Target Funds?

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bwinoregon
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Target Funds?

Post by bwinoregon »

Hello,
Thank you in advance for your responses.

I am trying to decide whether to roll over about 200,000 in my wifes old 401K to a target fund. I am familiar with glide paths and I am looking at T-rowe's, Fidelity and Vanguard. She is 48 and I am 39 are we are both looking to retire at 62 (optimistic, I know) and have a combined net worth of about 600,000. Our income is about 100,000 annually and we put about 15% into our 401K and max out our roths. We are good savers but I got burned in 2000 with buying random funds based off of the names and now I primarily focus on target funds as my investment of choice.


My question is shoudl I use Vanguards, Fidelities or T rowes funds? Is there a difference (besides cost). I am interested in Fidelity because they have a center near my work and could handle the transfer from 401k to rollover IRA easy.

Additionally, if I already have about 100K in VTTHX....should I branch out to T-rowe or Fidelity's target funds for "diversity" or does it not really matter? Thank you.
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hoppy08520
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Re: Target Funds?

Post by hoppy08520 »

Hello and welcome to the forum.

Each fund family might have a different philosophy behind the composition of their target funds. The Fidelity Freedom funds have 20+ underlying funds, which seems a bit excessive. It's been said before that Fidelity sticks many of its new or under-selling funds into the Freedom Funds so they can get some traction.

TRP doesn't cram as many funds into its offerings, more like 10 or so. One other observations about TRP compared to Fidelity and Vanguard is that TRP seems to emphasize large growth stocks.

In the long run, what will probably make Vanguard perform better is ER: 0.17% compared to around 0.78% for TRP and 0.82% for Fidelity.
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jjustice
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Re: Target Funds?

Post by jjustice »

For what it's worth, Morningstar rates Vanguard and T. Rowe Price as the two best target date providers.
http://www.morningstar.com/cover/videoc ... ?id=584542

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sambb
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Re: Target Funds?

Post by sambb »

i like them, if you like the glide path. Some people second guess it but as an overall plan, it is a solid choice, and simplifies life.
Laura
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Re: Target Funds?

Post by Laura »

I am a big fan of the Vanguard Target Retirement funds. In addition to all the clutter found in the other company funds you will also find significantly higher expense ratios. Many others are in agreement and you might enjoy this article from Morningstar titled Vanguard Dominates The Fund Industry Again.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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abuss368
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Re: Target Funds?

Post by abuss368 »

I would consider Vanguard for the low fees and simple approach. They do not add a lot of complex funds at often much higher fees. Vanguard also has all four underlying funds as index offerings.

I have family in the Target funds and I also invest in one fo the funds. We are very happy and thankful.
John C. Bogle: “Simplicity is the master key to financial success."
sambb
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Re: Target Funds?

Post by sambb »

Great idea, it will stop you from tinkering, and auto-rebalance. Target date is ideal for any retirement account --- i think they are the benchmark, as long as you are satisfied with asset allocation.

A lot of people here seem to focus on the allocation - but you can take your best guess and always readjust in the future to a different target date fund if the circumstances in your life or your risk tolerance change. It isn't a big deal.
terrabiped
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Re: Target Funds?

Post by terrabiped »

bwinoregon wrote:I am interested in Fidelity because they have a center near my work and could handle the transfer from 401k to rollover IRA easy.

Additionally, if I already have about 100K in VTTHX....should I branch out to T-rowe or Fidelity's target funds for "diversity" or does it not really matter? Thank you.
I recommend Vanguard for the same reasons others have given. As far the Fidelity office near your work, I wouldn't give much weight to that factor. They are all a phone call away and the transfer involves nothing more than a few phone calls and a few mailings. It will be easy regardless of which custodian you choose.

As far as diversity, the Vanguard target funds are fully globally diversified. Adding a Fidelity or TRP fund in addition to your existing Vanguard fund just duplicates the holdings of the VG fund at higher costs.

Also, when you have substantial assets with one company you get benefits. Google Vanguard Voyager Select Services. In my opinion those benefits trump any benefits you would get from having additional accounts elsewhere.
YDNAL
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Re: Target Funds?

Post by YDNAL »

bwinoregon wrote:My question is shoudl I use Vanguards, Fidelities or T rowes funds? Is there a difference (besides cost). I am interested in Fidelity because they have a center near my work and could handle the transfer from 401k to rollover IRA easy.
Oregon, welcome!

You should never buy anything because "there is a center near my work."

Instead, buy what best-matches the Equity/Fixed split for your personal circumstances, with the most possible diversification, and pay the least cost possible.

I like Vanguard Target Date funds.
https://investor.vanguard.com/mutual-fu ... etirement/#/
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stemikger
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Re: Target Funds?

Post by stemikger »

As far as Target Date Funds go, Vanguard's seem to make the most sense. Having said, that, it is a good idea to make sure Vanguard sticks with their approach. Since their Target Date funds came to fore, they did change their asset allocation, international allocation and most recently added international bond funds. So even though it is still a good solid choice, it is a good idea to make sure any additional changes they make are in line with your investment philosophy.

I think they make a lot of sense and simplify life and as others have told me on numerous times. You can do a lot worse.
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sport
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Re: Target Funds?

Post by sport »

You may also wish to look at Vanguard's Life Strategy Funds. The main difference is that these funds keep a constant allocation while the Target funds decrease their equity holdings over long periods of time. Either type of fund would be a good choice.
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abuss368
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Re: Target Funds?

Post by abuss368 »

Vanguard has made changes to the Target funds since creation in 2003:

1) Increased the equity allocation to International from 20% to 30%.
2) Removed Prime Money Market Funds.
3) Replaced the Intermediate Term TIPS with the Short Term TIPS Index Fund.
4) Added Total International Bond Index Fund.
5) Removed Europe, Asia, and Emerging Markets individual funds for the Total International Index Fund.

That is a lot in 10 years. I have been writing for a while that I will not be surprised if the international equity allocation will be the next change in terms of an increase to 40% or so. Essentially the allocation to international investments at the portfolio level has already increased with the inclusion of the new Total International Bond Index fund.
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hoppy08520
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Re: Target Funds?

Post by hoppy08520 »

abuss368 wrote:Vanguard has made changes to the Target funds since creation in 2003:

1) Increased the equity allocation to International from 20% to 30%.
2) Removed Prime Money Market Funds.
3) Replaced the Intermediate Term TIPS with the Short Term TIPS Index Fund.
4) Added Total International Bond Index Fund.
5) Removed Europe, Asia, and Emerging Markets individual funds for the Total International Index Fund.

That is a lot in 10 years. I have been writing for a while that I will not be surprised if the international equity allocation will be the next change in terms of an increase to 40% or so. Essentially the allocation to international investments at the portfolio level has already increased with the inclusion of the new Total International Bond Index fund.
You may have left out what is arguably the most significant change of all -- in 2006 they made the asset allocations more aggressive by upping the stock fund portions by 10% - 20% depending on the fund (see: http://www.bogleheads.org/wiki/Vanguard ... nt_changes). Many of the other fund families were doing the same thing to juice returns, and it caused a lot of heartburn when these funds got hammered in 2009.

As for the other changes, I think a fund company should change the mix in their target date funds if it betters the fund. Vanguard (as with much of the investing community) has generally went in a direction of having more international stocks, so the shift from 20% to 30% of equities in international is reflected in their all-in-one funds (LifeStrategy as well). I also thinks it made sense to go with a single total international fund rather than a handful of smaller funds.

The MM fund was, I believe, only in the Income fund (targeted for people in retirement), and the TIPS fund is generally in the Income (or close to it) range, so those changes don't affect the people holding the "far out" funds.

I think you should stay on top of what is inside your target date fund, but for anyone who really wants to pick their funds, I wouldn't go with a TD fund -- just build your own.
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abuss368
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Re: Target Funds?

Post by abuss368 »

hoppy08520 wrote:
abuss368 wrote:Vanguard has made changes to the Target funds since creation in 2003:

1) Increased the equity allocation to International from 20% to 30%.
2) Removed Prime Money Market Funds.
3) Replaced the Intermediate Term TIPS with the Short Term TIPS Index Fund.
4) Added Total International Bond Index Fund.
5) Removed Europe, Asia, and Emerging Markets individual funds for the Total International Index Fund.

That is a lot in 10 years. I have been writing for a while that I will not be surprised if the international equity allocation will be the next change in terms of an increase to 40% or so. Essentially the allocation to international investments at the portfolio level has already increased with the inclusion of the new Total International Bond Index fund.
You may have left out what is arguably the most significant change of all -- in 2006 they made the asset allocations more aggressive by upping the stock fund portions by 10% - 20% depending on the fund (see: http://www.bogleheads.org/wiki/Vanguard ... nt_changes). Many of the other fund families were doing the same thing to juice returns, and it caused a lot of heartburn when these funds got hammered in 2009.

As for the other changes, I think a fund company should change the mix in their target date funds if it betters the fund. Vanguard (as with much of the investing community) has generally went in a direction of having more international stocks, so the shift from 20% to 30% of equities in international is reflected in their all-in-one funds (LifeStrategy as well). I also thinks it made sense to go with a single total international fund rather than a handful of smaller funds.

The MM fund was, I believe, only in the Income fund (targeted for people in retirement), and the TIPS fund is generally in the Income (or close to it) range, so those changes don't affect the people holding the "far out" funds.

I think you should stay on top of what is inside your target date fund, but for anyone who really wants to pick their funds, I wouldn't go with a TD fund -- just build your own.
As I was posting the earlier thread, I was remembering certain changes and updates. That is right about the increase in equities resulting in less bonds.

Thank you for reminding all of us.
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MichaelM24
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Re: Target Funds?

Post by MichaelM24 »

abuss368 wrote:Vanguard has made changes to the Target funds since creation in 2003:

1) Increased the equity allocation to International from 20% to 30%.
2) Removed Prime Money Market Funds.
3) Replaced the Intermediate Term TIPS with the Short Term TIPS Index Fund.
4) Added Total International Bond Index Fund.
5) Removed Europe, Asia, and Emerging Markets individual funds for the Total International Index Fund.
All of these changes look like improvements to me.
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nisiprius
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Re: Target Funds?

Post by nisiprius »

MichaelM24 wrote:
abuss368 wrote:Vanguard has made changes to the Target funds since creation in 2003:

1) Increased the equity allocation to International from 20% to 30%.
2) Removed Prime Money Market Funds.
3) Replaced the Intermediate Term TIPS with the Short Term TIPS Index Fund.
4) Added Total International Bond Index Fund.
5) Removed Europe, Asia, and Emerging Markets individual funds for the Total International Index Fund.
All of these changes look like improvements to me.
As noted by Hoppy, Abuss368 left out the biggest change, though: goosing up the stock allocation in 2006.

The change, as shown by Morningstar in a chart below, amounted to sliding all of the curves forward by about fifteen years. Basically, they moved everyone onto the course that had been set for someone fifteen years younger.

They expect you to stay the course in these funds for a lifetime, but they can't keep the funds on the same course for a single decade.

They claim that their target funds are supposed to get more conservative with time. Yet, someone who invested in one of them near the beginning actually has a higher stock allocation today than they did when they began.

Morningstar has properly taken them to task, very politely, for this in the paper, Bait and Switch: Glide Path Instability.

Sensible people can differ about what is the "best" portfolio for a life stage, but having billed these as lifetime funds that are supposed to get more conservative with time, they should have done what they said they were going to do.

The short take-home from Morningstar's report is that Fidelity has literally been all over the map and inconsistent. Vanguard made a huge big-bang change in 2006. Of the three, T. Rowe Price has been the only one to keep their funds on the course originally set for them.

For the record, Vanguard says that they expected their target-date funds to attract investors that were more conservative than average, and that they change the funds in 2006 because their studies showed this was not the case.

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Last edited by nisiprius on Mon Jan 20, 2014 8:22 pm, edited 3 times in total.
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MichaelM24
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Re: Target Funds?

Post by MichaelM24 »

nisiprius wrote:
MichaelM24 wrote:
abuss368 wrote: They claim that their target funds are supposed to get more conservative with time. But in fact, the 2006 change amounted to sliding all of the curves forward by about fifteen years. That means that someone who invested in one them near the beginning actually has a higher stock allocation today than they did when they begaN
True, but the mistake was creating such unreasonably conservative funds in the first place. Fixing them wasn't the mistake.
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Re: Target Funds?

Post by Grt2bOutdoors »

nisiprius wrote:
MichaelM24 wrote:
abuss368 wrote:Vanguard has made changes to the Target funds since creation in 2003:

1) Increased the equity allocation to International from 20% to 30%.
2) Removed Prime Money Market Funds.
3) Replaced the Intermediate Term TIPS with the Short Term TIPS Index Fund.
4) Added Total International Bond Index Fund.
5) Removed Europe, Asia, and Emerging Markets individual funds for the Total International Index Fund.
All of these changes look like improvements to me.
Abuss368 left out the biggest change, though: goosing up the stock allocation in 2006.

They expect you to stay the course in these funds for a lifetime, but they can't keep the funds on the same course for a single decade.

They claim that their target funds are supposed to get more conservative with time. But in fact, the 2006 change amounted to sliding all of the curves forward by about fifteen years. That means that someone who invested in one them near the beginning actually has a higher stock allocation today than they did when they began.

Morningstar has properly taken them to task, very politely, for this in the paper, Bait and Switch: Glide Path Instability.

Sensible people can differ about what is the "best" portfolio for a life stage, but having billed these as lifetime funds that are supposed to get more conservative with time, they should have done what they said they were going to do.
One could make the argument that all these changes are part marketing - ie. juice returns to encourage asset retention, asset growth and capture of market share. The other argument one could make is "the mutual fund complexes" don't know what they are doing or don't have a firm investment strategy for getting from Point A to Point B, unlike a pension fund complex which has a firm mandate and strategy for accomplishing it. Pension funds may make tweaks to their strategy, but I highly doubt you would find the vast majority of them undertaking 10 or more substantial changes within a 10 year period.
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MichaelM24
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Re: Target Funds?

Post by MichaelM24 »

Grt2bOutdoors wrote:
nisiprius wrote:
MichaelM24 wrote:
abuss368 wrote:Vanguard has made changes to the Target funds since creation in 2003:

1) Increased the equity allocation to International from 20% to 30%.
2) Removed Prime Money Market Funds.
3) Replaced the Intermediate Term TIPS with the Short Term TIPS Index Fund.
4) Added Total International Bond Index Fund.
5) Removed Europe, Asia, and Emerging Markets individual funds for the Total International Index Fund.
All of these changes look like improvements to me.
Abuss368 left out the biggest change, though: goosing up the stock allocation in 2006.

They expect you to stay the course in these funds for a lifetime, but they can't keep the funds on the same course for a single decade.

They claim that their target funds are supposed to get more conservative with time. But in fact, the 2006 change amounted to sliding all of the curves forward by about fifteen years. That means that someone who invested in one them near the beginning actually has a higher stock allocation today than they did when they began.

Morningstar has properly taken them to task, very politely, for this in the paper, Bait and Switch: Glide Path Instability.

Sensible people can differ about what is the "best" portfolio for a life stage, but having billed these as lifetime funds that are supposed to get more conservative with time, they should have done what they said they were going to do.
One could make the argument that all these changes are part marketing - ie. juice returns to encourage asset retention, asset growth and capture of market share. The other argument one could make is "the mutual fund complexes" don't know what they are doing or don't have a firm investment strategy for getting from Point A to Point B, unlike a pension fund complex which has a firm mandate and strategy for accomplishing it. Pension funds may make tweaks to their strategy, but I highly doubt you would find the vast majority of them undertaking 10 or more substantial changes within a 10 year period.

The current Vanguard fund looks almost perfect. It's virtually identical to T. Rowe Price's glide path. They made one significant change (asset allocation is the only change with much impact) in a very young fund. Big deal.

They made an unusably conservative fund that they fixed within it's first three years. It's been steady for eight years. They didn't change the allocation during the 2008 plunge.
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Re: Target Funds?

Post by robertalpert »

Vanguard target date funds are transparently constructed with 4 or 5 component index funds. They are fully indexed and are the only ones I would consider.

Target date funds from other sources like T Rowe Price and Fidelity have a hodgepodge of 20 to 30 component funds; are not fully indexed; and therefore not very transparent in their construction. They have greater tracking error than Vanguard funds. I believe that these fund companies use target dates for the purpose of increasing the assets of actively managed component funds that are otherwise underbought by the buying public. That's just my 2-cents worth.
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Re: Target Funds?

Post by ofcmetz »

robertalpert wrote: I believe that these fund companies use target dates for the purpose of increasing the assets of actively managed component funds that are otherwise underbought by the buying public. That's just my 2-cents worth.
^This is probably true in many cases.

Blackrock's Lifepath Target Date Index Funds are also pretty decent choices when available in retirement plans. They contain 100% Index funds.

Based on the OP's choices, I would go with the Vanguard Target Retirement Funds. Personally I prefer the Lifestrategy series of funds which have a constant allocation to the Target Date series of funds.. You can use these for your own glide path. I would look at the conservative growth or moderate growth ones. I'm more of a fan of a constant asset allocation which I would change as financial or life circumstances change. I don't see a need to make very small changes every year.

I also think Nisi makes very valid points in regards to the Target Date funds. Vanguard has definitely messed with these funds too much for anyones good. Too much tinkering is bad for all investors involved.
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Re: Target Funds?

Post by Clever_Username »

Probably the biggest deal for me:
nisiprius wrote:They claim that their target funds are supposed to get more conservative with time. Yet, someone who invested in one of them near the beginning actually has a higher stock allocation today than they did when they began.
Ouch. I'm very glad I got my younger sister into Vanguard's target funds (all of her retirement savings is in tax-advantaged). I'd be a little uneasy at 90% stock (she's in TR 2045, started about two years ago), but this isn't a worry for her -- she just contributes annually, usually with me present, sees that there's money there from the past, and that's that. I'd be really upset if I had gotten her into a fund that increased its stock allocation by so much.
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