Target Retirement Funds to add international bonds

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Re: Target Retirement Funds to add international bonds

Postby VictoriaF » Sat Feb 09, 2013 12:52 pm

EyeDee wrote:
VictoriaF wrote:John Maynard Keynes famously stated, "When my information changes, I alter my conclusions." If a new relevant fund appears, why should not Target-Retirement funds adjust their composition? The strategy set it and forget it works far better than market timing and speculation. Appropriate strategic adjustments work better than set it and forget it.

I have no idea to what extent the new fund is appropriate, but the animosity to it in this thread seems to exceed any possible harm the fund may cause.

Victoria
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Although I believe one can argue the changes made to the Target-Retirement funds were improvements, the problem for some of us on this board is how we wanted to use them.

Even with the prospects of future changes the funds are excellent choices for people who do not want to pay close attention to their investments. I have and continue to recommend them to my friends who do not want to follow their investments closely.

However, there two cases on this board that the constant changing presents a problem. The minor one is the one that most directly affects me. I was trying to include the funds as base funds and add other funds to give me the mix of stocks/bonds, U.S./international, large/small that I wanted. The constant changing makes that difficult - particularly leaves me concerned that if something happened to me and they made major changes, my wife would not have the portfolio I had set up. With the first change I started restricting our use of the funds, with the second my wife said to drop them.

The other bigger problem with their constant changing is that many on this board recommend people pick the funds based upon their stock/bond ratio fitting their needs instead of based upon their age. Vanguard regularly improving the funds works very well for those who buy the funds to have a simple portfolio based upon their age, but for those who buy based upon the recommendations of this board they could very well end up with a portfolio that does not match their goals. Perhaps the better solution is for the board members to stop recommending the funds based upon current settings and instead suggest them or not suggest them based upon their use if they fit ones age and not ones portfolio goals. If someone's goals do not fit the use of the Target Retirement funds based upon ones age, we should perhaps help the person set up their own unique portfolio using other funds and forget about the desire to stay simple if they are not comfortable with Vanguard deciding what their holdings are based upon their age.


Your first point is that your wife, if she outlives you, may end up with an asset allocation that is not exactly the same as you wanted. However, asset allocation is not a precise science. A new allocation may be slightly better or slightly worse, and we cannot know in advance which way it will be, because we don't know how the markets will behave. As you say, it's a minor point.

Your second point is that the target retirement dates do not correspond to the desired allocations. This is a valid point, but it transcends the topic of this discussion, which is the addition of the international bonds. I agree that one should choose a Target-Retirement fund based on its composition rather than on matching one's retirement year with that listed in the fund name.

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Re: Target Retirement Funds to add international bonds

Postby Tabulator » Sat Feb 09, 2013 1:53 pm

stemikger wrote:I doubt it will get Mr. Bogle's blessing. He still does not invest in international equities. I will stick to the plain vanilla Balanced Index Fund. This is where Mr. Bogle saves for his Grandchildren.

Why does he avoid international equities?

EyeDee wrote:I was trying to include the funds as base funds and add other funds to give me the mix of stocks/bonds, U.S./international, large/small that I wanted. The constant changing makes that difficult - particularly leaves me concerned that if something happened to me and they made major changes, my wife would not have the portfolio I had set up. With the first change I started restricting our use of the funds, with the second my wife said to drop them.

The other bigger problem with their constant changing is that many on this board recommend people pick the funds based upon their stock/bond ratio fitting their needs instead of based upon their age. Vanguard regularly improving the funds works very well for those who buy the funds to have a simple portfolio based upon their age, but for those who buy based upon the recommendations of this board they could very well end up with a portfolio that does not match their goals. Perhaps the better solution is for the board members to stop recommending the funds based upon current settings and instead suggest them or not suggest them based upon their use if they fit ones age and not ones portfolio goals. If someone's goals do not fit the use of the Target Retirement funds based upon ones age, we should perhaps help the person set up their own unique portfolio using other funds and forget about the desire to stay simple if they are not comfortable with Vanguard deciding what their holdings are based upon their age.

If what you are saying is true, it is helpful context to understand why people are so upset about these recent changes. Basically, people around here are using these funds for purposes for which they are not intended, which is fine, but that shouldn't interfere with -- or cause confusion in -- people who are okay with an automatic age-computed portfolio.
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Re: Target Retirement Funds to add international bonds

Postby stemikger » Sat Feb 09, 2013 2:09 pm

Posted by Multivoiced
Why does he avoid international equities?


Hi Multi,

I have bored many here with this topic and it would be unfair to them to rehash it. So in short, Mr. Bogle devotes an entire chapter in Common Sense On Mutual Funds to this topic.

He also has shown his humbleness and has said that many smart people feel differently about this and he may be wrong. However, when I hear him speak about why he avoids it, I understand it and feel safe following his advice, but many very smart pros on this board also have a very convincing argument on why you should not avoid it.

The bottom-line is you have to make that decision on your own after hearing both sides. I value simplicity above all else, so for me investing my entire retirement in the Vanguard Balanced Index Fund until I’m in my later years fits me perfectly and I love the simplicity of that. I also love the fact that it will stay the same and not change. I can’t say that about the Target Retirement Funds.
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Re: Target Retirement Funds to add international bonds

Postby abuss368 » Sat Feb 09, 2013 2:14 pm

stemikger wrote:
Posted by Multivoiced
Why does he avoid international equities?


Hi Multi,

I have bored many here with this topic and it would be unfair to them to rehash it. So in short, Mr. Bogle devotes an entire chapter in Common Sense On Mutual Funds to this topic.

He also has shown his humbleness and has said that many smart people feel differently about this and he may be wrong. However, when I hear him speak about why he avoids it, I understand it and feel safe following his advice, but many very smart pros on this board also have a very convincing argument on why you should not avoid it.

The bottom-line is you have to make that decision on your own after hearing both sides. I value simplicity above all else, so for me investing my entire retirement in the Vanguard Balanced Index Fund until I’m in my later years fits me perfectly and I love the simplicity of that. I also love the fact that it will stay the same and not change. I can’t say that about the Target Retirement Funds.


How do you work that with a taxable account? Do you place the balanced index fund in there as well?
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Re: Target Retirement Funds to add international bonds

Postby grok87 » Sat Feb 09, 2013 2:51 pm

retiredjg wrote:Here's one of the VG white papers you are talking about, grok87. Not sure if this is the first or the second.

https://institutional.vanguard.com/iam/ ... main=false

thanks Jan. That is probably the right one as it is from 2009.
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Re: Target Retirement Funds to add international bonds

Postby stemikger » Sat Feb 09, 2013 3:10 pm

abuss368 wrote:
stemikger wrote:
Posted by Multivoiced
Why does he avoid international equities?


Hi Multi,

I have bored many here with this topic and it would be unfair to them to rehash it. So in short, Mr. Bogle devotes an entire chapter in Common Sense On Mutual Funds to this topic.

He also has shown his humbleness and has said that many smart people feel differently about this and he may be wrong. However, when I hear him speak about why he avoids it, I understand it and feel safe following his advice, but many very smart pros on this board also have a very convincing argument on why you should not avoid it.

The bottom-line is you have to make that decision on your own after hearing both sides. I value simplicity above all else, so for me investing my entire retirement in the Vanguard Balanced Index Fund until I’m in my later years fits me perfectly and I love the simplicity of that. I also love the fact that it will stay the same and not change. I can’t say that about the Target Retirement Funds.


How do you work that with a taxable account? Do you place the balanced index fund in there as well?


Hi abuss368,

Instead of saving extra money in a taxable account with any extra money I had I paid off my house which I did last month. So maybe now I will have extra for taxable space, so I will have to ask you folks when the time comes for me to do that.

Right now I'm beefing up my emergency fund to cover a years’ worth of expenses because my job seems to be on shaky ground. I hope it's not, but I'm kind of a worry wart so being liquid seems to be a good defensive strategy right now.

When Mr. Bogle was asked where he invests money for his grandkids this is what he said:

Q: Do you set a little aside for those grandkids in 529 college-savings plans? (Vanguard has about $40 billion in assets in 27 state 529 plans.)

A: I don't really like the idea of tying up your money in 529 plans, because of all the restrictions on withdrawals. I'm not against them, I just like having more flexibility than being required to use those funds specifically for educational purposes. We do save a little money for all my grandkids every year, but we just chose the Vanguard Balanced Index Fund (VBINX). It's about 60 percent stocks, 40 percent bonds, and it's been wonderful. We give them what we can within annual gift-tax limitations, and put it all into that very tax-efficient fund.

For those who want to read the rest of this article here is the link below:

http://www.reuters.com/article/2012/09/ ... LI20120911
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Re: Target Retirement Funds to add international bonds

Postby retiredjg » Sat Feb 09, 2013 3:18 pm

stemikger wrote: So maybe now I will have extra for taxable space, so I will have to ask you folks when the time comes for me to do that.

Here's one possible answer. :happy

https://personal.vanguard.com/us/funds/ ... IntExt=INT
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Re: Target Retirement Funds to add international bonds

Postby stemikger » Sat Feb 09, 2013 6:53 pm

retiredjg wrote:
stemikger wrote: So maybe now I will have extra for taxable space, so I will have to ask you folks when the time comes for me to do that.

Here's one possible answer. :happy

https://personal.vanguard.com/us/funds/ ... IntExt=INT


Thanks I'll look into it. However, my first priority is building that big fat EF.
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Re: Target Retirement Funds to add international bonds

Postby Dandy » Mon Feb 11, 2013 1:56 pm

Changing allocations in these funds is a concern. I have much more concern with changing the equity allocation to be more aggressive a few years back then this change which is attempting to add diversity in the fixed income side of the portfolio. Having it replace 20% of the bond allocation seems to be a modest change.

I welcome the change to move allocations out of money market - which are no longer serving the purpose that they once did. e.g. modest yield virtually no risk. Now almost no yield and while higher quality shorter term portfolio is required I don't think they have prevented a run on these funds especially from institutional investors which could break the buck. Also, some talk of not allowing money market funds to maintain the buck.
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Re: Target Retirement Funds to add international bonds

Postby Rodc » Tue Feb 12, 2013 5:34 pm

Phineas J. Whoopee wrote:
Grt2bOutdoors wrote:
Rodc wrote:If inflation is a concern, it is mostly a long term concern. Why would one want short term TIPS?


Didn't see your post, but my thoughts exactly - seems they are trying to have their cake and eat it, that almost never works out the way one thinks it should. The risk in retirement is longer term inflationary impacts on your assets, short-term Tips may provide some imaginary liquidity (say this because US Treasury Tips market is liquid) or are they thinking that deflation is in the cards? If deflation, hold nominals.

Hi Rodc, Grt2bOutdoors,

Short-term TIPS are inflation-adjusted to exactly the same degree as longer-term TIPS. Both of Vanguard's funds roll their bonds, of course, so the inflation protection is ongoing.

Expectantly, the short-term TIPS fund should have a closer correlation to current inflation; less interest rate risk (in this case, real interest rates); and lower long-term returns because it will not earn the term premium.

Thinking that the short-term TIPS fund does not protect itself against inflation as well as the longer-term fund is a misconception.

There may well be reasons to avoid short-term TIPS, but what you've mentioned isn't among them.

PJW


Problem is that if inflation does show up in spades, will TIPS real returns hold up? If you hold long term TIPS you eliminate reinvestment risk. That is if you have say 20 year TIPS you lock in inflation protection. Look at today. Short term TIPS at negative yields. Yes tracks inflation, but not really the behavior you want. Of course I prefer to hold individual long TIPSl. I bought a bunch with decent real yields, no reinvestment worries to speak of (yes, can't reinvest interest payments at decent rates, but the principal continues on).

Indeed, generally short term nominals track inflation pretty well, though no guarantee, so short term TIPS are at best a rather modest improvement over short term nominals in that case . It is only long term nominals where inflation might eat you up. So on that front as well, I still don't really get short term TIPS. Not that they are bad, just seems to largely (not entirely) miss the point.
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Re: Target Retirement Funds to add international bonds

Postby mack123 » Tue Feb 12, 2013 5:49 pm

I don't really get why people are so worked up and against the change. If you don't want a "one fund solution" or a fund of funds portfolio, just dont own it. It's simple.

Target Date Funds need tweaking - if only because they are a relatively new product. There will almost certainly be new asset allocation models that come down the line that may offer less volatility for similar returns. By making this change, Vanguard is fulfilling it's responsibility to provide the best all in one solution, not the best "set it and forget it" solution.
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Re: Target Retirement Funds to add international bonds

Postby tsturbo » Tue Feb 12, 2013 10:12 pm

mack123 wrote:I don't really get why people are so worked up and against the change. If you don't want a "one fund solution" or a fund of funds portfolio, just dont own it. It's simple.

Target Date Funds need tweaking - if only because they are a relatively new product. There will almost certainly be new asset allocation models that come down the line that may offer less volatility for similar returns. By making this change, Vanguard is fulfilling it's responsibility to provide the best all in one solution, not the best "set it and forget it" solution.

Great post, fully agree :moneybag
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Re: Target Retirement Funds to add international bonds

Postby rypa » Thu Feb 14, 2013 2:30 am

Slightly off-topic, but I've been thinking lately about how I'll be shifting my asset allocations over the next 20 years as I start to approach retirement. This Target Date fund discussion inspired me to check into the underlying assets for the various funds and I was surprised to see how aggressive these allocations are in relation to guidelines like "your age in bonds". For example:

Target Date / Equity / Bonds & Cash
2010 / 43% / 57%
2015 / 55% / 45%
2020 / 81% / 19%
2025 / 78% / 22%
2030 / 78% / 22%
2035 / 86% / 14%
2040 / 90% / 10%

Am I nuts, or are these pretty aggressive? Has this been addressed in detail elsewhere in the forums?
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Re: Target Retirement Funds to add international bonds

Postby retiredjg » Thu Feb 14, 2013 9:56 am

rypa wrote:Am I nuts, or are these pretty aggressive? Has this been addressed in detail elsewhere in the forums?

You are not nuts. The usual guidance is to pick a target fund that matches your desired stock to bond ratio. Just ignore the date.
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Comments about Target Fund criticisms.

Postby Taylor Larimore » Thu Feb 14, 2013 1:32 pm

Eye Dee:
I was trying to include the funds as base funds and add other funds to give me the mix of stocks/bonds, U.S./international, large/small that I wanted. The constant changing makes that difficult.


When descibing their Target Funds, Vanguard writes: "Get a professionally managed portfolio in a single, low-cost investment."

I think it is usually a mistake to add additional funds to a Target Fund. You lose the sophistication of an expertly designed portfolio, and you also lose the benefits of Simplicity. If you want a multi-fund portfolio, it is nearly always better to hold individual funds.

The other bigger problem with their constant changing is that many on this board recommend people pick the funds based upon their stock/bond ratio fitting their needs instead of based upon their age.


Vanguard Target Funds are normally located in tax-advantaged accounts. Anytime the stock/bond ratio is no longer appropriate, it is easy and cost-free to exchange to another Target Fund with more appropriate allocations. If you feel no other Target Fund is appropriate--design your own individual fund portfolio.

I agree with Victoria who wisely wrote:

I have no idea to what extent the new fund is appropriate, but the animosity to it in this thread seems to exceed any possible harm the fund may cause.


Best wishes.
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Re: Target Retirement Funds to add international bonds

Postby ShowMeTheER » Thu Feb 14, 2013 1:44 pm

rypa wrote:Slightly off-topic, but I've been thinking lately about how I'll be shifting my asset allocations over the next 20 years as I start to approach retirement. This Target Date fund discussion inspired me to check into the underlying assets for the various funds and I was surprised to see how aggressive these allocations are in relation to guidelines like "your age in bonds". For example:

Target Date / Equity / Bonds & Cash
2010 / 43% / 57%
2015 / 55% / 45%
2020 / 81% / 19%
2025 / 78% / 22%

2030 / 78% / 22%
2035 / 86% / 14%
2040 / 90% / 10%

Am I nuts, or are these pretty aggressive? Has this been addressed in detail elsewhere in the forums?


I doubt those 2 are correct... but your point is a good one. The TR funds are significantly more aggressive than an age in bonds approach.
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Re: Target Retirement Funds to add international bonds

Postby Electron » Wed May 08, 2013 5:38 pm

This thread has been discussing three upcoming changes to Vanguard Target Retirement funds, and includes comments on the new hedged international bond fund, the short term inflation protected securities fund, and the money market fund.

Wouldn't replacing the money market fund with a short term bond index fund have been an obvious choice? I would have preferred that over eliminating it.

The short term inflation protected securities fund currently has a negative SEC yield. Doesn't this in effect increase the expense ratio of the target retirement fund in order to purchase inflation protection? I assume that a fund with negative SEC yield would lose money if market conditions remained the same over a period of time.

I agree with others that the base asset allocation of the target retirement funds continues to change over time and one cannot count on that allocation remaining the same in the future.
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Re: Target Retirement Funds to add international bonds

Postby grabiner » Wed May 08, 2013 8:24 pm

Electron wrote:The short term inflation protected securities fund currently has a negative SEC yield. Doesn't this in effect increase the expense ratio of the target retirement fund in order to purchase inflation protection? I assume that a fund with negative SEC yield would lose money if market conditions remained the same over a period of time.


The SEC yield for the inflation-protected funds does not include the inflation adjustment; Vanguard explains this in a footnote to the yield. If a TIPS has a -1% yield and inflation is 3%, the TIPS will return 2%, but it will report -1% in the SEC yield. If a nominal bond has a 2% yield, it will earn no more than the TIPS, but it will report 2% in the SEC yield.
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Re: Target Retirement Funds to add international bonds

Postby abuss368 » Wed May 08, 2013 11:21 pm

The Intermediate Term Inflation Bond fund has a positive yield again!
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Re: Target Retirement Funds to add international bonds

Postby nedsaid » Wed May 08, 2013 11:32 pm

This is a matter of personal preference. To the average investor, owning or not owning international bonds will probably make little difference over their investing career. I have chosen to own them in two different funds.

I like the idea of another asset class to diversify into. I also like the added currency diversification.

I have seen good arguments both pro and con.

It is good to see that Vanguard has vindicated my choice of international bonds by adding them to their Target Date Funds.
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Re: Target Retirement Funds to add international bonds

Postby Beagler » Thu May 09, 2013 5:18 am

For a set of funds that was so "carefully constructed," the VG TR funds sure have gone throughout a lot of changes since their inception.

The investor who wishes to remain in control of her/his own asset allocation seems to have to constantly play defense if employing a VG TR Fund.
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Re: Target Retirement Funds to add international bonds

Postby G-Money » Thu May 09, 2013 6:31 am

abuss368 wrote:The Intermediate Term Inflation Bond fund has a positive yield again!

I know that's what Vanguard has published, but I'm skeptical. The published SEC yield (which is supposed to be only the real yield, not the nominal yield, for TIPS) changed in a single day from around -1% to +0.27%. See this thread: viewtopic.php?f=10&t=115853&newpost=1686388

There has not been any wild swing in TIPS prices recently. Looking at the secondary market shows TIPS still only offer a positive real yield only at the long end of the curve. Real yields aren't hitting the 0.25% range until you get to maturities over 20 years. The TIPS fund has an average maturity around 10 years, which, as near as I can tell, is still in the negative real yield territory.

I can't explain the change on Vanguard's website, but I am reluctant to trust it.
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Re: Target Retirement Funds to add international bonds

Postby Phineas J. Whoopee » Thu May 09, 2013 1:10 pm

G-Money wrote:...
I can't explain the change on Vanguard's website, but I am reluctant to trust it.

Skepticism is healthy.

In this case perhaps the combination of weekly SEC yield accounting along with the net asset value change in the prior five trading days of -1.18% can explain Vanguard's assertion.

E — BASED ON HOLDINGS' YIELD TO MATURITY FOR 30 DAYS AS OF END OF PREVIOUS WEEK.
https://personal.vanguard.com/us/funds/snapshot?FundId=0119&FundIntExt=INT#tab=1

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Re: Target Retirement Funds to add international bonds

Postby G-Money » Thu May 09, 2013 2:37 pm

PJW,

I'm not sure I follow you. The NAV on 5/2/13 was $14.52. The NAV on 5/3/13 was virtually unchanged, $14.42. The fund has had plenty of swings of that magnitude with barely any change in the SEC yield. For example, from 8/10/12 to 8/16/12, the NAV of VIPSX dropped $0.20 without any change in the SEC yield. https://personal.vanguard.com/us/funds/ ... &year=#res

And, of course, per note G next to the published SEC yield, the inflation component is not included in the SEC yield:

G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE
E — BASED ON HOLDINGS' YIELD TO MATURITY FOR 30 DAYS AS OF END OF PREVIOUS WEEK.


I suppose it is possible that a boatload of TIPS in VIPSX matured and Vanguard decided to load up on very long-term TIPS, but I think that's unlikely.

I emailed Vanguard about this. Hopefully Vanguard can explain.
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Re: Target Retirement Funds to add international bonds

Postby Phineas J. Whoopee » Thu May 09, 2013 3:50 pm

G-Money wrote:PJW,

I'm not sure I follow you. The NAV on 5/2/13 was $14.52. The NAV on 5/3/13 was virtually unchanged, $14.42. The fund has had plenty of swings of that magnitude with barely any change in the SEC yield. For example, from 8/10/12 to 8/16/12, the NAV of VIPSX dropped $0.20 without any change in the SEC yield. https://personal.vanguard.com/us/funds/ ... &year=#res

And, of course, per note G next to the published SEC yield, the inflation component is not included in the SEC yield:

G — DOES NOT INCLUDE ANY INCOME ADJUSTMENT RESULTING FROM CHANGE IN INFLATION RATE
E — BASED ON HOLDINGS' YIELD TO MATURITY FOR 30 DAYS AS OF END OF PREVIOUS WEEK.


I suppose it is possible that a boatload of TIPS in VIPSX matured and Vanguard decided to load up on very long-term TIPS, but I think that's unlikely.

I emailed Vanguard about this. Hopefully Vanguard can explain.

Like you and without doubt others I certainly look forward to reading Vanguard's response.
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Re: Target Retirement Funds to add international bonds

Postby G-Money » Fri May 10, 2013 4:07 pm

I posted Vanguard's response here: viewtopic.php?p=1691990#p1691990

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Re: Target Retirement Funds to add international bonds

Postby Phineas J. Whoopee » Sat May 11, 2013 11:34 am

G-Money wrote:I posted Vanguard's response here: viewtopic.php?p=1691990#p1691990

It's not the crime, it's the cover-up.

Serves me right for defending them.
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