which typically have the best long-term returns. As the fund's target date approaches, the manager shifts its assets into more sedate investments, such as bonds and money market securities, which are less likely to have a big tumble.

The big difference between most target maturity funds is the so-called glide path — the rate at which the fund reduces its stock holdings and increases its positions in bonds and cash. A more aggressive fund will have a short glide path, keeping its stock holdings relatively high until the target date is nigh. A more conservative fund will start paring back its stock holdings relatively early in its life.

Not surprisingly, many of the 2020 funds hit hardest had heaping helpings of stocks. Oppenheimer Transition 2020 fund, for example, had 61.5% in U.S. stocks and 20% in foreign stocks, for a total allocation of 81.5% in stocks. The fund plunged 34.5% this year through Wednesday.

AllianceBernstein 2020 Retirement Strategy, down 32.4% for the year, had 79% of its assets in stocks. The fund had 30% of its holdings in foreign stocks — normally a good diversification move but not in this kidney stone of a market.

Foreign stocks, as measured by the Europe, Australasia and Far East Index, have plunged 37% this year. Normally, you add international stocks because they don't move in lockstep with the U.S. stock market. What people forget, however, is that overseas markets typically fall when the U.S. stock market does. When Wall Street suffers, it rarely suffers alone.

Furthermore, U.S. investors in international stocks suffered because the value of the U.S. dollar rose. If you have stocks valued at 10 million euros and the euro is worth $1.45, your holdings are worth $14.5 million. If the euro falls to $1.35, as it has, your holdings are suddenly worth $1 million less.

To be fair, nearly every classic diversification strategy has backfired this year. Consider bonds, which typically rise when stock prices fall. But the only type of bond that has fared well in this market has been Treasury bonds, which also have the lowest yields. A manager who put money into corporate bonds — or, worse yet, high-yield junk bonds — watched that part of his portfolio explode during the bear market.

Consider Fidelity Freedom 2020, a fund of funds. The fund had 3.6% of its assets in Fidelity High Yield Income, a junk-bond fund, and another 3.6% in Fidelity Capital and Income, another high-income fund. The Freedom 2020 fund plunged 33.3% this year through Wednesday.

You shouldn't draw the conclusion from these funds' poor performances that diversification is bad, or that you would be better off keeping your savings under the floorboards. Sometimes, bad markets happen to good people. But you should take a close look at target allocation funds — and, perhaps, split your retirement among two or three, just to be on the safe side.

John Waggoner is a personal finance columnist for USA TODAY and author of 'Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments,' available Monday from John Wiley & Sons publishers. His Investing column appears Fridays. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com.