If you had $60,000....

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Topic Author
BigMike
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If you had $60,000....

Post by BigMike »

...to allocate within Vanguard tax-deferred retirement accounts, and assuming all other things are equal (i.e. your desired overall allocation can be tweaked by changing other accounts to come out fine either way), would you go for:

$40K VTTHX Target Retirement 2035
$20K VBTLX Total Bond Market Admiral

OR

$20K VTSAX Total Stock Market Admiral
$20K VGTSX Total International
$20K VBTLX Total Bond Market Admiral

I'm really interested in opinions on these two choices, and whether there is a significant difference in the international holdings in particular. Thanks!
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norookie
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Post by norookie »

:D Time Horizion is key Mike :D 2035?, I'd go for number 2. :D
" Wealth usually leads to excess " Cicero 55 b.c
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Taylor Larimore
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Adding more funds to a target fund?

Post by Taylor Larimore »

Hi Big Mike:

Target Funds are primarily designed to be maintenance free, stand-alone funds. Adding funds requires rebalancing and makes asset allocation difficult.

In my opinion, investors should use all Target or use individual funds--not both. Also, Target funds should nearly always be in tax-advantaged accounts.
"Simplicity is the master key to financial success." -- Jack Bogle
vesalius
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Re: If you had $60,000....

Post by vesalius »

BigMike wrote:...to allocate within Vanguard tax-deferred retirement accounts, and assuming all other things are equal (i.e. your desired overall allocation can be tweaked by changing other accounts to come out fine either way), would you go for:

$40K VTTHX Target Retirement 2035
$20K VBTLX Total Bond Market Admiral

OR

$20K VTSAX Total Stock Market Admiral
$20K VGTSX Total International
$20K VBTLX Total Bond Market Admiral

I'm really interested in opinions on these two choices, and whether there is a significant difference in the international holdings in particular. Thanks!
You are comparing apples to oranges here. Like Taylor said why use 2 different in the first option. If you want 67%/33% equity to bond as you have indicated in option 2 simply choose Vanguard Target Retirement 2020 Fund (VTWNX) and you have no need for the $20K VBTLX Total Bond Market Admiral.

Now comparing

$60k Vanguard Target Retirement 2020 Fund (VTWNX)

to

$20K VTSAX Total Stock Market Admiral
$20K VGTSX Total International
$20K VBTLX Total Bond Market Admiral

is closer to apples to apples. In both portfolios you have roughly 67% equity, but in the Target Retirement 2020 Fund you currently have 20% of equities in foreign stocks.

Your second portfolio is also roughly 67% equity, but 50% of equity in foreign. The other difference is that the expense ratio of this 3 admiral fund portfolio will be slightly cheaper than the single target fund, but will require you to do any rebalancing.

Now this comparison is a little more complicated in that the Target retirement funds will be changing in 2011. The foreign component of that fund will be changed to 30% VGTSX Total International as opposed to 20% of Vanguard Pacific, European and Emerging funds currently used. So after 2011 the differenced between the single 2020 Target retirement fund and the 3 fund portfolio you propose will boil down to 4 things really
  • 1. Target 2020 = Foreign stock 30% of equity and your 3 fund portfolio = Foreign stock 50% of equity
    2. Target 2020 automatically rebalances and you must rebalance the 3 fund portfolio yourself
    3. The 3 fund portfolio, particularily once Total International gets admiral funds next year will be cheaper overall than the single Target retirement fund.
    4. every 5 years or so the Target retirement will change its equity/bond allocation becoming more conservative; whereas, you control the rate of change of your 3 fund portfolio
So neither are bad choices and you can proably let your personal preference make the choice. The one major caveat is that you should be utilizing a Target retirement type fund in a tax advantaged account, if the money is in both taxable and non taxable or only in taxable it would be more tax efficient to do the 3 fund portfolio. If all in a taxable account use Vanguard Intermediate-Term Bond Admiral Shares (VBILX) instead of the total bond fund.
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tetractys
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Re: Adding more funds to a target fund?

Post by tetractys »

Taylor Larimore wrote:In my opinion, investors should use all Target or use individual funds--not both.
Yes, this was my first thought on the OP. The TR funds have a bond allocation built in, so picking the TR fund with the proper bond allocation, irrespective of date designation, precludes any need for a separate bond fund.

But concerning expenses I think separate funds will cost less for two reasons: The TR funds are more expensive than the sum of their parts (Don't believe me, check this please.), and separate funds will be eligible for Admiral shares.

Best regards, Tet
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joe8d
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Post by joe8d »

If in the early accumulation phase,with a 60K balance and having the VG TR series available to you in your TD account,I would just go with the appropriate TR fund for now.You can always break it apart in the future as you get closer to or actually in retirement.
All the Best, | Joe
Topic Author
BigMike
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Re: Adding more funds to a target fund?

Post by BigMike »

Thank you all for the very thoughtful replies.
tetractys wrote: Yes, this was my first thought on the OP. The TR funds have a bond allocation built in, so picking the TR fund with the proper bond allocation, irrespective of date designation, precludes any need for a separate bond fund.
Tet and Vesalius, you both picked up exactly on what my thought process was. I picked the TR 2035 because it matches up with the desired year, but then because I'm more conservative I felt like I had to add more bonds. Thank you for pointing out that TR 2020 accomplishes the allocation I want without the need to add the bond account. A rookie mistake, I'm sure, but it shows how one can get caught up in just focusing on what you are told is the "right" TR date for you.
But concerning expenses I think separate funds will cost less for two reasons: The TR funds are more expensive than the sum of their parts (Don't believe me, check this please.), and separate funds will be eligible for Admiral shares.
Yes, it seems as if the three funds (especially when VGTSX offers Admiral) will be cheaper as an aggregate. All of this money is held in non-taxable, BTW, and I don't mind doing the rebalancing manually when appropriate. I have to keep an eye on the accounts anyway, because the VG funds are my wife's and mine are in an employer 403(b), so the VG funds are just one part of our overall asset allocation.

Thanks again for all the thoughtful replies. I've been slowly figuring out my total overall mix of funds, and have received tremendous help from this group in doing so. I'll post what I think is my final portfolio for critique in the near future.
YDNAL
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Re: Adding more funds to a target fund?

Post by YDNAL »

BigMike wrote:
tetractys wrote: Yes, this was my first thought on the OP. The TR funds have a bond allocation built in, so picking the TR fund with the proper bond allocation, irrespective of date designation, precludes any need for a separate bond fund.
Tet and Vesalius, you both picked up exactly on what my thought process was. I picked the TR 2035 because it matches up with the desired year, but then because I'm more conservative I felt like I had to add more bonds. Thank you for pointing out that TR 2020 accomplishes the allocation I want without the need to add the bond account. A rookie mistake, I'm sure, but it shows how one can get caught up in just focusing on what you are told is the "right" TR date for you.
Don't beat yourself up, BigMike.

Yesterday I met with our banking representatives that were pitching their 401K services. The person - with self-proclaimed 15 years of experience in the field - looked at me with a straight face and said the TR fund date is a great way for inexperienced people to choose the investment that is appropriate for them.

The person suddenly left with a boot-print in the back of the pants. :lol:
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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norookie
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Post by norookie »

:D Your certainly correct about the expenses. Just getting back to your thread I see you've some pro's on board. I just set up a 2035 TRFund at Schawb, its ER is .85 IIRC. But its not for me. its a gift, and its to get to attempt to get the individual to bring it up to 1k, to switch it to VGs STAR fund. :?
" Wealth usually leads to excess " Cicero 55 b.c
SpecialK22
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Re: Adding more funds to a target fund?

Post by SpecialK22 »

YDNAL wrote: The person - with self-proclaimed 15 years of experience in the field - looked at me with a straight face and said the TR fund date is a great way for inexperienced people to choose the investment that is appropriate for them.
While I certainly agree that it is most appropriate to select the TR fund that best approximates an individual's risk tolerance, I can kind of see where this person is coming from. Inexperienced investors not only typically do not understand what their risk tolerance is, but they often have almost no understanding of different asset classes. On more than one occasion I have suggested to very inexperienced investors to select the TR fund that most matches their likely retirement date and then to research more on investing to decide what allocation they truly need. My company also automatically invests employees' 401(k) contributions into the TR date fund closest to the employees 65th birthday if no other election is set.
Last edited by SpecialK22 on Wed Nov 10, 2010 11:37 am, edited 1 time in total.
dbr
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Post by dbr »

TR date rule is no more inappropriate than age in bonds, Adrian's rule, bald rules of thumb for tax placement, and lots of other rules.
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