DIY cheaper than Target Retirement Find?

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hlwebb01
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DIY cheaper than Target Retirement Find?

Post by hlwebb01 »

I'm an ignorant investor, totally uninterested in investing, stocks or any oother money matters. Five years from retirement. Buying the Bogle philosophy that you can't beat the market, and should keep costs to a minimum. Tempted to just put all of my savings (around $500k, aiming to double that in 5 years) in the 2020 Target Retirement Fund, which cost 0.18%. If I do it myself, using the 3 funds strategy, would that be cheaper?
DSInvestor
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Re: DIY cheaper than Target Retirement Find?

Post by DSInvestor »

Vanguard Target Retirement 2020 fund currently has 41% bonds, 35% Total Stock Market, 24% Total International Stock.

Vanguard Total Bond Market Index Admiral shares VBTLX er=0.07%
Vanguard Total Stock Market Index Admiral shares VTSAX er=0.05%
Vanguard Total International Stock market Index Admiral shares VTIAX er=0.14%

The weighted average of these three funds in the same AA ratio as the TR2020 would be er=0.079%. It would be a lower expense ratio but you'd have to manage rebalancing and glide path yourself.

If your 500K is held in a mix of tax advantaged and taxable accounts, using separate funds will allow you to place funds for tax efficiency. Target Retirement funds are excellent choices for tax advantaged accounts like IRA, 401k.
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abuss368
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Re: DIY cheaper than Target Retirement Find?

Post by abuss368 »

hlwebb01 wrote:I'm an ignorant investor, totally uninterested in investing, stocks or any oother money matters. Five years from retirement. Buying the Bogle philosophy that you can't beat the market, and should keep costs to a minimum. Tempted to just put all of my savings (around $500k, aiming to double that in 5 years) in the 2020 Target Retirement Fund, which cost 0.18%. If I do it myself, using the 3 funds strategy, would that be cheaper?
Hi hlwebb01,

Without getting into any math, an investor must ask themselves if they prefer the simplicity of an all in one fund or the additional complexity of multiple funds.

That is key.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Phineas J. Whoopee
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Re: DIY cheaper than Target Retirement Find?

Post by Phineas J. Whoopee »

hlwebb01 wrote:... Tempted to just put all of my savings (around $500k, aiming to double that in 5 years) in the 2020 Target Retirement Fund, which cost 0.18%. If I do it myself, using the 3 funds strategy, would that be cheaper?
Hi hlwebb01, and welcome to the forum!

The strategy you describe is an extreme variation on the classic "I hope my portfolio doubles in the ten years before I retire." Hope isn't a strategy, although occasionally it may work out.

It isn't absolutely impossible that the 2020 fund, or its component parts held separately for slightly less expense ratio, will return 15% annualized, but one shouldn't count on it.

Regardless of raw return, its cost efficiency will depend on whether you hold it in a tax-advantaged account or not.

We really don't have enough information to answer. If you want really good advice, you should use our asking portfolio questions format.

But please, please don't base your plan on sustained 15% returns over five years from any portfolio, let alone one 60%, and falling, in equities. It probably won't work.

PJW
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retiredjg
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Re: DIY cheaper than Target Retirement Find?

Post by retiredjg »

hlwebb01 wrote:I If I do it myself, using the 3 funds strategy, would that be cheaper?
Yes, it would be cheaper, but .18% is still very low cost and is probably cheap enough if you prefer not doing this yourself.

But if some of this money is in a taxable account (something other than a 401k, IRA, etc.) then a target fund is not your best choice for tax-efficiency. You might want to have people here look at what you've got. See the link at the bottom of this message for how to do that.
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hlwebb01
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Re: DIY cheaper than Target Retirement Find?

Post by hlwebb01 »

Thanks very much for the replies: busy completing a portfolio plan. Just to clarify: I aim to double my current amount in 5 years through additional savings, not through investing!
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Phineas J. Whoopee
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Re: DIY cheaper than Target Retirement Find?

Post by Phineas J. Whoopee »

hlwebb01 wrote:Thanks very much for the replies: busy completing a portfolio plan. Just to clarify: I aim to double my current amount in 5 years through additional savings, not through investing!
Thanks.

Not aimed at you personally, but at new posters more generally, that's why using the asking portfolio questions format is so important. When people don't use it, other posters end up wasting their time thinking about, researching (I did some math for you), and writing answers to questions the new posters didn't intend to ask.

I recognize it's part of the job of welcoming people. I am not writing anything against you personally, hlwebb01.

PJW
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Re: DIY cheaper than Target Retirement Find?

Post by Goal33 »

retiredjg wrote:
hlwebb01 wrote:I If I do it myself, using the 3 funds strategy, would that be cheaper?
Yes, it would be cheaper, but .18% is still very low cost and is probably cheap enough if you prefer not doing this yourself.

But if some of this money is in a taxable account (something other than a 401k, IRA, etc.) then a target fund is not your best choice for tax-efficiency. You might want to have people here look at what you've got. See the link at the bottom of this message for how to do that.
Exactly... I would have preferred a Target Retirement Fund despite the 2x+ expense fees, however with 60%+ of my portfolio in taxable accounts I had to do it myself for tax reasons.
larmewar
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Re: DIY cheaper than Target Retirement Find?

Post by larmewar »

0.18% vs 0.08% (rounded off) on $500K is $500/yr. Is the extra work worth $40/month and change?

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Re: DIY cheaper than Target Retirement Find?

Post by 2015 »

larmewar wrote:0.18% vs 0.08% (rounded off) on $500K is $500/yr. Is the extra work worth $40/month and change?

Lar
Yup. In my case it is. I can't understand why people will go to all the trouble to chase credit card rewards schemes or toilet paper deals at Costco and not take the time to rebalance, what, once a year? I just did it yesterday and it took me all of 15 minutes. $500 well spent. Then again, I only have 4 funds and all are at VG.
Last edited by 2015 on Sat Jan 02, 2016 8:45 pm, edited 1 time in total.
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Re: DIY cheaper than Target Retirement Find?

Post by 2015 »

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Watty
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Re: DIY cheaper than Target Retirement Find?

Post by Watty »

It would be good to check the details of the funds to make sure that there are not any restrictions or fees for short term trading.

One advantage of the target date funds is that they are pretty much rebalanced every day and that would be hard to do with a three fund portfolio.
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Re: DIY cheaper than Target Retirement Find?

Post by BW1985 »

Watty wrote:It would be good to check the details of the funds to make sure that there are not any restrictions or fees for short term trading.

One advantage of the target date funds is that they are pretty much rebalanced every day and that would be hard to do with a three fund portfolio.
I think it's either 30 or 60 days online but you can buy back into that same fund by mail without the restriction. No trading fees for VG indexes that I'm aware of.
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Polymath
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Re: DIY cheaper than Target Retirement Find?

Post by Polymath »

retiredjg wrote: But if some of this money is in a taxable account (something other than a 401k, IRA, etc.) then a target fund is not your best choice for tax-efficiency. You might want to have people here look at what you've got. See the link at the bottom of this message for how to do that.
I've read this in several target date fund threads, but never with the reasoning behind the statement. Is this because in a taxable account you want to handle the different sources (stocks, bonds) separately for tax harvesting purposes or is their a different reason TDF's are less optimal for taxed accounts? Thanks.
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retiredjg
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Re: DIY cheaper than Target Retirement Find?

Post by retiredjg »

Polymath wrote:
retiredjg wrote: But if some of this money is in a taxable account (something other than a 401k, IRA, etc.) then a target fund is not your best choice for tax-efficiency. You might want to have people here look at what you've got. See the link at the bottom of this message for how to do that.
I've read this in several target date fund threads, but never with the reasoning behind the statement. Is this because in a taxable account you want to handle the different sources (stocks, bonds) separately for tax harvesting purposes or is their a different reason TDF's are less optimal for taxed accounts? Thanks.
Yes, that is one of the reasons - having your stocks and bonds married to each other does reduce flexibility in the taxable account.

The main reason is that the target funds contain taxable bonds which are not tax-efficient when held in a taxable account. Bonds pay out dividends regularly and those dividends are taxed at your marginal rate each year even if the dividends are reinvested.

The conventional Boglehead position is that bonds are best held in you tax-advantaged accounts (IRA, 401k, etc) where the earnings are not taxed until you actually withdraw the money. Since most people withdraw in retirement and since a lot of people fall into a lower tax bracket in retirement, you may pay tax at a lower rate at that time. And end up with more money. :happy

Not everyone agrees that bonds should be held in tax-advantaged accounts, especially during this recent period of very low interest rates. And some people feel that bonds do belong other tax-advantaged accounts, but not in Roth IRA.

Also there are exceptions - such as holding shorter term money in taxable for a goal nearer than retirement.

Here is a more in depth discussion. https://www.bogleheads.org/wiki/Princip ... _placement
Polymath
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Re: DIY cheaper than Target Retirement Find?

Post by Polymath »

Thank you much and makes perfect sense. If I had not been reading in the middle of the night the answer may of occurred to me. :)
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