Newbie considering Vanguard Target fund

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docnews
Posts: 36
Joined: Tue Apr 22, 2014 5:57 am

Newbie considering Vanguard Target fund

Post by docnews »

Newbie - converted boglehead after being educated by following the whitecoatinvestor - who has a pent-up mega-post to introduce himself:

Emergency Fund: none (very stable job + $62k in Roth IRA contributions + $3-5k in checking account)
Debt: Med school loans $148k at 6.5% in IBR ($26/day of interest, yikes!)
Tax Filing Status: Married Filing Jointly, no children yet...
Effective Tax Rate: 4% in 2013 (7.5% if you exclude education credit) + no income tax state
Age: Mid 20s
Desired allocation: stocks>>bonds primarily because of my age

Current Income: $80k (spouse working)
Expected Income in 2.5 years: $200k (spouse not working)

Combined Roth IRAs: $69k
Permanent Portfolio Fund (PRPFX): $58k (choice made by an advising family member before I did my own research)
Vanguard Total Stock Market Index Fund (VTSMX): $5.5k
Vanguard 500 Index Fund (VFINX): $5.5k

My financial philosophy: Balance saving and living so that I enjoy the fruits of my labor at a similar level year after year while giving in celebration of those who gave so much to me.

My formulating financial plan:
1) Rough budget with minimal income of $200k split into fifths for ages 30-50
20% "Thanks": Giving
- currently my wife and I already tithe plus give about 5% in gifts
20% "Save": Retirement
- hopefully mostly in tax advantaged accounts, especially if an independent contractor
20% "Duty": Taxes
- good estimate on that level of income, especially with tax deferred accounts
20% "Home": Mortgage + Utilities
- 15yr <$500k, preceded by 5yrs of school loan repayment and saving downpayment
20% "Sustain": Living
- Food, Clothing, Transportation, Insurance, Travel (my favorite "toy")

2) After 20 work years with 20% savings ($40k) = $1 million if conservative 3% real ROI = $40k/year with a 4% withdrawal rate that could sustain me from age 62-92 with a large "buffer" from social security and medicare.

3) For years 50-62 start slowing my work hours down and living off my part time income. Worse case scenario: use this as a time to play catch up or make more of a retirement "buffer".

I "tested" this budget by comparing to the whitecoatinvestor's budget who is in the same field as me and seemed pretty reasonable.
[His raw data from an old post split into my categories:
Income, Gross: 17647x12 = $211,764
11.3% Giving = 1990
22.8% Saving = 3406+622 =4028
22.2% Taxes = 3925 (he lives in an income tax state)
26% (21.5% w/o rental) Housing: 3180 + 816 + 608 = 4604 (3788)
17.6% Living (kids included) = 336+829+1235+700 = 3100]

After much research, I am considering moving all of our retirement savings into a Vanguard Target Fund (specifically: 2045 or VTIVX), but the whitecoatinvestor has a great article where he lists "7 Reasons I Don't Use Target Retirement Funds" http://whitecoatinvestor.com/7-reasons- ... ent-funds/ I wrote a long comment, trying to decipher if Vanguard's Target fund is for me. And though the whitecoatinvestor had a very kind response I think I would benefit from a response from the boglehead community as well. Here is my attempt to go through all the perceived problems with a Vanguard Target fund:

"P1 with Accounts: Since I'm a beginner (aka intern, just like when you started this investing adventure) this is not been a problem for me yet and from reading your blog I've noted that 401ks often offer Target funds but NOT other index options.

P2 with Dates: I don't see the issue here. I just need to decide the year in which I want my retirement to tip towards conservative (50% equity / 50% fixed income at the year in the name). With your plan, you have to decide the same thing but you have to manage the glide.

P3 with Glide: You seem to indicate you will try to "time" your glide. Isn't that why indexing and rebalancing concepts were created to avoid timing the market? Won't you be tempted to wait starting your glide if your retirement comes at the same time as a bubble? If you plan a glide and stick it to it you should be fine but it sounds like you haven't set it in stone just yet.

P4 with Allocation: Though I understand the concept of diversification, I don't fully comprehend this concept of tilting. To me, it feels like tinkering, bordering on guessing the market. Surely when I invest in the Total Stock Market I am investing in the small cap as well. I understand that the Total Stock Market could be deemed "tilted" towards large cap but isn't that just the reality of the full market that has more stable returns? Basically you stated you would be okay financially if these riskier allocations relatively flopped but your gambling for a few extra percentage points on your ROI. Is that a fair statement? Call me conservative but I want to get "rich" slow and steady.

P5 with Managers: This problem makes sense to me. Managed indexing does seem like an oxymoron, but I don't think the managers will get many investors if they do more than balance and follow the plan proposed. Your critique of adding international bonds falls a little flat when your own investment plan has ballooned to include new allocations as you become more well read. If a Target Fund ever announced a major change that profited the company providing the fund, I would jump ship so quick they wouldn't get a cent.

P6 with Tax Efficiency: Since this is not a problem for you, I doubt it will be a problem for me. You posted that even you (with your wise savings) were not able to maximize your tax havens and had no taxable investment accounts. I'm still trying to wrap my mind around the $50k 401k but I will look for this possibility during my job searches on its own merits.

P7 with Costs: This is the one where you really could change my mind. But then I saw your "usually" hiding behind parentheses so I did some research. Vanguard Target fund expense ratios are 0.18%. You have a lot to be proud of by setting up a plan with 0.16%. Are you sure you haven't made 2 base points worth of errors? How about your delay in rebalancing in comparison to the funds continual rebalancing? Or a slight delay in investment do to complications or adjustments necessary with 5 accounts? Granted you are probably really on top of these things but the average doc is likely to make some costly error/delay along their 'investing career' (including me). Plus you said this takes 2 hours per year (not to mention this website management's countless hours of self-education) to make investment decisions. If you spent that time working as ED doc (as stressful as it is) you will probably negate most of the reward of your own "targeting".

Basically I'm intrigued by cheap Target funds because it takes the #1 danger (ME) out the equation in two more ways (indexing already removing my guessing the market):
1) Rebalancing
2) Gliding"

Is my reasoning sound?
Based on my plans, do I belong as a boglehead?
zup28w
Posts: 61
Joined: Wed Mar 28, 2012 9:17 am
Location: Boston, MA

Re: Newbie considering Vanguard Target fund

Post by zup28w »

Hi Docnews,

I'm by no means an financial expert, but thought I'd share with you my thoughts. I'm 34 and switched over to a Boglehead strategy in 2012. My wife had a bunch of bad investments when I first met her; the broker was making more money than she was. We withdrew all her money and began funding a Roth IRA with a Vanguard Target Date Fund. It's done very well for her, partly because equities have been doing well and the asset allocation of the portfolio is heavy in stocks. The main reason my wife likes it is that she can sit back, relax, and let the fund do it's thing. Will we keep it in there forever? Who knows. But for now, it's working well for us.

On the flip side, my portfolio is mostly (I'm still getting there) a 3 fund portfolio - Total Stock, Total Bond, Total International. It lets me manage the asset allocation on my own vs a Target Date Fund. I can also take advantage of tax efficient fund placement, something you can't do with a single Target Date fund. I recommend reading:

http://www.bogleheads.org/wiki/Three-fund_portfolio (Make sure you read 5 The LifeStrategy and Target Retirement funds are four-fund portfolios)
http://www.bogleheads.org/wiki/Principl ... _placement

Hope this helps. There are a lot of other good articles on the Wiki. Good luck!

Greg
Topic Author
docnews
Posts: 36
Joined: Tue Apr 22, 2014 5:57 am

Re: Newbie considering Vanguard Target fund

Post by docnews »

Thanks zup28w for the reply!

I guess the "lets me manage" is the risk Target funds remove.

You say that you are "almost" to 3 fund portfolio. Isn't it so much easier to just buy 1 fund then balance 3 in several accounts?

Also don't all the tax advantages go away if you are already only using tax advantaged accounts?

Plus do have a set plan for when you rebalance and how you glide (lower equities as you near retirement)? If you don't, aren't you susceptible to market timing? If you do, is the cost savings worth your time?
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nisiprius
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Re: Newbie considering Vanguard Target fund

Post by nisiprius »

I think White Coat Investor is probably doing you a service in stirring up doubts and making you think about possible alternative and just doing critical thinking, but once you've mulled it over you shouldn't be afraid to go back to your first choice, once you're sure you haven't missed anything. Kipling (substitute "constructing portfolios" for "constructing tribal lays")
In 'In the Neolithic Age,' Rudyard Kipling wrote:Here's my wisdom for your use, as I learned it when the moose
And the reindeer roamed where Paris roars to-night:—
"There are nine and sixty ways of constructing tribal lays,
"And—every—single—one—of—them—is—right!"
The general idea should be something like this: Bogle, The Twelve Pillars of Wisdom
...Successful investing involves doing just a few things right and avoiding serious mistakes...

Pillar 2. When All Else Fails, Fall Back on Simplicity.

There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
You will go nuts trying to determine "the best." Notice that Bogle does not say that his suggested strategy is best, only that there are an infinite number that are worse. Personally I would revise that to say there are an infinite number of strategies that cannot be distinguished--you cannot prove any are better or worse than any of the others, and even thirty years later you will know which one performed best but you will not know whether it was because it was a superior strategy or whether it was just the luck of the time period.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
synpacket
Posts: 112
Joined: Wed Apr 09, 2014 10:01 am

Re: Newbie considering Vanguard Target fund

Post by synpacket »

Do you think you can beat a Vanguard target retirement fund? I'm not a professional in the field of investing, so I don't think I'm smart enough to do it. And being smart may have nothing to do with it anyway. But everything I read seems to say that the people who are smart can't really do it either.

So, I would say the simplest choicest is the best one, because you make the fewer moves or decisions. The more moves you make, the more chances you have to make mistakes.

I think some people may make their investments more complex than a single fund because they're really interested in investing, so it's sort of a hobby, and a TR fund is boring. For me at least, boring is exactly what I want.
zup28w
Posts: 61
Joined: Wed Mar 28, 2012 9:17 am
Location: Boston, MA

Re: Newbie considering Vanguard Target fund

Post by zup28w »

docnews wrote:Thanks zup28w for the reply!

I guess the "lets me manage" is the risk Target funds remove.
If that is your biggest concern, then a Target Date Fund is a great choice.
docnews wrote:You say that you are "almost" to 3 fund portfolio. Isn't it so much easier to just buy 1 fund then balance 3 in several accounts?
Sure, one is easier than 3, but there are some limitations with a single fund. I feel that I'm young and can be more aggressive now because I have plenty of time before I retire. A target fund doesn't allow me to do that. I have a little more control of the curve along with better control of maximizing tax advantage accounts.
docnews wrote:Also don't all the tax advantages go away if you are already only using tax advantaged accounts?
Yes, but there are contribution limits to tax advantaged accounts. You can only put $5500 into a Roth Ira per year at your age, but once you hit your higher Salary, Roth IRAs won't be an option. You can do a solo 401k which allows higher amounts, however, contribution limits can change over time.
docnews wrote:Plus do have a set plan for when you rebalance and how you glide (lower equities as you near retirement)? If you don't, aren't you susceptible to market timing? If you do, is the cost savings worth your time?
I have a general plan, but not a set plan. I can't predict where what my income and expenses will be 20-30 years. No clue what tax laws will be like. There are multiple calculators out there I can use to determine a proper AA for my age. I figure I'll check it every few years and adjust accordingly. My main goal is to keep up my contributions, lower my costs, and rebalancing when necessary. As nisiprius said, there is no "best method". A lot will depend on the individual and their situation.

So I do agree with some of the others when I say go with the Target Date Fund. Good luck!

Greg
Topic Author
docnews
Posts: 36
Joined: Tue Apr 22, 2014 5:57 am

Re: Newbie considering Vanguard Target fund

Post by docnews »

Nisiprius, thanks for your reply. Even though my schooling has been complex, I'm amazed that the simplest solution is usually not only sufficient but the best. I'm so happy that Mr. Bogle through seeming to use complexity ("buying the market") is offering increasing supreme simplicity. Starting with S&P 500 then Total US Stock/Bond Market then Total World Stock/Bond Market and now Target plans that rebalance and glide for you.

Synpacket,
But everything I read seems to say that the people who are smart can't really [beat a Vanguard target retirement fund] either.
That is where I'm surprised not many bogleheads have argued against these Targets when they have portfolios with 4-20 funds!
The more moves you make, the more chances you have to make mistakes.
So true. I love discussing finances but I'm not going to make things uneccessarily complex to spice up my investing and play games with thousands of hard earned dollars. I might eat at a Las Vegas buffet but I'm not gambling a cent.

Zup28w, actually Target funds are pretty darn aggressive when you are young, but I guess you are referring to "tilting" which I believe is "guessing the market" (just in categories of investments ie small cap, not in individual stocks and bonds) which pretty darn close to "gambling" for my taste.

Roth IRAs ($11k if married) is an option at higher incomes with back door IRAs. Plus a stealth IRA (HSA). There are enough options that the Whitecoat Investor had not even filled all the space. The government can always change the game but even if they do, isn't it easier to move from 1 fund than rearrange multiples?

I'm not sure a general plan works for gliding. If you don't glide gradually, you are likely to be timing the market or be too aggressive near retirement.

I hope I don't sound like I'm starting an argument but you guys are really helping me "test" my theories!
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