targetdate funds are the investment engines that power many americans’ 401k plans as they offer a cheap and easy way to make setitandforgetit decisions about retirement but last year’s steep losses in stocks and bonds showed they aren’t immune to poor performance—and highlighted a divide in the investing strategies that guide most of the funds there is no blanket approach among targetdate funds says megan pacholok a senior analyst at morningstar research services some firms including industry titan vanguard group stick with strategic asset allocation which involves setting target allocations across various asset classes and rebalancing regularly to stay close to the allocations through all market conditions others such as t rowe price group allow tactical changes to portfolios to respond to shortterm changes in market conditions targetdate funds are dull by design gradually adjusting the allocation of stocks and bonds to become more conservative as the fund approaches its target date typically the approximate year you expect to retire assets have ballooned in recent years but with no place to hide from the stock and bond losses last year total assets in targetdate funds fell to 282 trillion in 2022 from a record 327 in 2021 according to a recent report from morningstar the vanguard target retirement funds amassed the most net inflows in 2022 taking in more than 64 billion the world’s secondlargest asset manager with 77 trillion in assets under management is firmly in the strategic asset allocation camp last year it published a note saying the “evidence is clear” when it comes to strategic asset allocation brian wimmer head of multiasset solutions at vanguard says the strategic assetallocation committee is focused on setting up investors for success over many decades tactical asset allocation he says is akin to market timing “there’s a very high bar to make changes” he says—so high that vanguard has made only a handful of strategic allocation changes since launching the target retirement series in 2003 the most recent was in 2015 when vanguard boosted international allocations in stocks and bonds “changes tend to be infrequent and longterm oriented” wimmer says “they’re intended to take advantage of longterm returns that the equity and fixedincome markets will provide us and are not intended to exploit a shortterm perceived market movement or inefficiency as based on our experience and research that’s very very difficult to do” vanguard’s targetdate funds in other words are largely set in stone not so at rival money manager t rowe price the firm uses a strategic asset allocation as the baseline for its portfolios but teams can make tactical adjustments to reflect their shortterm views “tactical allocation is a lever that allows you to have someone with a hand on the steering wheel who has the ability to incorporate more nearterm views into the portfolio as markets evolve” says andrew jacobs van merlen portfolio comanager for targetdate strategies in t rowe’s multiasset division “a manager who is purely strategic is playing the long game and the long game results in 90 of the outcome” he adds “but you can do better than that by taking advantage of market dislocations” last year was one of best years from a tacticalallocation perspective he says “in 2022 bonds didn’t work and stocks didn’t work we went into cash and floatingrate loans because we didn’t like the risk on the equity side or the risk on the defensive side of the portfolio in bonds” market volatility is a good reminder to look closely at how your fund manages your retirement money don’t expect your targetdate fund to be nimble and make changes in response to market conditions