Absolute Return IRAs Offer an Alternative to Target-Date Funds

absolute return IRA

While there are several investment options available for those saving for retirement, if you prefer more of a hands-off approach, your choices are bit more limited.

However, in response to an ever increasing desire for a “set it and forget it” method of investing, the industry came up with target-date funds as a solution…or so they thought.

In fact, they were so convinced of their effectiveness, they became the default allocation at enrollment. So if you planned to retire 20 years from now (2036), they’d enroll you in the “target 2036 fund”. Seems simple enough. As such, upon retirement or departure from the company, many felt it made so much sense they felt obligated to maintain these accounts as a sort of “autopilot” retirement option.
The thought was that by leaving it as is, the guesswork is removed from retirement savings by automatically having your asset mix adjusted by the fund from predominantly stocks to predominantly bonds as you age. By doing so, the hope was to reduce potential losses in your portfolio at the very point you need the money the most.

Target-date funds seemed like the perfect solution for passive investors saving for retirement. They could sit back and let the fund managers shift the assets for them. Everything was going along smoothly until the Great Recession. The problem: the fund architects assumed more bonds equals less risk…not so.

Imagine you’re just two years away from retiring and all of a sudden the bottom falls out of the market.
In 2009 Forbes magazine reported “…investors holding 2010 funds suffered losses of 40% in 2008.” Meaning, just 2 years from their “targeted” date for retirement, there was virtually no risk mitigation. Can you imagine having a nest egg of $500,000 and losing $200,000 of it right before you’re set to retire? That’s a lot of mortgage payments and cruises to Alaska. So much for a solution.

Thankfully…there’s an alternative that’s been used by institutions for decades.


Portfolio’s historically reserved for institutional investors like pension plans, foundations and large charities are designed to achieve favorable performance regardless of market conditions. These strategies are defined by a clear and simple philosophy – to protect you from severe losses in down markets, while providing quality participation in rising markets.

How do they do that?

First – they start with portfolios comprised of mutual funds and ETFs from some of the best and most well-known firms in the industry. Firms you already know, like, and trust.

Second – They then utilize market based quantitative algorithms to direct the portfolio’s movements in and out of these funds. These algorithms, designed to recognize and exploit positive or negative trends in the market, have had an impressive history of significantly reducing downside risk, while providing highly asymmetrical investment returns during negative markets. (Ex. 2000-02, 2007-09).

Rather than attempting to “time the market” when a negative trend has been established, the models will either exit the market and go to cash and treasuries to protect the portfolio, or go inverse to profit from the decline. A strategy that’s now much simpler to implement with the advent of inverse ETFs. Just as there are funds designed to profit when the market goes up, there are funds designed to do so when the market goes south. Unfortunately, most investors are unaware of these inverse options. Conversely, when the markets begin to recover, and a healthy trend has been established, the portfolio is then re-engaged in the market.

In short, they’re defensive in bad markets, yet opportunistic in good. While past performance is no guarantee of future results, those utilizing such strategies were able to side-step much of the last two market declines. Certainly compelling given our current markets.

While traditionally reserved for only the super wealthy…they are now available to everyone.

That said, while there has been a significant migration toward Absolute Return portfolios by individual investors over the past 15 years, they are still widely unknown to most.


While the standard “buy and hold” strategies employed by the majority of retail investment firms may have served you well while you where accumulating your assets, they can be anything but your friend once you’ve amassed your pot of gold….especially during negative markets.

Therefore, once you’ve accumulated your nest egg, you must – let me stress that again – you MUST employ tactical “Absolute Return” strategies similar to those utilized by large pension plans and university endowments. The reason for this – they have a long and confirmed track record of not only side-stepping severe losses in down markets, but have done so with 60-80 percent less risk and volatility than your current portfolio likely employs.

Given the increased volatility in the markets, this is vitally important for two reasons:

We don’t know when, or how deep the next decline will be
We don’t know how long the recovery will take

So if you have accumulated assets, and would rather not go through the pain and anguish of another 2000 – 2002 or 2007 – 2009…along with the time it took to recover from those losses…you owe it to yourself to learn more about this not so well-known option.

Seeking a Smoother Ride

While stocks and bonds realize growth over the long term, investors with accumulated assets approaching retirement don’t have the luxury of simply “riding it out.” For this reason, many are beginning to implement the same time-tested strategies traditionally reserved for institutional and high net worth individuals. The primary reason for this – absolute return managers have an audited and confirmed track record of favorable returns with a lower risk and volatility.

So, is an absolute return strategy right for you? Has your Target Date fund underperformed? If so, learn what charities like Carnegie Mellon and The American Cancer Society have known for decades. Contact your financial advisor to determine if an absolute return portfolio would be a welcome addition to your investment portfolio.

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