Bond Allocations in target retirement funds - vanguard

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Bond Allocations in target retirement funds - vanguard

Postby mrc_trb » Sun Feb 10, 2013 6:00 pm

I'm new to the forum and had a question on those target retirement funds that are offered in many 401k's. I have a good percent of my 401k in one of these funds. I am 33 years old with a target date of 2045. My question is on the bond allocation in these funds. I'll admit I don't understand bonds that well. My concern is the low interest rate and how this will affect the bond funds in my retirement fund. Will a fund manager be obligated to continue to buy bonds to meet the percentage requirementsin the fund, even if it may not be a great time to buy bonds? If so, would it be better to move out of that fund into something else? Any comments are much appreciated, thanks!

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Re: Bond Allocations in target retirement funds - vanguard

Postby Timcom99 » Sun Feb 10, 2013 7:21 pm

The Target Date 2045 fund you have has very little bonds in it. The 2045 fund consists of 63% Total Stock Market Index, 27% Total International Stock Index and only 10% Total Bond Index. It will continue to have these ratios until I think 2021 when it will enter the glide path phase and progressively go more heavy towards bonds.

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Re: Bond Allocations in target retirement funds - vanguard

Postby hoppy08520 » Sun Feb 10, 2013 7:22 pm

Hello and welcome to the forum. First of all, I don't know which fund your specific target date fund is, but most of the ones with a retirement date of 2045 are going to be around 90/10 or maybe 85/15 stocks/bonds. Going much lower than that is unlikely (given historical patters) to raise returns by much, but it is likely to increase volatility. At around 85/15 or 90/10, the fractional marginal increase in expected return is not a very good trade off for the expected volatility.

Here is this in a picture that you'll see from time to time here:
What this shows is that if you want higher returns (i.e. move UP along the Y axis) then you have to take greater risk (i.e. move RIGHT along the X axis). When you look at this chart, an 80/20 allocation (move 4 squares to the left of the "100% Stocks" square) loses only 0.5% of returns compared to a 100/0 allocation, but the standard deviation (a measurement of volatility and risk) goes down 3%. This means that this portfolio will achieve nearly the same returns, but have much less volatility. Dialing it down to 60/40, which seems like a coward's portfolio, only lowers your expected return by 1%, but reduces your standard deviation from 16% down to 11% (almost a third less) for a smoother ride.

While volatility might not matter much to a 33-year-old with a long horizon, it's still a nice trait to have in a portfolio for many people, especially when you probably don't pay much for it when comparing a 95/5 portfolio, for example, to an 80/20 portfolio.

There have been many posts from others about the so-called impending bond collapse, so I'd recommend you read through some of them to get a better perspective.

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Re: Bond Allocations in target retirement funds - vanguard

Postby nisiprius » Sun Feb 10, 2013 7:35 pm

Timcom99's point is right on. You only have 10% bonds, so don't obsess about it. Tune out the noise.

There's always something going on, in which talk feeds on itself and there's a faddish infatuation with some current investment topic that always gets blown out of proportion. At any given moment you will be thinking "but EVERYONE says this is a good time for X," or "but EVERYONE says it's a bad time for Y." I don't quite know what has triggered the current round of bond-apocalypse talk, but it's mostly noise.

That said, it may relieve you to know that the Target Retirement funds aren't actually required to hold any specified proportions of anything. I'm not at all sure that's good, but, anyway, it's not as if the fund managers' hands are tied. If they were certain that bonds were poison, they could cut back on them.

They've adapted, or perhaps tinkered, any number of times. 2006 they sharply increased stock allocation, a couple of years ago they boosted international stocks from about 20% to about 30% of total stocks, and they've just announced that within the bond allocation they'll be putting about 20% of it into international bonds. And, indeed, they are switching from intermediate-term TIPS in some of their funds to short-term TIPS, so that is in fact an example of dialing back bond risk.
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Re: Bond Allocations in target retirement funds - vanguard

Postby mrc_trb » Sun Feb 10, 2013 9:39 pm

Many thanks for the replies. I know my bond percentage is low, but you do hear a lot of noise about it. Very interesting point on the fund managers redistributing, I didn't know that. Thanks for all the info, it's very helpful to hear!

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