Vanguard Target Retirement Funds?

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Vanguard Target Retirement Funds?

Postby DMoney » Thu Jul 25, 2013 3:42 pm

I was hoping to solicit any opinions of the Vanguard Target Retirement Funds (for my 401k). They invest in 4 funds: domestic and international stock index funds and domestic and international bond index funds. It is very similar to the "3-fund portfolio" that is often championed on this forum, and very similar to what I would likely invest in on my own. The 2045 fund (my target retirement fund) is 90% equity, 10% bonds. Ideally I was thinking more of 80% equity, 20% bonds but I do have a long investing horizon (30 years). As I see it...

Upsides: Exposure to international bonds, low expense ratio (0.18%), low maintenance.
Downsides: Cannot control allocation %, no exposure to REITs.

Any ideas?

Thanks.
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Re: Vanguard Target Retirement Funds?

Postby TylerS » Thu Jul 25, 2013 4:16 pm

These funds are great. If you'd like to be at 80/20, just pick a different "target" year that matches the allocation you want. Down the road, if it slides towards bonds too quickly, you can move to a different target year.

Hope this helps.
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Re: Vanguard Target Retirement Funds?

Postby TomatoTomahto » Thu Jul 25, 2013 4:46 pm

I've personally never missed REITs, but if it really bothers you, set aside a percentage for whatever REIT fund exists in your 401k. Don't worry about AA to the precise percentage; results don't dramatically change on a percent or two.
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Re: Vanguard Target Retirement Funds?

Postby SeattleCPA » Thu Jul 25, 2013 4:59 pm

I love them.

BTW, a few weeks ago--and I share this because I think it might be interesting to all bogleheads--Mel Lindauer contacted me via message because a WSJ reporter had contacted him about my defense of target retirement funds in a bogleheads forum.

When I ended up talking with reporter, who was very nice and who obviously participates or at least lurks here, I tried to make the point I think target retirement funds are good because (a) they're so easy given you don't have to do work of, e.g., rebalancing and because (b) they'll work even when you are or I am old and maybe a little less capable... or maybe for our spouses or partners if we predecease them and we've been the family's chief investment officer.
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Re: Vanguard Target Retirement Funds?

Postby Taylor Larimore » Thu Jul 25, 2013 5:10 pm

DMoney:

Welcome to the Bogleheads forum!

You are fortunate to have Vanguard's Target Funds in your 401K. Morningstar ranks them among the best of all target funds. As Tyler said, don't pick the Target fund based on the fund's retirement date. Pick the target fund with the stock/bond allocation that suits you.

Don't worry about over-weighting REITs. Total Stock Market Index Fund (in the target funds) holds the market weight in REITs. I figure the Vanguard experts know more than I do about their target fund compositions.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Vanguard Target Retirement Funds?

Postby dbr » Thu Jul 25, 2013 5:59 pm

For investments entirely within a 401K TR funds can work very well. They do not work any better than certain other possible combinations of funds can work.

I think TR funds are prone to misunderstanding because people confuse the date in the fund name with investment advice, and that is not good at all. It is also necessary to understand the glide path by which the funds change asset allocation over time. This can also be confused with investment advice that the investor should be considering explicitly. Vanguard has arbitrarily changed the asset allocation in these funds in the past. That again constitutes implementing investment advice with a possibility of the investor not clearly understanding the consequences.

It is also true that investors advising themselves could certainly arrive at worse advice.

There is an alternative in lifestyle funds that do not change allocation over time. I don't know if your 401K has access to a family of such.
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Re: Vanguard Target Retirement Funds?

Postby FNK » Thu Jul 25, 2013 6:28 pm

Here are the scenarios where TR funds shine brightest:

1) Your portfolio is small. Rebalancing a small portfolio is working below minimum wage. You should start with a TR fund and split it into components (if you really want to) once you get to $50-100K.

2) Your entire retirement portfolio is in tax-advantaged accounts. Tax optimization comes into play once you start taxable investing.

3) You don't want to learn all this stuff. Fire and forget. This presumes you're not going to add other funds to the mix.

4) You know this stuff but your heirs don't so you want to leave them foolproof guidance just in case. Step up in basis, convert everything to TR, move on.
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Re: Vanguard Target Retirement Funds?

Postby aquifer » Fri Jul 26, 2013 1:51 pm

I have all of my 401k money in Vanguard's TR 2035 fund. I have been very pleased with my choice so far. That being said, you have to be ready for Vanguard to occasionally adjust the allocation of their TR funds. Most recently it was the addition of the international bond fund. After studying the change for a while I concluded that I would accept the addition and not make any changes. There may be a time when I am not comfortable with a change that Vanguard makes to the TR funds but I'll cross that bridge when I get there. That's my $.02 on the subject.
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Re: Vanguard Target Retirement Funds?

Postby Iorek » Fri Jul 26, 2013 1:57 pm

FNK wrote:Here are the scenarios where TR funds shine brightest:

1) Your portfolio is small. Rebalancing a small portfolio is working below minimum wage. You should start with a TR fund and split it into components (if you really want to) once you get to $50-100K.

2) Your entire retirement portfolio is in tax-advantaged accounts. Tax optimization comes into play once you start taxable investing.

3) You don't want to learn all this stuff. Fire and forget. This presumes you're not going to add other funds to the mix.

4) You know this stuff but your heirs don't so you want to leave them foolproof guidance just in case. Step up in basis, convert everything to TR, move on.


And--

5) You are not sure you have the discipline (or time or inclination...) to maintain your preferred asset allocation, including a reduction in your equity allocation as you age (according to whatever glidepath you may have selected).

Some people have the attitude that lifecycle funds are for "dummies" but I think they can also be tools to avoid behavioral problems than can reduce longterm returns. Sometimes realizing you might do a dumb thing is the smartest thing you can do.
Last edited by Iorek on Fri Jul 26, 2013 2:01 pm, edited 1 time in total.
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Re: Vanguard Target Retirement Funds?

Postby Taylor Larimore » Fri Jul 26, 2013 1:58 pm

DMoney:

Morningstar recently did a 69 page study of various Target-Date Funds. Vanguard and T.Rowe Price were given their top "Gold" award for overall performance.

viewtopic.php?f=10&t=120442&newpost=1760060

Best wishes.
Taylor
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Re: Vanguard Target Retirement Funds?

Postby Gviper » Sat Jul 27, 2013 10:51 am

Is there any advantages to the 3 fund portfolio vs. a Target Retirement fund that matched your desired allocation?
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Re: Vanguard Target Retirement Funds?

Postby dbr » Sat Jul 27, 2013 11:04 am

Gviper wrote:Is there any advantages to the 3 fund portfolio vs. a Target Retirement fund that matched your desired allocation?


1. A three fund portfolio is more tax efficient if in a taxable account, at least if one has both taxable and tax deferred accounts. Even in a taxable account flexibility to tax loss harvest and drill down to specific tax lots of specific asset classes would be helpful.

2. A TR fund automatically follows a glide path. If one does not want that glide-path then it is an advantage to use separate funds. There are also life strategy funds that do not follow a glide path. The final step in TR, the Target Retirement Income Fund, does not continue to adjust the asset allocation.

3. Vanguard and other companies have shown a tendency to change the composition of the TR funds with little fanfare. That may be an advantage or it may be an advantage for the investor to have increased awareness by making any changes explicitly himself.

4. I think that an explicitly three (or any) fund portfolio is better for the investor to understand exactly what he has. To the extent TR funds are no-brainers, they are also thoughtless from the point of view of the investor. I am not sure that is a good thing.

5. Three fund portfolios may be slightly cheaper. I think there are some complaints about the lack of Admiral shares for TR funds. However, this is already in an area of diminishing benefit.

6. It is probably easier and more straightforward to vary the asset selection if an all in one fund is not the core fund. For example, one might prefer a larger position in TIPS in the bond allocation, or other choices (yes that gets away from the basic three fund concept). The counter argument is that being in a TR fund removes any temptation to try to be fancy.
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Re: Vanguard Target Retirement Funds?

Postby Gort » Sat Jul 27, 2013 1:31 pm

Iorek wrote:
FNK wrote:Here are the scenarios where TR funds shine brightest:


5) You are not sure you have the discipline (or time or inclination...) to maintain your preferred asset allocation, including a reduction in your equity allocation as you age (according to whatever glidepath you may have selected).

Some people have the attitude that lifecycle funds are for "dummies" but I think they can also be tools to avoid behavioral problems than can reduce longterm returns. Sometimes realizing you might do a dumb thing is the smartest thing you can do.


Well said!
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Re: Vanguard Target Retirement Funds?

Postby Gviper » Sat Jul 27, 2013 2:52 pm

dbr Thanks for the breakdown. I really appreciate your help and guidance
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Re: Vanguard Target Retirement Funds?

Postby hq38sq43 » Sat Jul 27, 2013 3:33 pm

In her "Smart and Simple Financial Strategies for Busy People," Jane Bryant Quinn writes apropos of target retirement funds:

"These are my favorite sleep-tight funds, the easiest investments in the universe. They're new and, where offered, already hugely popular. People who hear about them feel that little click in the mind that says, 'Yes, this is going to work.' "

That little book is a true gem, even better (mostly because much shorter) than her "Making the Most of Your Money Now."

Best regards,
Harry at Bradenton
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