Target Date Retirement funds: Features or Flaws?

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ronin
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Target Date Retirement funds: Features or Flaws?

Post by ronin » Fri Jan 28, 2011 11:13 pm

My apologies if this has already been discussed, but with respect to their target date retirement funds, why do the Vanguards, Fidos, TRPs of the world:

    1 - Appear to under-weight bonds in many cases <AND>
    2 – Seem to dismiss the French/Fama 3-factor model when constructing their equity portion by way of under-weighting small/mid caps

Is it too hard of a “sell” to most investors? Am I missing or misunderstanding something?
Thanks!

Chuck
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Post by Chuck » Fri Jan 28, 2011 11:28 pm

1. In the world where we live, a fund's quality is unfortunately measured by returns. More stock is expected to produce greater returns, so there you go. (In the previous decade, Vanguard's TR funds were losing market share to the others' more stocky funds. Now everyone seems to have reached a stalemate at about 90% stock, which many on this forum say is too much.)

2. TR funds have mid and small cap stocks in their market weight. I believe they use the total stock market fund. TR funds are for uninformed and/or lazy investors. (I mean both of those terms in a good way, I swear!) Investors who want a tilted portfolio are not the target market. It's like saying "why aren't there more documentaries on Nickelodeon."

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Mel Lindauer
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Post by Mel Lindauer » Fri Jan 28, 2011 11:52 pm

Here's a column I wrote for M* on that very subject a while back.

http://news.morningstar.com/articlenet/ ... Id=2686718

Regards,

Mel
Best Regards - Mel | | Semper Fi

ronin
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Post by ronin » Sat Jan 29, 2011 11:26 am

Thanks to you both for your thoughts on this!

golfallday
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Post by golfallday » Sat Jan 29, 2011 12:08 pm

TRP's retirement line up is extremely aggressive. I also think expensive. The hyper-diversification TRP employs in these funds basically lands you in what you would get in a Global Index Fund. I never understood why TRP's Retirement Funds 2020-2035 had around 20% allocations to their Growth Fund as well as Value Fund; then on top of that about 20% allocated to S&P 500 Index. This overlap made no sense to me...and today I'm with Vanguard.

VG's line up is great because it is so simple, but I think you need to supplement any selection with small caps. I use VEXMX (14% right now).

Good luck, good investing.

________________________________

Amateurs built Noah's Ark; experts built The Titanic.

Triple digit golfer
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Post by Triple digit golfer » Sat Jan 29, 2011 12:15 pm

Bonds are not necessarily underweighted, unless you mean underweighted to the entire global financial market. They increase for each age group. Whether or not they hold too many or not enough bonds is an individual opinion that isn't right or wrong.

As for small and value, the logical starting point is the market weight. For a "fund of funds" or any fund that wants to be simple and universal for many people, I think the market weight is the correct mix.

As for why they don't use the market weight for U.S./international, I think it's because general concensus is to hold more of your home country's stocks. Whether we agree or disagree, that's what many experts say. Vanguard says 30% international. Bogle says 0-20%. Very few "experts" say hold 55%, for whatever reason.

So in setting up a fund that's easy to understand, will be accepted by most people, and competes with other funds, I think the mix that most of the big guys use is about right.

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lmpmd
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Re: Target Date Retirement funds: Features or Flaws?

Post by lmpmd » Sat Jan 29, 2011 12:33 pm

ronin wrote:My apologies if this has already been discussed, but with respect to their target date retirement funds, why do the Vanguards, Fidos, TRPs of the world:

    1 - Appear to under-weight bonds in many cases <AND>
    2 – Seem to dismiss the French/Fama 3-factor model when constructing their equity portion by way of under-weighting small/mid caps
Is it too hard of a “sell” to most investors? Am I missing or misunderstanding something?
Thanks!


It seems to me if you want more bonds you pick one with a smaller number in the name. For example if you want more in bonds you'd pick the one with 2020 in the name as opposed to 2030.

I've seen graphs of the vg total stock marked index fund vs the vg S&P 500 index. The total stock market has more small/mid caps. To my eyes they do exactly the same.

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touchdowntodd
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Post by touchdowntodd » Sat Jan 29, 2011 12:34 pm

one thing i can say is that I dont like the larger ERs

that being said id rather do my own AA ... 8)
tryin to do this right... thanks guys

dbr
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Re: Target Date Retirement funds: Features or Flaws?

Post by dbr » Sat Jan 29, 2011 12:43 pm

ronin wrote:My apologies if this has already been discussed, but with respect to their target date retirement funds, why do the Vanguards, Fidos, TRPs of the world:

    1 - Appear to under-weight bonds in many cases <AND>
    2 – Seem to dismiss the French/Fama 3-factor model when constructing their equity portion by way of under-weighting small/mid caps
Is it too hard of a “sell” to most investors? Am I missing or misunderstanding something?
Thanks!


As others are opining, the TR funds are underweight in bonds compared to opinion here, some reasons explained. It is agreed that the retirement date concept applied to these funds is meaningless but also easily addressed with the advice to select a fund with the bond allocation one wants. One also gets a glide path to more bonds with time, which one may or may not want. It is a topic of discussion whether or not TR fund marketing is misleading, but no investor should invest in anything without understanding at a broad level what it is.

If you want a personal opinion, I think a basic "three fund" approach or whatever one wants to call it, is a simpler and more understandable way to invest than imagining that buying a TR fund is simple and understandable. If one wants more asset classes or a tilt to asset classes, then that isn't very hard to do. There are investors who would feel the opposite. Those investors are well served by TR funds, if they understand what they have.

I don't agree that not tilting is equivalent to "dismissing" the F-F model. It is perfectly rational to accept that the F-F model is an accurate model for stock returns while choosing not to actually select a tilted asset allocation for one's investments.

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jidina80
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Re: Target Date Retirement funds: Features or Flaws?

Post by jidina80 » Sat Jan 29, 2011 1:28 pm

On #2 in the original post, the funds are not under-weighting small and mid-capitalized stocks when they use total market funds. They are invested in small and mid-cap stocks in approximately the same proportion as the investments of all the active investors. The Target Retirement funds are reaping a 'free ride' on the collective wisdom of all the active traders who determine fair value of each stock.

Many fund managers and passive investors do not believe there is an additional performance gain to be had today by by over-weighting small and mid-cap stocks, or value stocks. Any well-known historical performance advantage is probably already priced into today's stocks.

Just.

exigent
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Post by exigent » Sat Jan 29, 2011 1:52 pm

The underweighting of bonds is, IMHO, performance chasing. Back in 2006, Vanguard actually modified their TR funds to hold less bonds.

A specific example would be TR 2035, which was reduced from 24% bonds to 10% bonds. I'm not sure if they made subsequent modifications, but this 10% level was slated to last until 2010 when TR 2035 would have gradually started getting less aggressive.

As others have noted, this change was presumably b/c investors typically choose funds based on returns, so more aggressive funds look better in the good times. Unfortunately, this move made the bear market beat down even worse for TR fundholders.

dbr
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Post by dbr » Sat Jan 29, 2011 2:07 pm

An issue with TR funds is that higher income investors with both taxable and tax deferred space would generally be more tax efficient placing stocks and bonds separately than using a TR fund anywhere.

ronin
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Post by ronin » Sat Jan 29, 2011 2:29 pm

good point dbr.

gotfina
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Post by gotfina » Sat Jan 29, 2011 10:38 pm

target date funds should be illegal!! How about this conversation, Advisor: Well ronin, how old are you? Ronin: I`m 40 y/o. Advisor: ok here is your portfolio. That is just plain irresponsible to not go further. If you are 50 y/o but the mkt is raging no problem if your in, if your 30 y/o and its 2008 you should not be adding more to stocks every month because "you can afford to loose"

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jidina80
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Post by jidina80 » Sat Jan 29, 2011 11:56 pm

Overall, I think Target Retirement funds are a great investment for the average investor. During the past 30 years, the U.S. workforce has moved from employer-funded pensions to do-it-yourself retirement plans for which most people are not competent to manage.

The Target Retirement funds aren't perfect, but for the average person who doesn't know much about finance, they greatly reduce most investing risks:
    - The risk of a grossly inappropriate asset allocation.
    - The risk of chasing performance, timing, or rebalancing at the wrong time.
    - The risk of high fees and predatory advisors.
They're not perfect, but a hell of a lot better than before.

Just.

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wander
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Post by wander » Sun Jan 30, 2011 12:08 am

Target Retirement funds are great products but only few fund companies are really providing quality funds (Vanguard is one of them).

dharrythomas
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Post by dharrythomas » Sun Jan 30, 2011 1:58 pm

I agree with Just. They're not perfect (what is?), but they are a solid option that is better for most people that other options.

Several years ago Warren Buffett told his stockholders that many of them would do fine investing on their own. Charlie Munger's retort was that many of them wouldn't.

Since many leave their 401(k) investment in the default account, we're better off with Target Date funds as the default than money market funds. The Target Date funds at least provide diversification and reduce equity risk as an individual ages.

Harry

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