Bonds, on the other hand, are only happy when it rains. A bond, like a bank CD, pays a fixed rate of interest to its owner. When interest rates rise, investors spurn older bonds with lower interest rates, and the bond falls in value. Typically, a mix of stocks and bonds produces a less volatile ride over time, with smaller gains than stock funds, but smaller losses, too.
But “typically” doesn’t mean “always,” and rising interest rates in 2022 clawed stocks and bonds almost equally. As stock funds registered double-digit losses, bond funds did, too. Large funds that invest in a diversified array of bonds have fallen 15 percent this year, according to Morningstar. Some funds invested in higher-yielding long-term bonds, which also fall hardest when interest rates rise.
Even Treasury Inflation-Protected Securities, or TIPS, have fared poorly. Although TIPS have inflation protection, they are still bonds, vulnerable to rising interest rates. Typical TIPS funds are down about 12 percent this year, according to Morningstar.
What to watch for
Different target-date funds take different approaches to investing, and you should know how those approaches affect investment returns.
To vs. through. In industry parlance, a target-date fund’s gradual shift from stocks to bonds is called its glide path. Some funds’ glide path takes them to a bond-heavy portfolio at the target retirement date, and the fund’s portfolio doesn’t change much after that.
Other funds, however, have a longer glide path, because at 65, you could still have 20 years or more of life in retirement — and in that time period, you need some stocks to keep returns high. These funds might not reach their most conservative point until many years after the target date. It’s likely that “through” funds with heavier stock holdings fared worse in 2022 than their “to” cousins. By and large, you should expect more volatility in a “through” fund than a “to” fund.