The cost of owning a TDF vs 3 funds

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Mario2222
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The cost of owning a TDF vs 3 funds

Post by Mario2222 »

Can you help me understand the real cost of vanguard target date fund 2045?Is it just the ER of 0.15% or I need to pay the expense ratios of the 4 underlying index funds in a TDF? If the TDF ER is 0.15 then why people still telling me that I will save money by owning a 3 or 4 funds instead of a TDF?
DSInvestor
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Re: The cost of owning a TDF vs 3 funds

Post by DSInvestor »

Mario2222 wrote: Sun Aug 23, 2020 5:07 pm Can you help me understand the real cost of vanguard target date fund 2045?Is it just the ER of 0.15% or I need to pay the expense ratios of the 4 underlying index funds in a TDF? If the TDF ER is 0.15 then why people still telling me that I will save money by owning a 3 or 4 funds instead of a TDF?
Vanguard Target and LifeStrategy fund expense ratios are the acquired expense ratios of the underlying funds. You are not paying an extra 0.15% on top of what is charged by the underlying funds.

Note that the Target and LifeStrategy funds hold Investor share class of the funds. If you held separate funds, you'd hold Admiral shares which have lower expense ratio than the Investor share class. For example, Total Stock Market Investor shares has er=0.14% compared to Admiral shares er=0.04%.
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FiveK
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Re: The cost of owning a TDF vs 3 funds

Post by FiveK »

Mario2222 wrote: Sun Aug 23, 2020 5:07 pm Is it just the ER of 0.15%
Yes.
...why people still telling me that I will save money by owning a 3 or 4 funds instead of a TDF?
DSInvestor wrote: Sun Aug 23, 2020 5:20 pm Note that the Target and LifeStrategy funds hold Investor share class of the funds. If you held separate funds, you'd hold Admiral shares which have lower expense ratio than the Investor share class.
Calculate the weighted average of Admiral shares for the underlying funds. That will be slightly less than 0.15%. The difference is what you are paying for Vanguard to rebalance, etc. That may or may not be worthwhile to you.
Dominic
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Re: The cost of owning a TDF vs 3 funds

Post by Dominic »

Usually individual funds are cheaper than funds of funds. That said, we're talking about a maximum of $15 each year per $10,000 if you switch to 0% expense ratio funds. If you go with Vanguard funds, it's probably more like $10/year saved per $10,000 invested.

It's extra money, sure, but it's not going to change your life in retirement. What could change your life in retirement is logging in to your account, seeing that one of your funds has lost a significant amount of money, and abandoning your strategy. Target funds are set and forget, so there's a potentially huge behavioral benefit to using them.
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arcticpineapplecorp.
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Re: The cost of owning a TDF vs 3 funds

Post by arcticpineapplecorp. »

Mario2222 wrote: Sun Aug 23, 2020 5:07 pm Can you help me understand the real cost of vanguard target date fund 2045?Is it just the ER of 0.15% or I need to pay the expense ratios of the 4 underlying index funds in a TDF? If the TDF ER is 0.15 then why people still telling me that I will save money by owning a 3 or 4 funds instead of a TDF?
i find in life that:
things that save me money cost me time. (hunting for bargains)
things that cost me money should save me time. (paying someone else to mow my yard)

tradeoffs in life.

so the TDF will save you time in two areas:
1. rebalancing
2. reducing risk (shifting allocation over time).

You're paying slightly more for this benefit of saving time having to do those yourself. And as others have said, will you actually do those things that are required if you hold the funds individually instead of as TDF? You have to be honest with yourself.

In my Roth IRA I hold 70% total stock (US, .04% e.r.) and 30% total international .11% e.r.). That comes out to be 0.061%. Cheaper than holding target date 2040 (.14% e.r.) though not exactly apples to apples (TDF holds 40% of the stock in total international, not 30%, and holds bonds which I don't have at present).

So there may be differences besides price, for instance, in composition that you desire.

In my case the TDF would be a little more than 2X the cost. Not large based on the amount of money invested and at some later date, I'll probably utilize this later in life for simplicity. Either is fine.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
livesoft
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Re: The cost of owning a TDF vs 3 funds

Post by livesoft »

The cost of owning a TDF (with its 4 funds) and the cost of using 3 funds are so close to each other that random chances such as the day that you buy more shares of any of them and the day you rebalance will swamp out any differences of cost. You may also have more behavioral errors when using the 3 separate funds that change your results.

We could take 100 different investors and divide them into two categories with 50 investors each:
(a) Those that use the TDF, and
(b) Those that use the 3 separate funds.

But then we can turn them loose and let them do all the investing that they want to do, but not specify the amounts they contribute, when they contribute, when they might rebalance, when they might tax-loss harvest, when they sell. nor any of the other transactions and things they might do with these investments. I think we would find that the average result and standard deviation of that average for each class of investors would be larger than the difference in costs of these mutual funds.

Indeed, a clever Boglehead might even write a little jiffy to test my hypothesis with past prices available for these funds.
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Actin
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Re: The cost of owning a TDF vs 3 funds

Post by Actin »

Opportunity costs can be very expensive
rkhusky
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Re: The cost of owning a TDF vs 3 funds

Post by rkhusky »

The stock market fluctuates by at least 0.1% almost every day, sometimes by 10x that much.
hnd
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Re: The cost of owning a TDF vs 3 funds

Post by hnd »

for me the cost of TDF funds with vanguard is the 40% in international funds. For me at this point thats just too much but if you are happy with that % its great to invest and never have to deal with it.
matthewbarnhart
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Re: The cost of owning a TDF vs 3 funds

Post by matthewbarnhart »

Mario2222 wrote: Sun Aug 23, 2020 5:07 pm Can you help me understand the real cost of vanguard target date fund 2045?Is it just the ER of 0.15% or I need to pay the expense ratios of the 4 underlying index funds in a TDF? If the TDF ER is 0.15 then why people still telling me that I will save money by owning a 3 or 4 funds instead of a TDF?
The real cost to me? When I was in individual funds I spent hours playing with rebalancing spreadsheets and fretting over my US/Intl/Bonds allocation. Now that I'm in Target Date funds, I don't worry about it.

For reference, I have 10 years of expenses saved. 2/3rds of my portfolio is tax-advantaged and invested in 2045 Target Date funds. 1/3rd of my portfolio is in taxable and is invested 100% in VT (Vanguard Total World index).

I highly recommend this thread for guidance, it helped me: viewtopic.php?f=10&t=287967
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