Target Date worth it?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Freddobbs
Posts: 35
Joined: Sun Mar 03, 2019 1:25 pm

Target Date worth it?

Post by Freddobbs »

I am looking for advice on two fronts, one regarding taking some money off the table for 30 days until I get comfortable with an AA for the long term. Specifically, I hold Total Bond, Total Stock market, Total International, Small cap Value and Large cap value index. Essentially a small and value tilt, which id like to keep.

Question #1- As I am very uncertain about my AA, is it a terrible idea to take my tax deferred and park them all (about 60% of net assets) in a money market for 30 days until I decide on a good AA?
Question #2- I am leaning toward a target date fund and keeping small cap and large value indexes so I have LESS to rebalance. Is it worth it to lose some costs? Currently all my costs are .08, the target dates have a .13 fee. IS this silly to worry about? Is it worth it since I will still need to adjust the value portion anyway?
02nz
Posts: 6413
Joined: Wed Feb 21, 2018 3:17 pm

Re: Target Date worth it?

Post by 02nz »

There's a poster here whose signature says something like, If you have to ask about a target-date fund, you're the right person for it. I think that's true in your case. The difference in expense ratio is tiny, and if it can save you from behavioral pitfalls it's more than worth it.

Speaking of which, the fact that you're even contemplating moving everything to cash for 30 days to decide on an AA suggests you may be particularly susceptible to behavioral pitfalls (we are all susceptible, some more than others). Target-date funds or not, moving everything to cash isn't the way most people here would recommend for shifting AAs. Decide on the AA first, and then make the move. Or at most, move no more to cash/bonds than for the most conservative allocation you would consider.

Have you taken a look at the allocation for the target-date fund? How does it compare to your current AA?
livesoft
Posts: 75173
Joined: Thu Mar 01, 2007 8:00 pm

Re: Target Date worth it?

Post by livesoft »

I use a target date fund in one of my accounts even though the rest of the portfolio is allocating in a heavily tilted to small-caps and value.

The target date fund is actually outperforming my overall portfolio. Sad. :twisted:

The expense ratio difference of 0.13% versus 0.08% is meaningless.
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
JupiterJones
Posts: 2974
Joined: Tue Aug 24, 2010 3:25 pm
Location: Nashville, TN

Re: Target Date worth it?

Post by JupiterJones »

#1: I agree with 02nz. Parking money is not a terrible idea in-and-of-itself, but the fact that it's motivated by uncertainty in your AA is a bit of an eyebrow-raiser. How would another 30 days make you feel comfortable about it anyway? I wonder if you're going for an AA that's more aggressive that perhaps it should be for you?

#2: If you continue to want your small-cap/value tilt, then I'll go against the crowd here and say just keep the separate funds. More to rebalance? Yeah. But if you keep your other two funds outside of your Target Date, then you're still going to have to rebalance anyway, of course. The difference in effort and discipline required between rebalancing among five funds and rebalancing among three funds is virtually nil.
Stay on target...
Topic Author
Freddobbs
Posts: 35
Joined: Sun Mar 03, 2019 1:25 pm

Re: Target Date worth it?

Post by Freddobbs »

Current allocation is 65/35 and Im really challenged by it. My value portion is about 15 % of the portfolio so there is not an exact match for a target date fund.
User avatar
vineviz
Posts: 9287
Joined: Tue May 15, 2018 1:55 pm

Re: Target Date worth it?

Post by vineviz »

Freddobbs wrote: Mon Jun 08, 2020 11:02 am Current allocation is 65/35 and Im really challenged by it. My value portion is about 15 % of the portfolio so there is not an exact match for a target date fund.
If you must have a SCV tilt, try this:

85% Vanguard Target Retirement 2025 Fund (VTTVX)
15% Vanguard Small-Cap Value Index Fund (VSIAX)

Don’t go to cash while you figure it out. That’s a terrible idea.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
bgf
Posts: 1556
Joined: Fri Nov 10, 2017 9:35 am

Re: Target Date worth it?

Post by bgf »

vineviz wrote: Mon Jun 08, 2020 11:16 am
Freddobbs wrote: Mon Jun 08, 2020 11:02 am Current allocation is 65/35 and Im really challenged by it. My value portion is about 15 % of the portfolio so there is not an exact match for a target date fund.
If you must have a SCV tilt, try this:

85% Vanguard Target Retirement 2025 Fund (VTTVX)
15% Vanguard Small-Cap Value Index Fund (VSIAX)

Don’t go to cash while you figure it out. That’s a terrible idea.
OP, you might already know this, but you need to basically be small cap value for life if you are going to do it.

On the other hand, given the large amount of bonds in 2025, you're unlikely to see the small cap value as an "underpeformer" in comparison.

Seeing one fund as an underperformer compared to other funds in your portfolio, rather than looking at your portfolio as a single entity, can lead to behavioral errors.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
User avatar
CABob
Posts: 4998
Joined: Sun Feb 25, 2007 8:55 pm
Location: Southern California

Re: Target Date worth it?

Post by CABob »

Question #1- As I am very uncertain about my AA, is it a terrible idea to take my tax deferred and park them all (about 60% of net assets) in a money market for 30 days until I decide on a good AA?
Are you going to be back in 30 days asking if it's a good time to get back into the market?
Bob
statefan03
Posts: 64
Joined: Wed Mar 25, 2020 12:31 pm
Location: NC

Re: Target Date worth it?

Post by statefan03 »

My problem with the Target Date fund is they are too heavy in International Stocks and have zero International Bonds. Overall it's a great product but I'd rather customize those ratios myself, and save a few ER points in the process.

If you are in a taxable account then they make a lot of sense so you don't have to worry about rebalancing and creating taxable events.
02nz
Posts: 6413
Joined: Wed Feb 21, 2018 3:17 pm

Re: Target Date worth it?

Post by 02nz »

statefan03 wrote: Mon Jun 08, 2020 1:44 pm My problem with the Target Date fund is they are too heavy in International Stocks and have zero International Bonds. Overall it's a great product but I'd rather customize those ratios myself, and save a few ER points in the process.

If you are in a taxable account then they make a lot of sense so you don't have to worry about rebalancing and creating taxable events.
Not so. The rebalancing absolutely has tax implications in a taxable account even though it's automatic, and so we often recommend against holding target date funds (or LifeStrategy and the like) in taxable. Another reason is the income from the bond portion is non-qualified, and thus taxed like ordinary income. Search for more in-depth discussions of this.

You are also incorrect about international bonds. Every Vanguard target date fund I checked is made up for 4 underlying index funds - U.S.and international stocks, and U.S. and international bonds.
Last edited by 02nz on Mon Jun 08, 2020 2:03 pm, edited 1 time in total.
Topic Author
Freddobbs
Posts: 35
Joined: Sun Mar 03, 2019 1:25 pm

Re: Target Date worth it?

Post by Freddobbs »

CABob wrote: Mon Jun 08, 2020 1:38 pm
Question #1- As I am very uncertain about my AA, is it a terrible idea to take my tax deferred and park them all (about 60% of net assets) in a money market for 30 days until I decide on a good AA?
Are you going to be back in 30 days asking if it's a good time to get back into the market?
All in good fun! I gotcha, it is interesting the number of posts on bogleheads like "Im getting out wish me luck" or "Im all in stocks". It is starting to look like a Jim Cramer blog. I don't think Ill get out into MM but rather tweak my IP for AA and re balance.

The target fund simplicity does have its merits though for taking some of the work out.
User avatar
Gort
Posts: 655
Joined: Sat Mar 17, 2007 5:07 pm

Re: Target Date worth it?

Post by Gort »

statefan03 wrote: Mon Jun 08, 2020 1:44 pm My problem with the Target Date fund is they are too heavy in International Stocks and have zero International Bonds. Overall it's a great product but I'd rather customize those ratios myself, and save a few ER points in the process.

If you are in a taxable account then they make a lot of sense so you don't have to worry about rebalancing and creating taxable events.
The Target Date Funds (as well as the static Life Stategy Funds) all have international bonds. Did you mean to say "...have international bonds"?
Last edited by Gort on Mon Jun 08, 2020 2:08 pm, edited 1 time in total.
02nz
Posts: 6413
Joined: Wed Feb 21, 2018 3:17 pm

Re: Target Date worth it?

Post by 02nz »

Freddobbs wrote: Mon Jun 08, 2020 2:03 pm The target fund simplicity does have its merits though for taking some of the work out.
Not just work, but behavior, which may be even more important.
statefan03
Posts: 64
Joined: Wed Mar 25, 2020 12:31 pm
Location: NC

Re: Target Date worth it?

Post by statefan03 »

02nz wrote: Mon Jun 08, 2020 1:53 pm
statefan03 wrote: Mon Jun 08, 2020 1:44 pm My problem with the Target Date fund is they are too heavy in International Stocks and have zero International Bonds. Overall it's a great product but I'd rather customize those ratios myself, and save a few ER points in the process.

If you are in a taxable account then they make a lot of sense so you don't have to worry about rebalancing and creating taxable events.
Not so. The rebalancing absolutely has tax implications in a taxable account even though it's automatic, and so we often recommend against holding target date funds (or LifeStrategy and the like) in taxable. Another reason is the income from the bond portion is non-qualified, and thus taxed like ordinary income. Search for more in-depth discussions of this.

You are also incorrect about international bonds. Every Vanguard target date fund I checked is made up for 4 underlying index funds - U.S.and international stocks, and U.S. and international bonds.
Thanks for the corrections. I use Fidelity and their Target Date Funds don't have International Bonds.
User avatar
Horton
Posts: 868
Joined: Mon Jan 21, 2008 3:53 pm

Re: Target Date worth it?

Post by Horton »

Freddobbs wrote: Mon Jun 08, 2020 11:02 am Current allocation is 65/35 and Im really challenged by it. My value portion is about 15 % of the portfolio so there is not an exact match for a target date fund.
How old are you? How large is your portfolio? You can be general - 5 figures, low/mid/high 6 figures, 7 figures...
DanFrancis
Posts: 64
Joined: Wed Jun 21, 2017 12:38 am

Re: Target Date worth it?

Post by DanFrancis »

Thanks for the corrections. I use Fidelity and their Target Date Funds don't have International Bonds.
[/quote]

I use a Vanguard Target Fund, so I thought I'd compare to Fidelity. They seem to me to be very different animals. Vanguard uses Index Funds exclusively in their Target Date Funds. From what I could tell with Fidelity (I compared the 2020 Target date), they use numerous categories of mutual funds, that I assume have managers. While they may or may not end up with similar outcomes, a main component of John Bogle's philosophy is the use of Index Funds for several reasons. I actually don't think it is an apple to apple comparison.
User avatar
vineviz
Posts: 9287
Joined: Tue May 15, 2018 1:55 pm

Re: Target Date worth it?

Post by vineviz »

DanFrancis wrote: Tue Jun 09, 2020 12:40 am
Thanks for the corrections. I use Fidelity and their Target Date Funds don't have International Bonds.
I use a Vanguard Target Fund, so I thought I'd compare to Fidelity. They seem to me to be very different animals. Vanguard uses Index Funds exclusively in their Target Date Funds. From what I could tell with Fidelity (I compared the 2020 Target date), they use numerous categories of mutual funds, that I assume have managers. While they may or may not end up with similar outcomes, a main component of John Bogle's philosophy is the use of Index Funds for several reasons. I actually don't think it is an apple to apple comparison.
Fidelity has several series of target date funds, and the Fidelity Freedom Index series is low-cost and passive.

E.g. https://fundresearch.fidelity.com/mutua ... /315793869
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
andrige
Posts: 44
Joined: Thu May 07, 2020 3:45 pm

Re: Target Date worth it?

Post by andrige »

Target dates are an extremely efficient way to get a diversified portfolio which reduces risk as you get closer to retirement and move through retirement.

I don't think there is anything inherently wrong with the asset allocation of a target date fund. It's slightly high on international for me so I tilt towards US in my taxable account (which also incidentally has a higher proportion of qualified dividends). Some people feel like target date funds are too aggressive/conservative with the bonds. However, again you could just tilt this issue away. You don't have to decide on tilts right at the beginning but can evolve them as you learn more about investing. Overall, TDFs are a convenient and efficient way to keep your core retirement savings.
User avatar
Watty
Posts: 21860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Target Date worth it?

Post by Watty »

statefan03 wrote: Mon Jun 08, 2020 1:44 pm My problem with the Target Date fund is they are too heavy in International Stocks and have zero International Bonds.
....
I use Fidelity and their Target Date Funds don't have International Bonds.
That is funny, I moved from the Vanguard target date fund to a three fund portfolio a few month ago because they have international bonds. :D

I may eventually move to a non-Vanguard target date ETF just so that I do not have the international bonds.

My issue with them is that the Vanguard International bond fund is currency hedged so they will not get any benefit if the dollar goes down. They also yield less than 0.5% and have a duration of over 8 years. I just don't see a scenario where they can do well and they will drop a lot if(when ?) interest rates go up.

If they were not hedged they would at least have some upside potential if the dollar weakens.

There are lots of opinions on international bonds with no real consensus.
DanFrancis
Posts: 64
Joined: Wed Jun 21, 2017 12:38 am

Re: Target Date worth it?

Post by DanFrancis »

I was not thrilled when Vanguard added international bonds to their target funds, but I decided to stay with it. You can't just look at yield. They have averaged over 4% a year over the past 7 years. I'm happy with that in the current climate.
User avatar
ruralavalon
Posts: 20585
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Target Date worth it?

Post by ruralavalon »

Freddobbs wrote: Mon Jun 08, 2020 10:36 am I am looking for advice on two fronts, one regarding taking some money off the table for 30 days until I get comfortable with an AA for the long term. Specifically, I hold Total Bond, Total Stock market, Total International, Small cap Value and Large cap value index. Essentially a small and value tilt, which id like to keep.

Question #1- As I am very uncertain about my AA, is it a terrible idea to take my tax deferred and park them all (about 60% of net assets) in a money market for 30 days until I decide on a good AA?
It is a terrible idea go to cash while you figure out your ideal asset allocation.

Freddobbs wrote: Mon Jun 08, 2020 10:36 amQuestion #2- I am leaning toward a target date fund and keeping small cap and large value indexes so I have LESS to rebalance. Is it worth it to lose some costs? Currently all my costs are .08, the target dates have a .13 fee. IS this silly to worry about? Is it worth it since I will still need to adjust the value portion anyway?
In my opinion a target date fund is an excellent idea for you. The expense ratio difference is nearly meaningless.

If you finally decide that you need a value tilt you could still use a target date fund and add a bit of a small value fund.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
jpelder
Posts: 843
Joined: Mon Jan 26, 2015 3:56 pm
Location: Concord, NC

Re: Target Date worth it?

Post by jpelder »

I highly recommend target-date funds to people who are unsure of their allocation. They definitely reduce behavioral pitfalls and remove the need to rebalance with contributions or buy and sell. My entire retirement portfolio is invested in the Vanguard Target 2055 Fund (as public employees, we both also pay into our state pension plan). My wife an I decide our retirement savings goal for the year, divide by 24, and set up an auto-investment into each Roth IRA. Very easy, and we don't have to think about it until raise time comes around.

It would be relatively simple to set a fixed ratio of target date to tilt (maybe 85-15, like vineviz suggested). That way, you can just rebalance your tilt every so often, and you don't have to worry about the other funds' ratios.

Edited to add: I would not switch to money market while you decide. It would be better to just leave everything alone until you decide what to do, then reallocate straight from current to new.
Post Reply