Perspectives : Investment | April 16, 2025

Are Vanguard target-date funds equipped to weather market volatility?

Investors have encountered significant market volatility in recent weeks, particularly within U.S. equity markets. This volatility stands in stark contrast to the previous upward trajectory of U.S. stocks, which saw returns greater than 20% for five of the last six years.
From a performance standpoint, we never like to see negative returns. But we also recognize that over a full investment life cycle, there will be periods of market turbulence. Vanguard Target Retirement Funds are built to minimize surprises during these occurrences and typically perform in alignment with their respective asset allocations. For example, Figure 1 compares the relative performance of Vanguard Target Retirement Income Fund with that of two benchmarks: the Morningstar Target-Date Income Average and the S&P 500 Index during five distinct periods of market volatility. During these severe market downturns, Vanguard fared better than the peer average, providing better risk mitigation when investors need it most.
Figure 1. Designed for strong performance while limiting the impact of market volatility
Average annual total returns as of March 31, 2025, and provided by Vanguard.
Sources: Vanguard and Morningstar, Inc. Data are as of month-end through month-end for each relevant period. 
Note: The Morningstar Target-Date Income Average aggregates the performance of all target-date income funds that Morningstar tracks and is a benchmark used to evaluate that performance. The S&P 500 Index is a market-capitalization-weighted index that tracks the performance of the 500 leading companies listed on the U.S. stock exchange.
The performance data shown represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so investors' shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. Visit our website at institutional.vanguard.com/performance for the most recent Vanguard investment performance. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Recent market turmoil is exposing weaknesses in some of the asset classes commonly used in target-date funds (TDFs) but also underscores the benefits of a simple, diversified portfolio. This is reassuring for both plan sponsors and participants.

At Vanguard, navigating bouts of market volatility is nothing new for us, and we even developed a term for it: Vanguard weather. These are periods of financial turbulence when Vanguard’s disciplined, low-cost, long-term approach can serve investors well. During past periods of Vanguard weather:

  • Vanguard’s diversification strategy helped limit downside volatility.
  • Our portfolio managers maintained targeted TDF asset allocations despite volatility.
  • Investors stayed the course and stuck to their long-term retirement plans.

Reliable performance helps investors stay the course

Saving for retirement is like a marathon for TDF investors who are in the accumulation stage, with many years to still grow their assets. In difficult market environments, which we saw in 2008 and more recently in 2020 and 2022, watching declining balances can be stressful. However, investors are best served when TDFs seek to avoid extremes in their returns and focus on consistency instead. Because the chances of positive returns improve with longer holding periods, some exposure to risky assets is needed to provide retirement investors with sufficient growth. 
Figure 2. TDF adoption can reduce portfolio trading
Sources: How America Saves 2013. Vanguard; How America Saves 2024. Vanguard. 

In-line performance expectations have contributed to Target Retirement Fund investors staying the course. According to Vanguard research, TDF investors tend to have significantly less dispersion in outcomes and a more consistent risk-return experience with their retirement savings.1 Figure 2 illustrates our analysis of investor trading behaviors during five different periods of market volatility. We found that only 4% and 2% of investors in single TDFs traded throughout 2020 and 2022, respectively.

Knowing what to expect can help investors avoid behavioral errors, such as panic selling at an inopportune time. In our view, it is best to remain committed to a multiasset, diversified retirement game plan.

Vanguard’s approach to global diversification

Vanguard Target Retirement Funds emphasize global diversification. Our international equity exposure remains in line with global market capitalization and higher than other competitors’ allocations to these securities.2 Each fund's equity allocation is designed to offer long-term growth potential, while the fixed income allocation can help provide stability and downside protection. The underlying components of these funds offer high-quality, broad exposure to both global equity and fixed income markets, working together to effectively diversify and balance the various risks investors face over their investment life cycle.

Plan sponsors can fulfill their fiduciary duties by ensuring that an asset manager's diversification strategies meet their intended goals, particularly as TDFs become a larger part of overall plan assets.

Vanguard Target Retirement Funds’ allocations maintain their target

During periods of heightened volatility, the frequency of rebalancing a TDF and its benchmark can affect how closely a TDF maintains its asset allocation. In 2020 and 2022, the equity and fixed income markets experienced unprecedented intraday valuation swings, presenting significant challenges. The goal of Vanguard’s TDF rebalancing policy is to provide our investors with the best long-term investment outcomes. Therefore, our approach to rebalancing seeks to strike a balance between transaction costs, which are a drag on absolute performance and erode returns, and alignment with the funds’ strategic asset allocation targets.

Vanguard's asset allocations are designed for long-term horizons, which include periods of market uncertainty. Since more than 90% of a portfolio’s long-term return variability is driven by its strategic asset allocation, significant deviations can harm risk-adjusted returns.3 Vanguard's disciplined and sensible approach to rebalancing ensures that investors can have confidence in their retirement plans, knowing that the asset mixes will remain consistent based on their age and planned retirement date.

Looking ahead

Since their inception in 2003, Vanguard Target Retirement Funds have weathered multiple market downturns, performing as designed by reducing downside risk across the glide path. Our TDF investors have historically remained committed to their long-term plans, even amid volatility. In 2022, we were encouraged to see those individuals saving for retirement largely stayed the course, with only 2.3% of Vanguard TDF investors making an exchange that year. We remain vigilant and ready to guide our investors through future market challenges to help them achieve retirement readiness.

This latest front of Vanguard weather provides a valuable opportunity for plan sponsors to evaluate their TDF providers, ensuring they meet the high expectations of the tens of millions of investors who rely on TDFs for a growing portion of their retirement savings. 

Sources:

1 How America Saves 2024. Vanguard.

2 Morningstar data, based on most recent holdings disclosure for each fund included in the calculation. As-of dates may vary depending on the timing and frequency of data made available to Morningstar. Data as of March 31, 2025. Global market capitalization calculated using FTSE All Country Equity Index and Bloomberg Barclays Global Aggregate Bond Index.

3 Gary P. Brinson, Randolph Hood, and Gilbert L. Beebower. Determinants of Portfolio Performance.  Financial Analysts Journal, 1986. 42(4), 39–44. DOI: 10.2469/faj.v42.n4.39

Notes:

  • For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
  • Investments in Target Retirement Funds and Trusts are subject to the risks of their underlying funds. The year in the fund or trust name refers to the approximate year (the target date) when an investor in the fund or trust would retire and leave the workforce. The fund/trust will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The Income Trust/Fund and Income and Growth Trust have fixed investment allocations and are designed for investors who are already retired. An investment in a Target Retirement Fund or Trust is not guaranteed at any time, including on or after the target date.
  • Vanguard Target Retirement Trusts are not mutual funds. They are collective trusts available only to tax-qualified plans and their eligible participants. Investment objectives, risks, charges, expenses, and other important information should be considered carefully before investing. The collective trust mandates are managed by Vanguard Fiduciary Trust Company, a wholly owned subsidiary of The Vanguard Group, Inc.
  • All investing is subject to risk, including the possible loss of the money you invest. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss. Past performance is no guarantee of future results. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Investments in bonds are subject to interest rate, credit, and inflation risk.