Bogleheads

[Oddibe McDowell]

I'm still trying to work on my asset allocation, which I know depends on everyone's individual situation.

I've been reading the forum regularly over the last few months, Bogleheads guide, Four Pillars, etc.

It seems to me that most on this forum (as well as Bogle, Bernstein, etc.) would recommend a higher bond allocation more than what the TR funds provide. For instance, the 2030 fund at Vanguard has a 13% bond allocation (from what I understand). The T Rowe Price Fund has only 9% or so. If we assume a retirement at 65 or so - would this be an appropriate bond allocation for a 42 year old?

If we used the old "age in bond" approach - the TR funds are obviously way off. Age minus 110 would be way off - and even age minus 120. Are these too aggressive under a traditional "Boglehead" approach?

I'm 28 and trying to pinpoint my own bond allocation - I figured the TR funds were a good place to look at what might be appropriate (unfortunately I have no TR funds in my 401(k)). But it seems they might be more aggressive than what's generally recommended on this forum and in the Boglehead's Guide.

Thoughts on the bond allocation in TR funds?

[norm]

When you think about buying a Target Retirement Fund you should look at them to see which one has the AA you are seeking not the Target Retirement date. As the fund moves closer to it's date the AA becomes heavier in bonds and you can sell it and buy another target fund that suits your desired AA at that time.

At age 28 I wouldn't be concerned about owning bonds for a long time.
_________________
NormC

�Illegitimus Non Carborundum �

“The art is not in making money, but in keeping it”

[fredd]

The bear market of 2000-2002 caught me with too little exposure to fixed income. Why buy boring 5% bonds when the stock market is on fire? I am 58 and moving slowly to a 60-40 stock to bond split.

It is 100 or 110 minus your age, not the other way around.

fredd

[YDNAL]

Oddibe McDowell,

I use the TR funds for my own benchmark and was looking at them this morning since I'm adjusting my AA end-2007 and then 2012.

They jump about 10% points every 5 years. For instance, VG TR 2015 = 36%, TR 2010 = 45% and TR 2005 = 55%.

Regards,
YDNAL

[Pangloss]

Hi Oddibe. I've puzzled over this point also. A lot of people on this forum definitely advocate higher bond allocations than the TR funds. I'm 31 years old and have a 10% bond allocation right now. I've considered adjusting up to 12-15%. However, I plan on working another ~35 years, so I should have plenty of time to correct a 5% allocation mistake I make while I'm in my 30's. I don't have a particularly good way to decide what bond allocation to use, so for now, I will stick with copying Vanguard's TR2045 allocation. Presumably they have a good reason for the allocation. In any case, the most improtant point is to have a well diversified portfolio composed of very low cost funds.

[dave.d]

I agree with Oddibe the Vanguard TR funds (and their competitors) are too aggressive in terms of stock/bond allocation. I can see no good reason for anyone to be beyond 80/20, but these funds run 90/10 for years. That said, you could do a lot worse.

I was very attracted to these at one point based on automatic rebalancing, and the idea that in a taxable account you won't have to sell the fund and realize capital gains to become more conservative over time. Upon greater education though, I realized that (1) in later years they'll still sell the stocks within the fund and therefore have to distribute the gains, so no big advantage; and (2) the taxable bonds are a big problem with my marginal tax rate.

IIRC, the allocations on these were changed on these just last year to be more aggressive (or at least to include international). Suspicion at the time was that Vanguard was engaged in a bit of performance chasing because of historical underperformance relative to competitive and similarly-dated T. Rowe Price and Fidelity funds.

I actually approve of the addition of international, in isolation. In context, however, it was a fairly nasty thing to do to people who may have planned taxable allocations around the fact that these funds did not include international. There's be some talk recently that REIT's and/or commodities might be added, although the latter is surely smoke as Vanguard has no commodity vehicle.

--Dave

[livesoft]

Vanguard TR funds always had international. They changed to add emerging markets. AllianceBernstein TR funds always had REITs (about 10%).

[Oddibe McDowell]

Thanks for the responses.

Pangloss - nice to know somebody around the same age dealing with the same thing. I agree with you - I guess it's best at this point to diversify and stay as low cost as possible.

But it's awful tough for me to come up with a number that works - when TR funds and conventional wisdom says one thing .... then you read Bernstein says 80/20 sould be max equity allocation .... or Ben Graham said 75/25 .... Bogle says age in bonds, etc.

I guess we'll all see how it plays out over time, maybe it's just part of the game.

[Taylor Larimore]

[Laura]

Oddibe,

All investors are different so there is not "one asset allocation for all 25 year olds" or "one for all 30 year olds", etc. It is a personal decision and you should settle on something that makes you comfortable.

We tend to be our own worst enemy when it comes to investing. Many people say they can take volatility but when they hear news reports that the DOW is down 200 points they are on this forum posting about whether it is time to get out. Bailing out is about the worst thing that you can do so it is much better to pick a more conservative allocation that you can stick with over time then going with a very aggressive allocation that will make you uncomfortable.

That said, there are people who have absolutely no problem with the ups and downs of the market. They remain focused on the long term and never even break a sweat even through the worst bear markets. Which group do you fall in? Only you can answer this question. Remember that investing is not a test of nerves and you shouldn't spend all of your time worrying about your money. If you do to me it says you are too aggressive. Remember that you can modify your allocation as you gain more investing experience. You can start out more conservative, perhaps 80/20, then change your mind later once you see how you respond to the ups and downs. If you want to switch to 90/10 just increase new contributions to equity. If you need to drop to 70/30 just direct new money to bonds.

I am not advocating changing your allocation all the time but it might take you a little bit to discover your own pain threshold.

Laura

[Ken Schwartz]

[United]

Interesting.

One of my biggest criticisms against the target retirement funds is that they are too conservative.

[nick22]

I think Vanguard was just trying to match T Rowe's 90% equity composition.

I think 90/10 is a bit much, but many TR investors may never look at these accounts and balances and be shielded somewhat from the frequent ups and downs of the market. The big concern is that I assume when these investors are picking they are looking at recent high performance numbers (read higher in equity) and have unwittingly forced Vangurad to match this approach.
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Nick22

[Zander]

[Ken Schwartz]

[Dino]

The reason I decided on a Life Strategy fund rather than TR was that the LS funds do not change allocation of bonds with time. I then chose a bond fund to accompany the LS Growth fund in the amounts (DCA) I am comfortable with.

I don't know why you couldn't use a TR fund and simply add a bond fund in the amount you need to produce the allocation you desire. Of course, I am talking about nontaxable accounts.

Dino

[Quasimodo]

Over the most recent ten year period Wellesley Income has outperformed Total Stock Market Index and all of the Life Strategy funds, and done so with a smoother ride.

Wellesley has roughly 2/3 intermediate term bonds (including some foreign bonds but no commercial-mortgage backed, currently) and 1/3 value-oriented stocks (including at least one REIT currently)

John
_________________
A beautiful thing is never perfect.

Egyptian proverb

[United]

[bpp]

[EmergDoc]

[YDNAL]

[mesaverde]

Hi Oddibe,

I'm 34 and use Target Retirement 2030 in my tax defered accounts. I plan to start drawing from these accounts when I am ~60 years old.

According to the way Vanguard has the TR funds allocated now, that would mean that the 2030 fund would hold approximately 55% bonds when I am 60, close to my age in bonds at retirement. Right now this fund holds only 13% in bonds (certainly nothing close to my age) but by the time I turn 60 and will actually need the money, the bond/stock ratio should be right on. That is, if Vanguard doesn't change anything.

[larryswedroe]

Just one note, don't know if mentioned before but there is the potential for wrong location with these funds. You should have preference for the equity risk (not just equities but equity risk, like EM bonds and junk bonds and converts and preferreds0 in the taxable and the bonds in tax advantaged, so these funds (same for lifestyle funds) can lead you to have wrong location. IF that is the case avoid them

[mcdave]

[Random Musings]

United wrote:

[United]

Yeah, those are good points.


Another note: I think it's important to keep in mind that volatility does not equal risk. A low-volatility portfolio may not be low-risk, and vice versa. Over long enough time spans (years), 100% equity portfolios may actually have LESS risk, despite being more volatile.


One last thing: does it always come back to one's need to take risks? Of that I'm not so sure. Here's my perspective on the issue.

Let's assume the goal of investing is primarily retirement. People want to stop working at some point, and when they do, they don't want to live in poverty. Based on this assumption, it seems there are three categories of people investing for retirement: people without enough money for retirement, people with barely enough money for retirement, and people with tons of money for retirement. Here are their strategies:

--People without enough money for retirement--
These people NEED to take risk to meet their retirement goals. Thus, they invest in stocks.

--People with barely enough money for retirement--
These people have enough for their retirement goals, but they can't afford to lose any money. These people CAN'T take risk. Even bonds could be too risky.

--People with tons of money for retirement--
These people are investing money that won't be used for retirement. They WANT to take risk, because they can afford to and it pays a premium.

Again, these are my unrefined views. Other people may have an entirely different interpretation.

[Oddibe McDowell]

Does anybody know what the original equity/bond allocations were for the Target Retirement Funds (before the 2006 changes noted in the link from Ken)?

I'm very interested to see and I couldn't find it on Vanguard's website. Thanks.

[Ken Schwartz]

Hi Oddibe,

I'll provide you with numbers shortly. For now, here is the Target Retirement Funds Preliminary Prospectus from 2003.

Best wishes,
Ken

[Ken Schwartz]

Oddibe,

Here are the initial allocations from 2003, plus commentary from the preliminary prospectus concerning their intended evolution over time.

Target Retirement Income Fund
50% Total Bond Market Index Fund
25% Inflation-Protected Securities Fund
20% Total Stock Market Index Fund
05% Prime Money Market Fund


Target Retirement 2005 Fund
50% Total Bond Market Index Fund
35% Total Stock Market Index Fund
15% Inflation-Protected Securities Fund

[Oddibe McDowell]

Ken:

Thanks for your help with this, I appreciate your time.

Interesting they made these changes after only a few years.

[benca1]