As interest rates continue to hover near their all-time lows, many people are beginning to wonder when rates will rise and how that might impact their investments.
These days, a lot of attention has been focused on how higher interest rates might affect bond investments. While we’ve covered this topic on our blog, we are increasingly being asked how rising rates may impact target date funds (TDFs).
It’s a good question, especially for investors nearing retirement who are wondering what a rising rate environment may mean for their TDF. But first, let’s look at what we’ve seen historically when it comes to TDFs and rising rates.
History says: When rates rose, so did stocks
Investors choose TDFs so that they can take advantage of long-term correlations, or relationships, between asset classes, which tend to move in certain ways together over time. T
Target dates include equities to provide diversification against bonds, and vice versa. History has shown that it’s rare to experience a rise in rates without a rise in equities. As the chart below illustrates, the returns for stocks in a rising rate environment have generally been attractive not only during the period when rates went up but also in the subsequent 12 months.