Are Vanguard's target-retirement funds too aggressive?

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bogler1029
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Are Vanguard's target-retirement funds too aggressive?

Post by bogler1029 »

Would you consider 90/10 too be too aggressive an asset allocation for someone in their early 30s? Bogle's "age in bonds" would have them holding at least 30% in bonds, but across several large brokerages, I've noticed that their target-retirement funds are very aggressive. For example, T. Rowe. Price's 2035 fund for someone in their mid-40s has them at around 84% stocks, 12.5% bonds, 3.5% other (i.e. cash).
Bubbagump
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by Bubbagump »

Keep in mind those funds are generalizations and their end dates span 10 years (+/-5 years either way) then at the retirement point, they gradually shift even more to bonds and add TIPS. It all depends what you believe. You will likely see less risk with age in bonds, but some folks are fine with age in bonds -20. I have seen age in bonds -20 used as bench mark more and more.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by Twins Fan »

As past threads have pointed out about the target date funds, they can be a bit of a moving target by the companies and the strategy behind them can change any year. So, the low bond holdings could be result of the expected returns going forward from here. I don't know that for sure, just a possibility.

Also, I don't really think they are too aggressive for the more common target date investor. By more common, I mean folks just starting out or 401k set it and forget it types. Just contributing is more important for them than 90/10 or 70/30. Folks that are more involved probably run their own plan/funds, or use a target date fund that fits their AA.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by asif408 »

I consider it too aggressive, but I guess the more important question is do you consider it too aggressive? Can I assume you are asking because you are considering it as an investment?
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bogler1029
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by bogler1029 »

Asif, the reason I'm asking is because I am considering selling the current target-year in my IRA and purchasing shares of a sooner retirement date. I was reading a thread about the 2008/2009 crisis and people who were 90-100% in stocks suffered a lot. I would like to think I could handle losing 40% but won't know until I'm tested. But losing 6-7% so far in this current correction hasn't caused me any worry.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by Mel Lindauer »

1. Determine the asset allocation breakdown you're comfortable with (stocks/bonds).
2. Ignore the date in the name and pick the Target Date fund that matches your desired asset allocation.

That's it.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by Silence Dogood »

I feel like we've beaten this topic to death already.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by asif408 »

bogler1029 wrote:Asif, the reason I'm asking is because I am considering selling the current target-year in my IRA and purchasing shares of a sooner retirement date. I was reading a thread about the 2008/2009 crisis and people who were 90-100% in stocks suffered a lot. I would like to think I could handle losing 40% but won't know until I'm tested. But losing 6-7% so far in this current correction hasn't caused me any worry.
I understand. You might want to check out this link (if you are not already aware of it): http://www.portfoliovisualizer.com/back ... allocation

It only goes back to 1972, but I've run it with some different allocations just to see how much I would have gained or lost in specific years. It's definitely given me a better feel for the level of risk I am willing to take. Definitely find the fund that has the stock/bond allocation you are comfortable with, since that primarily drives your risk. If you are not comfortable with any you could always buy the underlying funds individually in the amounts you want.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by Twins Fan »

bogler, you realize the difference between 90/10 and 84/16 gains or losses, like the first post example in this one, would barely be noticeable, right?
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by Twins Fan »

bogler1029 wrote:Asif, the reason I'm asking is because I am considering selling the current target-year in my IRA and purchasing shares of a sooner retirement date. I was reading a thread about the 2008/2009 crisis and people who were 90-100% in stocks suffered a lot. I would like to think I could handle losing 40% but won't know until I'm tested. But losing 6-7% so far in this current correction hasn't caused me any worry.
Which fund have you lost 6-7% in? Since you brought up T Rowe 2035, I will assume T Rowe 2045 is the current fund...

http://www3.troweprice.com/fb2/fbkweb/s ... cker=TRRKX

Looks to be about breaking even for the year, and today is looking like it might get back up over even a little.
countmein
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by countmein »

yes, too aggressive. You are one tail-event away from being wiped out.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by KyleAAA »

I think they're just about right. Just a TAD more aggressive than the 120-age in stocks rule-of-thumb would suggest on some parts of the glide path, but mostly right-on.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by CPABOB »

I agree that they are too aggressive for my taste. I still find them useful, mostly because the only have a $1,000 minimum (Which is helpful for young investors). I personally use one, but with a different target date than my actual target date. You could also use one in conjunction with a bond market index fund to achieve the desired allocation. I also find them heavy on international funds.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by greg24 »

Yes, yes, a thousand times yes.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by YDNAL »

bogler1029 wrote:Would you consider 90/10 too be too aggressive an asset allocation for someone in their early 30s?
1. A 30-yo multi-millionaire does not have the same financial profile as the 30-yo entry level manager at XYZ company that just started saving for retirement.

2. Age shouldn't drive asset allocations, Ability & Need for risk should. Then, we must be Willing (psychological) to take the risk.

So, the answer to your question, like all other general questions is..... it depends.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by leonard »

That's why TR funds should be chosen on the stock to bond ratio - not on their target date.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by stemikger »

Silence Dogood wrote:I feel like we've beaten this topic to death already.
Maybe so, but to the OP it's new.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by nisiprius »

bogler1029 wrote:Would you consider 90/10 too be too aggressive an asset allocation for someone in their early 30s? Bogle's "age in bonds" would have them holding at least 30% in bonds, but across several large brokerages, I've noticed that their target-retirement funds are very aggressive. For example, T. Rowe. Price's 2035 fund for someone in their mid-40s has them at around 84% stocks, 12.5% bonds, 3.5% other (i.e. cash).
Only you know whether they are too aggressive for you.

I'll opine that if you suspect they might be, they probably are. I'll also opine that it is better to err on the conservative side.

It is a very blunt instrument, but if you haven't done the exercise, you might at least consider running through Vanguard's Get a Recommendation tool; it doesn't deal with target retirement funds directly, but you can nevertheless use it to get an asset allocation based on your personal feelings. Enter $100,000 as the amount, regardless of how much you actually plan to invest. Answer the questions. You will get some kind of suggested allocation, like this one, and at least it is based on your answers, not on your age.
Image
Then you can compare it to a Target Retirement fund--and, conveniently, most of the Target Retirement funds use the same four funds as their tool does. For example, Vanguard [url=https://investor.vanguard.com/mutual-fu ... rview/0306]calls out Target Retirement 2045 for age 32-36, and at 90% stocks it is obviously much more aggressive than the 60% stocks recommended by the selection tool. Experimenting, you will find that Target Retirement 2020 compares this way with their tool recommendation:

Total Stock: Tool, 42%; Target Retirement 2020, 43.7%
Total International Stock: Tool, 18%; Target Retirement 2020, 17.7%
Total Bond: Tool, 32%; Target Retirement 2020, 31.4%
Total International bond, 8%: Target Retirement 2020, 7.9%

In other words, regardless of your age, if the portfolio tool gives the results shown, then the best match to the tool's recommendation is Target Retirement 2020.
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bogler1029
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by bogler1029 »

Thanks for the replies. Vanguard's tool recommends 80/20. I have decided to stick with my target year because I feel I can handle the volatility.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by Dandy »

I think they are too aggressive, especially the late dated ones. There is good theory that young people can go very aggressive because they have lots of time on their hands. That makes sense but ignores what is the risk tolerance of a new, inexperience investor? What happens if they save aggressively, accumulate a nice portfolio and then lose 40 or 50% of it? Will they stay the course or panic and play it too safe for the rest of their life.

Having your hard earned money cut in half (or a quarter) is a real slap in the face emotionally. So, while the theory has merit - it may not work out for many young people who don't have a good idea of their risk tolerance. So, my advice is to start off with a bit lower equity allocation than the far dated Target Date funds suggest.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by toto238 »

bogler1029 wrote:Thanks for the replies. Vanguard's tool recommends 80/20. I have decided to stick with my target year because I feel I can handle the volatility.
The "ideal" would be:

1. Put $1000 into the Target Retirement Fund that matches your year of planned retirement to start it
2. Throw whatever savings you can into that Target Retirement Fund, whenever you can
3. Leave alone and don't even look at it for 40 years
4. Retire, look at your final balance, and realize that you beat 90% of investors

If you can NOT look at your retirement account during times of trouble, then I don't think it's too aggressive. The only kinds of events that could cause you to sustain substantial long-term losses over a period of 40 years are events so catastrophic that its very likely NOTHING would be safe. Not even AU.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by tibbitts »

Well, we've gone from a debate between fixed 50/50 or 60/40 for everybody vs. age in bonds, to age-10, then to age-20, and now we have these TR allocations.

Certainly VG made a huge revision to the the TR allocations to make them more aggressive. I seem to recall that happening at pretty much the worst possible time for existing fund holders; maybe somebody else is more familiar with the history.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by nisiprius »

tibbitts wrote:Well, we've gone from a debate between fixed 50/50 or 60/40 for everybody vs. age in bonds, to age-10, then to age-20, and now we have these TR allocations.

Certainly VG made a huge revision to the the TR allocations to make them more aggressive. I seem to recall that happening at pretty much the worst possible time for existing fund holders; maybe somebody else is more familiar with the history.
They goosed them up in 2006. Morningstar has an interesting paper entitled Bait and Switch: Glide Path Instability which examines what various companies have done.
Prior to 2006, the Vanguard glide paths were much more conservative than they were starting in 2006. This graph does not explain what the cause of this shift was, nor does it tell why it occurred. But it does alert investors that a relatively dramatic one-time change occurred and could potentially occur again in the future.
They show the chart below. Each curve shows what Vanguard's glide slope was in a given year. Up through 2005, the glide slopes followed one path; in 2006 they abruptly changed.

Notice that in the middle years, the change actually increased stock allocation by more than 20%, e.g. in 2005, 50-years olds got about 52% stocks, and in 2006 that was raised to about 73% stocks. Another way to look at it is that the funds got about 15 years more aggressive--they gave 50-year-olds the 73% stock allocation they had formerly thought suitable for 36-year-olds.

Vanguard's officially stated reason for the change is that when they designed the funds, they expected them to attract investors who were more conservative than average, they found out that this was not true, and accordingly adjusted the funds.

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Re: Are Vanguard's target-retirement funds too aggressive?

Post by Compound »

Glide path (and changes thereto made by the investment company) is also an important consideration (as pointed out in nisiprius's graph). You may determine your initial asset allocation and pick a target date fund based on that, but realize that allocation may drift from your risk tolerance and need over time. Becuase of this, it may be worth taking more control yourself (such as through the three fund portfolio touted on these forums) to ensure your investments match your desired asset allocation over time.
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Re: Are Vanguard's target-retirement funds too aggressive?

Post by corner559 »

Absolutely not. The allocations are just fine where they are and were too conservative when they first rolled out. The notion of bond=age is far too conservative IMHO. I'm currently 90% in equities which is 25-30% off where I should be if I were to follow the age rule. For those under 30, I think 100% equities is totally appropriate.
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