I’ve been getting a ton of question about why the Vanguard target date funds crashed as much as 14% on 12/29. Well, in short, they didn’t. It was really just a dividend payout being reflected in the share price. This video breaks down what happened and what it means to you….(read more)
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Vanguard Target Date Funds Just Crashed?!
When it comes to investing for retirement, many individuals turn to target date funds as a reliable and low-maintenance option. These funds are designed to adjust asset allocation as an investor approaches their target retirement date, aiming to decrease risk and maximize returns. However, recent market turbulence has left some Vanguard target date fund investors concerned, as these funds experienced a significant drop in value.
Vanguard, one of the largest and most trusted investment management companies, offers a range of target date funds that are popular among retirees and those planning for their golden years. These funds have enjoyed a relatively stable performance over the years, providing investors with a sense of security in uncertain times.
However, the sudden drop in stock markets around the globe due to the COVID-19 pandemic has taken its toll on Vanguard’s target date funds. Much like other equity-based investments, these funds have suffered losses in the wake of this unprecedented economic crisis. Investors who were relying on these funds to grow their nest eggs for retirement have experienced a sharp decline in their portfolio values.
The crash in Vanguard target date funds can be attributed to the overall market turmoil caused by the pandemic. As major economies went into lockdown and businesses came to a standstill, stock markets witnessed significant volatility. The sudden drop in demand, supply chain disruptions, and uncertainty regarding the recovery timeline all contributed to investor panic, resulting in a sell-off of equities. Consequently, even diversified portfolios like Vanguard target date funds were not immune to this market crash.
However, it’s important to understand that market fluctuations are a normal and expected part of investing. The primary purpose of target date funds is to provide investors with a diversified portfolio that automatically adjusts its allocation as retirement approaches. This means that as investors near their target retirement year, the fund becomes more conservative, shifting towards a higher allocation of bonds and cash, which are generally less volatile than stocks. While this strategy helps to mitigate risk, it does not guarantee protection against market downturns.
Investors in Vanguard target date funds must remember that the market will eventually recover. Historically, stock markets have rebounded after every downturn, and the same is expected in the case of COVID-19. Vanguard has a long-standing reputation for weathering market storms, and the company’s commitment to low-cost, passive investing remains strong.
For those who are concerned about the recent crash in Vanguard target date funds, it’s advisable to stay the course and resist making impulsive decisions based on short-term market fluctuations. Selling at the bottom of a market cycle can lock in permanent losses, while staying invested may provide an opportunity to benefit from the eventual recovery.
It is crucial for investors to reassess their overall financial goals, risk tolerance, and time horizon. If they believe that their target date fund is no longer aligned with their investment objectives, they may consider consulting with a financial advisor to reallocate their portfolio or explore alternative investment options.
In conclusion, while Vanguard target date funds have experienced a recent crash due to unprecedented market turbulence caused by the COVID-19 pandemic, it is essential for investors to remain calm and focused on long-term goals. Market downturns are a natural part of investing, and historical data suggests that the market will eventually recover. Ultimately, a well-diversified portfolio and a disciplined approach to investing will prove beneficial in the long run.
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You have 0 idea what you are talking about, as someone who works for Vanguard I can tell you that they used to have a 100mill investment for institutions, then they changed it to 5 million. After all the selling we had to do to relocate funds, it left a massive tax burden on any investor that wasn't in a government tax exempt fund. So people got pissed and sold off, but with the bond rate raising I'd expect it to be fully back in a few months.
I don't think the tax burden in taxable accounts is minimal. For example, let's say get get taxed on $100,000 in capital gains distribution at 20%. You will have to pay $20,000 in taxes.
In order to pay $20,000 in taxes, you will have to sell more shares in the mutual fund to cover the tax burden, and pay a capital gains tax on that profit next year. In essence, are you getting taxed twice? Once when the fund did a capital gains distribution and another time when you had to sell the fund?
This is my scenario now. Most of my savings are in this fund. Now I have a huge tax burden and the only way to pay it off is to sell more shares of the fund.
Do you hold this TDF on a taxable account?
same thing happened with the Vanguard Health Care fund I owned ! VGHCX ! It paid out a huge capital gains and Dividends and the its share price dropped dramatically. Thank you for the explanation.
The same thing happen on my 2025 fund with Trowe Price. On December 20th I received a huge dividend payout and the next day the price per share dropped almost 10 percent. It has really left a bad taste in my mouth.
Share price on all investments always drops by dividend amount on ex-dividend date…….
I really appreciate your explanation. I noticed the exact same thing in my retirement account and called Vanguard the next day for an explanation. The guy told me there were a lot of calls about this question. He answered pretty much with the same explanation that you gave.
Why would anyone invest in target date funds? they are terrible. Invest in index funds, snp 500 or VTSAX . Even Jack Bogle would not recommend them.
The lesson I learned here was to turn off my reinvest option. Vanguard did the distribution and then reinvested at the fund price before it went down. If my distribution was to cash, I could have bought in the next day at the lower price. Lesson learned!
I'm confused. Why should you come out equal after a dividend payment? Shouldn't we come out ahead? It's almost like being punished for the dividend. Individual stocks don't do this, do they?
Another thing…..my year end statement shows a capitol gains on a Roth I had a target date fund in and a traditional also. I didn't have the "reinvest" button clicked on the Roth. I'm not 59.5. I reinvested on 1/3 when the dividend showed up in my account. I hope they fix that to show I didn't take an early distribution.
I saw it happen. I have VTTHX. Also called. Thing is I had less than a year and it is yet to be seen if the dividend will be taxed as income. That is NOT what I wanted for sure.
I have a million in Betterment which uses Vanguard. Why am I not getting a $100,000 in capital gains reinvested each year? I’m only getting about $10,000 in dividends each year. If you’re getting $10,000 for $114,000, I should be getting 10X that amount on $1,000,000 balance.
What’s the difference between capital gain and dividend? You got a $10,000 Capital gain in a $114,000 balance? I have a million in Vanguard and my quarterly dividends range from $2500 to $5000. Did you sell something to get that $10,000 Capital gain??? I’ve never seen a dividend or Capital gain so high on such a low balance? How often is this paid and reinvested to you? Quarterly or annually?
I have several. None of them crashed.
My VIPSX is driving me crazy. Inflation is out of control, so inflation-protected securities seemed like a safe option. Right after I bought in, it dropped 2.5% in a couple of weeks. I’m thinking of selling off after 1/12 if the latest CPI report doesn’t pull it up.
And yesterday it dropped another .76% What a POS
Dividends aren't 11%.. this is Cap gain due to rebalance
Target date fund is not the “entire stock market”..
It’s a capital gain distribution fund turnover they sold stocks not the fund the target date funds have funds and those funds have stocks and the manager sold some to manage the portfolio or rebalance and the 45% unrealized if the market do good it will be realized also you are correct about the fund price but it can also be lower or higher first it will be lower by the distribution and dividends price amount then the market moment of the nav will take it up or low more so you $1 example the market price might less $ 1.15 or less $0.95 if the underline assets are up. But this common in mutual funds.
I did freak out after I saw the price on VTTHX downed 16%. Then I realized the total shares went up so I was relieved. Lol…
I received email notice for my working 401k plan. There is a merger for vanguard target date fund. All institution share class merged to investor share as institutions add to remove options frequently. That is a horrible news for the share holders in taxable account. All people holding vanguard target fund should sell it to avoid unpredictable taxable events in further. Just buy the underlying funds instead, it is cheaper and tax efficient.
Thats why you should not invest in Vanguard it losses money all the time!
Mutual funds are required to distribute any net capital gains and accrued income to its shareholders on, at least, an annual basis. .
your explanation is fine on a MF distribution. But why a target fund. Those are terrible. Have high fees as they are a fund of a fund. Also 2022 is going to be a terrible time to be in bonds, as the fed has basically broadcast that they are going to raise interest rates.
Investment 101. Basic stuff.
All funds do this every year – capital gain distributions and dividends will show up as a big drop one day with an equivalent gain the next day. After the second day, the account value will be unchanged.
Thanks for posting this.. I freaked out and looked at each index within the fund. and saw no big changes. .couldnt figure it out….. Very helpful explanation.
Do you have any comment about their upcoming merger of the investment and institutional shares of the target date funds? Maybe this big capital gain has something to do with preparing for that?
Wouldn’t this be taxed as a dividend since it’s a dividend payout? If yes, that’s taxed at earned income rate and not long term capital gains. (Asking about a taxable account, not a thrift account).