Why the love for target date funds?

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thisismyusername123
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Why the love for target date funds?

Post by thisismyusername123 »

It seems rote on this board and elsewhere to steer new investors, especially younger investors, toward Vanguard target date funds. I question the wisdom of this approach.

While it's a worthy goal to get people out of the habit of reactive trading and market-timing, I worry about going too far in the other direction: breeding complacency and over-passivity. By suggesting a target-date 2050 fund for automatic 401k/Roth contributions or lump-sum investments, you are essentially telling investors that it's OK to ignore their asset allocation for 35 years. I think it's important for people to make an educated decision about the asset allocation that's right for them and, more importantly, know when to revisit that decision. Family, home, health, employment, income, and life goals change constantly and each major event warrants a reevaluation in personal investing philosophy and risk tolerance. Life is more bumpy than the Vanguard "glide path" suggests. It's a great fund company but there is no inherent reason why it deserves the trust of any particular investor to set his or her asset allocation for life.

Moreover, in promoting target-date funds as a catch-all for unsophisticated investors, people often forget that Vanguard is unique in that its funds are based on simple portfolios and carry low costs. The majority of investors do not have access to these funds in their 401k plans. Rather than choosing cheaper index funds that mimic the Vanguard target-date portfolio, they may be steered into ridiculously expensive, overmanaged retirement-date funds that will cost tens of thousands of dollars in the long term. (A lot of these funds are more conservative than Vanguard, which leaves even more money on the table as a consequence of reduced long-term equity exposure.)

In short, a target-retirement date is a shortcut and not a philosophy. The proper advice to a 25-year-old opening a Roth IRA shouldn't be "VFFVX" - it should be "Vanguard recommends funds made up of 63% domestic stocks, 27% international stocks, and 10% bonds for someone your age - and here's why."

Food for thought.
livesoft
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Re: Why the love for target date funds?

Post by livesoft »

Great. Please submit this as an Op-Ed piece to your favorite financial newspaper. Make sure it gets seen by lots of eyeballs. I would try WSJ, USAToday for starters.

Unfortunately, here is what might happen: Your article will get the title "Target Retirements are Bad" and people will thus stop investing in them in droves. FA's will jump on the title and get everyone back into 2% annual expense ratio funds with a 5.75% front-end load.
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Boglenaut
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Re: Why the love for target date funds?

Post by Boglenaut »

Most people, when you talk about the topics on this board, their eyes glaze over. For example, I am thinking of a friend of mine. He has no interest in retirement planning, and most of his assets in his 401K. He just uses the target date fund in his 401K. For him, it's the perfect choice (assuming ER's are reasonable, like his probably are).

For me:

1. I enjoy doing it myself. I like my tilts, etc.
2. I can get lower fees by selecting "Mix my own".
3. I can consider tax efficient placement because 40% of my money is not in retirement accounts.

I would never use target date funds. But for most people, they are a great idea.
Last edited by Boglenaut on Sun Mar 02, 2014 2:05 pm, edited 1 time in total.
surfstar
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Re: Why the love for target date funds?

Post by surfstar »

Simple.

Simple is good. Set it and forget it. This would help the average investor out way more than someone who tinkers around always changing things, asking "why do I need bonds", "what about REITs", etc. I would be happy if my 457b plan offered low cost target date funds. It doesn't and I have to use index funds with a 0.95 ER. I would happily exchange that for any companies target date fund.

The crux is getting the average person to actually invest. Once you can convince them of that, why confuse them with ETFs, multiple funds, weighting, etc? The perceived complexity is likely why they were hesitant to invest in the first place.
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Re: Why the love for target date funds?

Post by NAVigator »

The investment philosophy of the Vanguard target date funds is readily available in the prospectus which is required to be available when making an investment.

In addition, Vanguard clearly and openly describes the value of these funds. Here is a white paper on this topic;
Vanguard’s approach to target-date funds - VanguardApproach_TDF.pdf

This information provides the investor with portfolio construction reasoning. Other tools are readily available at Vanguard to help with asset allocation. The target date funds are an option.

Jerry
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dad2000
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Re: Why the love for target date funds?

Post by dad2000 »

I think low-cost target funds are a great idea for the average family that doesn't earn enough to justify investing in taxable. Following the simple plan of investing 10-15% of their income in a 401K target date fund from an early age would put them in a much better place than most.

Unfortunately, the ERs of my 401K target funds are in the >80bp range. If I had access to a Vanguard 2030 fund, I'd happily invest in it. Instead, I've had to slice and dice across 401k/IRA/Roth/HSA/taxable to keep my average ER reasonable.
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thisismyusername123
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Re: Why the love for target date funds?

Post by thisismyusername123 »

livesoft wrote:FA's will jump on the title and get everyone back into 2% annual expense ratio funds with a 5.75% front-end load.
Are Edward Jones et al. really hurting for business now that target date funds are popular? My audience with this post is the conscientious young person who has well-thought-out savings and retirement goals but doesn't want to put in an inordinate amount of time learning about the nuances of financial markets. The goal is to persuade these people to devote maybe 5-10 hours a year, if that, to reviewing the status of their portfolios and making educated decisions about reallocation.

Frightened people who want nothing to do with this and want some person to do it for them; gold hoarders; and tesla-and-bitcoin thrillseekers are beyond redemption.
terrabiped
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Re: Why the love for target date funds?

Post by terrabiped »

thisismyusername123 wrote:The proper advice to a 25-year-old opening a Roth IRA shouldn't be "VFFVX" - it should be "Vanguard recommends funds made up of 63% domestic stocks, 27% international stocks, and 10% bonds for someone your age - and here's why."

Food for thought.
New investors who are even the slightest bit resourceful can find that more comprehensive advice on the wiki, in the books recommended on the wiki, and on the vanguard site. And yet for reasons that I can't claim to understand, large numbers of people log on to the forum every week without having done any learning on their own and say something to the effect of I'm a newbie, someone tell me what to do!!! If you want to take the time to give each and every one of them a long comprehensive, answer, I think that's wonderful.
livesoft
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Re: Why the love for target date funds?

Post by livesoft »

Barry Barnitz linked this Vanguard whitepaper which is about investor behavior when it comes to Target Retirement funds:
Vanguard - Behavioral effects and indexing for participants

It's worth a quick look to see what you are up against.
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livesoft
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Re: Why the love for target date funds?

Post by livesoft »

It's probably not a bad idea to have many people start out in Target Retirement funds and then to get them to switch later. That said, there is that inertia thing.
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RyeWhiskey
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Re: Why the love for target date funds?

Post by RyeWhiskey »

thisismyusername123 wrote: In short, a target-retirement date is a shortcut and not a philosophy. The proper advice to a 25-year-old opening a Roth IRA shouldn't be "VFFVX" - it should be "Vanguard recommends funds made up of 63% domestic stocks, 27% international stocks, and 10% bonds for someone your age - and here's why."

Food for thought.
Well, to be fair, I'm not sure how many 'everyday' non-investors you've spoken to about investing but most don't understand or care about the difference between domestic and international stocks, or why one would hold a random number like 10% in bonds. Also, what kind of bonds, and why? You could direct them to Vanguard but that takes effort on their part, effort which they may not be able to make or simply don't want to.

In my experience, just getting someone to open a Roth, fund it, and invest in a low-cost, broadly diversified, all-market Target Retirement fund is a great step in itself. The several times I've been able to do this I have only had to explain why costs matter, why Vanguard is a good company, and what a changing allocation over time means.

No need to complicate things. Once the Roth is open and their money is invested they can educate themselves all they want on allocation, etc... But the most important thing is saving and investing early and at low cost. :beer
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pennstater2005
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Re: Why the love for target date funds?

Post by pennstater2005 »

Why does using a Target date fund mean you will ignore your asset allocation. I'm in a Lifestrategy fund and I know exactly the AA. It's not exactly rocket science (does anyone still use that?). You can always swap funds if they're in retirement accounts and who says at some point you can't move the funds into their individual funds when you're ready. I like not having to rebalance and spend too much time thinking it. I've got plenty of other stuff to do. Paint the steps, mud that wall, fix that leaky faucet, put trim around that window, really this list could just keep going..................... :annoyed
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steve_14
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Re: Why the love for target date funds?

Post by steve_14 »

Investing is boring, and most people don't want to think about. A target fund is one of the best don't-think-about-it options.
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Re: Why the love for target date funds?

Post by KyleAAA »

I think it is perfectly okay to ignore asset allocation for 35 years considering the alternative.

I think it comes down to what's best vs what's realistic. Yeah, investors should carefully consider their desired asset allocation and invest accordingly, but the majority of investors just aren't going to do that and there's absolutely nothing you can do to make them. Target funds are a reasonable solution to that problem in a way that "financial education" just isn't. It's not a lack of knowledge problem, it's a behavioral problem and you can't educate your way out of behavioral problems.
Last edited by KyleAAA on Sun Mar 02, 2014 3:18 pm, edited 1 time in total.
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Re: Why the love for target date funds?

Post by hq38sq43 »

Clearly, target retirement funds are not for everyone. But in her "Smart and Simple Financial Strategies for Busy People" Jane Bryant Quinn makes a very good case that for very many people they are virtually ideal. She agrees with Jack Bogle, Warren Buffett, and many others of like reputation that for most people simple investing is the best investing.

Best regards,
Last edited by hq38sq43 on Sun Mar 02, 2014 3:04 pm, edited 1 time in total.
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Re: Why the love for target date funds?

Post by DSInvestor »

We often suggest that investors first decide on an asset allocation (AA) then pick a target retirement (TR ) or LifeStrategy (LS) fund that matches that allocation. The thinking was done up front and the fund does the rest of the work allowing the investor to focus on contributions. If anything happens and the fund's AA no longer matches up with desired asset allocation, there would be no tax cost to exchange to another TR or LS fund that is a better match if those funds are held in tax advantaged accounts. We rarely recommend these funds for taxable accounts.
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TomatoTomahto
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Re: Why the love for target date funds?

Post by TomatoTomahto »

Be careful not to turn your preferences into virtues. I enjoy reading about investments; my wife does not. She is busy making the money that I invest.

I am beginning to use Target funds somewhat, since they're "set it and forget it."
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nedsaid
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Re: Why the love for target date funds?

Post by nedsaid »

I have recommended Target Date Funds to people not because I love them but because I think they are vastly superior to what most people would come up with on their own. The state of financial education in the United States is not very good. A large segment of our population are pretty clueless about financial matters.

A lot of it is that people are busy. Sometimes people don't have the interest. Not everyone has passion about personal finance topics. Whatever the reason, many people are just not that savvy in financial matters. If they pick an age appropriate Target Date Fund or pick a 60/40 balanced fund and forget it until they retire, these people will be miles ahead of most.

I use Target Funds as model portfolios and then make my own decisions on funds and asset classes.
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tadamsmar
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Re: Why the love for target date funds?

Post by tadamsmar »

thisismyusername123 wrote:It seems rote on this board and elsewhere to steer new investors, especially younger investors, toward Vanguard target date funds. I question the wisdom of this approach.

While it's a worthy goal to get people out of the habit of reactive trading and market-timing, I worry about going too far in the other direction: breeding complacency and over-passivity. By suggesting a target-date 2050 fund for automatic 401k/Roth contributions or lump-sum investments, you are essentially telling investors that it's OK to ignore their asset allocation for 35 years. I think it's important for people to make an educated decision about the asset allocation that's right for them and, more importantly, know when to revisit that decision. Family, home, health, employment, income, and life goals change constantly and each major event warrants a reevaluation in personal investing philosophy and risk tolerance. Life is more bumpy than the Vanguard "glide path" suggests. It's a great fund company but there is no inherent reason why it deserves the trust of any particular investor to set his or her asset allocation for life.
There is no compelling evidence that any investor will do better than a target date fund, unless perhaps if they have taxable investments. If they have taxable investment then a bit of tax management is perhaps appropriate, but I think there are well-respected advisors who would say that target date funds are OK even in taxable accounts.
Moreover, in promoting target-date funds as a catch-all for unsophisticated investors, people often forget that Vanguard is unique in that its funds are based on simple portfolios and carry low costs. The majority of investors do not have access to these funds in their 401k plans. Rather than choosing cheaper index funds that mimic the Vanguard target-date portfolio, they may be steered into ridiculously expensive, overmanaged retirement-date funds that will cost tens of thousands of dollars in the long term. (A lot of these funds are more conservative than Vanguard, which leaves even more money on the table as a consequence of reduced long-term equity exposure.)
There is good evidence that investors who never look at how there nest egg is doing do better than investors who pay lots of attention. Guess which group of investors tends to think of itself as sophisticated?
In short, a target-retirement date is a shortcut and not a philosophy. The proper advice to a 25-year-old opening a Roth IRA shouldn't be "VFFVX" - it should be "Vanguard recommends funds made up of 63% domestic stocks, 27% international stocks, and 10% bonds for someone your age - and here's why."
It's a way of life underpinned by a philosophy that's either hard or impossible to improve on.
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Re: Why the love for target date funds?

Post by yatesd »

This is because Target date funds are best for most people.

- Low expenses
- Allocations that are reasonable (and automatic)
- Helps to discourage tinkering, market timing, and allocation mistakes most people tend to make
- Avoids emotional mistakes

Yes, if someone has an interest in choosing a different date to reflect a different AA, then that is also good. Yes, if someone can mimic these allocations and lower expenses (by minuscule amounts) that is also good. However, if most investors used target funds they would increase their returns while minimizing risks.
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Re: Why the love for target date funds?

Post by ajcp »

thisismyusername123 wrote:I think it's important for people to make an educated decision about the asset allocation that's right for them and, more importantly, know when to revisit that decision..
This is something that sounds great when posted on a message board, until you actually have the get the horse to drink the water. Also...
tadamsmar wrote: There is good evidence that investors who never look at how there nest egg is doing do better than investors who pay lots of attention. Guess which group of investors tends to think of itself as sophisticated?
This is a really, really good point
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Re: Why the love for target date funds?

Post by Big Worm »

I call it "Ronco investing". Set it and forget it!
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Re: Why the love for target date funds?

Post by schuyler74 »

Below is Vanguard's recommended Glide Path. In another thread, retiredjg suggested that "almost all target funds have too much in stocks and it ended up that way because the companies were competing with each other, not because the numbers were appropriate for an age." Is this true? The chart shows a 40 year old who expects to retire at 65 should invest 90% stocks and just 10% bonds!

Image
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Re: Why the love for target date funds?

Post by Browser »

Absolutely no evidence that Target Date "glidepath" funds are anything but hype, so I agree with the OP that it's hard to find a rational explanation for the love. Maybe P.T. Barnum knows the answer.
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Re: Why the love for target date funds?

Post by dickenjb »

schuyler74 wrote:Below is Vanguard's recommended Glide Path. In another thread, retiredjg suggested that "almost all target funds have too much in stocks and it ended up that way because the companies were competing with each other, not because the numbers were appropriate for an age." Is this true? The chart shows a 40 year old who expects to retire at 65 should invest 90% stocks and just 10% bonds!
This is why at BH we recommend people decide the equity exposure they are comfortable with, then buy the TR fund that has that equity exposure. Ignore the date.
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Re: Why the love for target date funds?

Post by NorCalDad »

Baby steps. I think getting people to save more and use low-cost index funds is a big enough hurdle in itself. But I agree with the sentiment - thinking investors should move beyond blind faith in a target date fund. I find that the target date funds are somewhat misleading (Vanguard's are very aggressive, even for my fairly aggressive investment plan). Plus, I can save on fees by using admiral shares in my Roth, though not my 401k.

That makes sense to us here. But most people don't like to learn about asset allocation or their investments, and would rather put it on auto-pilot at relatively low cost. I'm sure people on a culinary message board may wonder why I use a Crock Pot 1-2 times a week.
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Re: Why the love for target date funds?

Post by SpringMan »

Not all target date funds are created equal. Some companies use active management for the sub-funds. Some companies even pass through the expense ratios of the sub-funds in addition to the expense ratio of the target date fund. Vanguard's target date funds are excellent and don't do anything like the above. They use index funds. When using target date funds, it is wise to ignore the date and look at the asset allocation that best matches your desired asset allocation. So love (maybe too strong a word) for target date funds would depend on which fund family IMO. They are not generally appropriate for taxable accounts. I use VG Target Retirement Income in one of my IRAs. It has no glide slope unlike the other target date funds. I am a fan of VG Wellesley Income fund and Target Retirement Income pairs well with Wellesley adding diversification IMO.
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ERZ80
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Re: Why the love for target date funds?

Post by ERZ80 »

This is exactly what I keep thinking about as I have landed a full-time job with a 401k. I am 23 and I am unsure whether to pick some sort of target date fund, and index fund, or a growth fund. I ned to be pretty aggressive as I am very young but I'm just not sure which to pick. I know I want to be 80/20 at the minimum...thoughts? suggestions? Thanks guys
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Re: Why the love for target date funds?

Post by chaz »

Target date funds don't have the lower ERs of the component funds in admiral class. But I prefer a Target date fund for DW when she inherits my IRA.
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thisismyusername123
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Re: Why the love for target date funds?

Post by thisismyusername123 »

ERZ80 wrote:This is exactly what I keep thinking about as I have landed a full-time job with a 401k. I am 23 and I am unsure whether to pick some sort of target date fund, and index fund, or a growth fund. I ned to be pretty aggressive as I am very young but I'm just not sure which to pick. I know I want to be 80/20 at the minimum...thoughts? suggestions? Thanks guys
Post your 401k menu along with expense ratios for each fund. At your age I would not be afraid to put 90-100% in stocks and even overweight small caps if you like.
ERZ80
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Re: Why the love for target date funds?

Post by ERZ80 »

I will be starting the new job within a week or so, I will definitely post my options on here as soon as I know them.
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Re: Why the love for target date funds?

Post by SpringMan »

ERZ80 wrote:This is exactly what I keep thinking about as I have landed a full-time job with a 401k. I am 23 and I am unsure whether to pick some sort of target date fund, and index fund, or a growth fund. I ned to be pretty aggressive as I am very young but I'm just not sure which to pick. I know I want to be 80/20 at the minimum...thoughts? suggestions? Thanks guys
It depends on what is available in your 401k and the expense ratios. Like I mentioned above, Vanguard has good target date funds but some other firms don't. At 23 being aggressive is the way to go. Use low cost index funds and don't fret if the market crashes, just keep buying in your 401k. If your 401k has bad options, usually an S&P 500 or Total Market Index will be the cheapest, put all your 401k investments there and use IRAs/Roth IRAs to compliment what is in your 401k.
Best Wishes, SpringMan
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Re: Why the love for target date funds?

Post by steve_14 »

schuyler74 wrote:Below is Vanguard's recommended Glide Path. In another thread, retiredjg suggested that "almost all target funds have too much in stocks and it ended up that way because the companies were competing with each other, not because the numbers were appropriate for an age." Is this true? The chart shows a 40 year old who expects to retire at 65 should invest 90% stocks and just 10% bonds!

Image
Couple of points here. One, a 40 year old with 25 high(er) earning years ahead of him likely has only 20% or so of his retirement savings accumulated, so the risks of a high stock allocation are limited at that age. Two, note how low risk the portfolio becomes in retirement - by taking more risk while young, you can dial it back quite a bit when old with the same expected lifetime return.
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Re: Why the love for target date funds?

Post by dbr »

steve_14 wrote: Couple of points here. One, a 40 year old with 25 high(er) earning years ahead of him likely has only 20% or so of his retirement savings accumulated, so the risks of a high stock allocation are limited at that age. Two, note how low risk the portfolio becomes in retirement - by taking more risk while young, you can dial it back quite a bit when old with the same expected lifetime return.
Your first point seems quite right as continued saving and contributions dominate, especially as earnings climb from entry level. Your second observation is not so. That asset allocation of 30% stocks in retirement is not based on something one "can" do because one is wealthy but rather reflects that generally at withdrawal rates that are not crazy unsafe the asset allocation in retirement doesn't matter as long as stocks are at least 30%-40% or so. However, that thinking is incomplete as retirement income strategy should and usually does involve more options than simply withdrawing from a portfolio.
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Re: Why the love for target date funds?

Post by ASUGrad »

While it's a worthy goal to get people out of the habit of reactive trading and market-timing, I worry about going too far in the other direction: breeding complacency and over-passivity. By suggesting a target-date 2050 fund for automatic 401k/Roth contributions or lump-sum investments, you are essentially telling investors that it's OK to ignore their asset allocation for 35 years. I think it's important for people to make an educated decision about the asset allocation that's right for them and, more importantly, know when to revisit that decision.
I agree investors 'should' make educated decisions. Many don't want to take the time to learn and stay up to date. If they aren't going to make educated decisions anyway... what is better than a TR fund? The people who find it interesting and want to play a role in their finances will do something else, but it gives other people an option.

For someone who doesn't want to follow the market and stay informed a TR fund + some advice on staying the course goes a lot further than handing them a list of 20 funds and saying pick what you like... which is what has been happening for decades. TR funds might not guarantee the best possible results, but they sure deter the worst possible results.
Is this true? The chart shows a 40 year old who expects to retire at 65 should invest 90% stocks and just 10% bonds!
Yes, and it is a great thing. The TR funds are 90% stock until about 25 yrs from retirement. Seeing that the stock market has only been down over a 10 year period twice in the past 100 years I think you can stand to be pretty aggressive 25 years out. In another topic I ran several simulations comparing the TR funds allocations to the age minus 10 rule of thumb and even with massive 50% stock market drops 20 yrs and 10 yrs out from retirement the TR still fared better. Even with a crash at retirement the TR funds fared better because they had saved up so much more thanks to higher growth in previous years.
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Re: Why the love for target date funds?

Post by donaldfair71 »

SpringMan wrote:Not all target date funds are created equal. Some companies use active management for the sub-funds. Some companies even pass through the expense ratios of the sub-funds in addition to the expense ratio of the target date fund. Vanguard's target date funds are excellent and don't do anything like the above. They use index funds. When using target date funds, it is wise to ignore the date and look at the asset allocation that best matches your desired asset allocation. So love (maybe too strong a word) for target date funds would depend on which fund family IMO. They are not generally appropriate for taxable accounts. I use VG Target Retirement Income in one of my IRAs. It has no glide slope unlike the other target date funds. I am a fan of VG Wellesley Income fund and Target Retirement Income pairs well with Wellesley adding diversification IMO.
So true. If I use the target retirement date Vanguard offers, it places me at 90/10 allocation. However, if I chose to go the target route in my 403b through LIncoln Financial, I would be at 63/37 for the same target. It advocates higher bonds than age (about age + 5 in fixed income).
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Re: Why the love for target date funds?

Post by sambb »

The extra fees are minuscule, compared to the disciplined investing
They work well
They are more sophisticated than one may think
I bet the research to establish the glide path is pretty good, compared to one's own expertise
They auto-rebalance

I think they are perfect for tax deferred funds, or life strategy if you like that approach. A 60/40 life strategy is probably all one needs for one's life if one is comfortable, compared to the average americans portfolio.

To each his own, its your money. Choose how to manage it. However, target and LS are a very good "core" choice that is hard to criticize.
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Re: Why the love for target date funds?

Post by wshang »

Now that the five years have elapsed since March 2009, the five year charts are no longer showing the breathtaking plunge. If one takes a look at VTINX the terminal target retirement fund, it went from 11.2 to 8.8, a 21% decline. Bad, but very tolerable. Wellesley VWIAX did nearly as well. Looking at one price, one can forget about the internal components. The OP's question begs the answer to why most investors (aka Dollar-Weighted Returns) do poorer than the official fund's performance (aka Time-Weighted Returns) and why some funds actually do better. Hint: "Stay the course" aided by tolerable downside volatility.

Morningstar whitepaper to this effect:
http://news.morningstar.com/articlenet/ ... ?id=303206


Threads like this make me think we are do for a . . . . . . :!:
The cure shouldn't be worse than the disease.
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stevewolfe
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Re: Why the love for target date funds?

Post by stevewolfe »

thisismyusername123 wrote:The proper advice to a 25-year-old opening a Roth IRA shouldn't be "VFFVX" - it should be "Vanguard recommends funds made up of 63% domestic stocks, 27% international stocks, and 10% bonds for someone your age - and here's why."
Ah we are down to the individual percentage in asset allocation for a 25 year old? This is now a precise science - 63/27 vs. say 65/25 or 60/30? I'd submit there is no material difference to be had. I think that target date funds are perfectly fine vehicle for their target - people whose interest level is set it and forget it. Anyone else will spend a little time and come to their own conclusion. I see no harm here.
DVMResident
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Re: Why the love for target date funds?

Post by DVMResident »

“Successful investing involves doing just a few things right, and avoiding serious mistakes.” — John C. Bogle.

The biggest and most common mistakes in investing are behavioral. Using a target date funds avoids most of the behavioral issues.

Target date funds are "close enough" and get 90% of the "few things right", but there is plenty to criticize.

I like them for what they are: short cuts for people who don't have the willingness or ability to educate themselves.

For the record, I think Life Cycle funds are better than glide paths assuming the investor pays *a little* attention.
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abuss368
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Re: Why the love for target date funds?

Post by abuss368 »

Easy: "Simplicity is the master key to financial success - Jack Bogle"
John C. Bogle: “Simplicity is the master key to financial success."
sambb
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Re: Why the love for target date funds?

Post by sambb »

It is ironic that some people have thought that target funds are for the less informed. I would disagree to that. I think they are a pinnacle of being informed, compared to other complicated options. As long as you are in a retirement acct, and know the asset allocation you want, i think they are for the more informed consumer who has figured out that they are unlikely to do better anywhere else on the average.
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grabiner
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Re: Why the love for target date funds?

Post by grabiner »

I often recommend them for getting started. If you have just opened your first Roth IRA with $5500 and you want to hold a diversified portfolio, the appropriate Target Date fund is an excellent choice. When several years of contributions and market gains have caused the balance to reach $50,000, it makes more difference what you invest in, and you may want to use individual funds.
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Eastwest
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Re: Why the love for target date funds?

Post by Eastwest »

-Because it's the most diversified and lowest cost option in my 401(k).
-Because I suffer from "analysis paralysis".
-Because I suffer from over-tinkering with my portfolio.
-Because "perfect is the enemy of good".
-Because I realize there is value in auto-re-balancing.
-Because I realize the % of income invested is more important than what I'm investing in.
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yatesd
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Re: Why the love for target date funds?

Post by yatesd »

DVMResident wrote:The biggest and most common mistakes in investing are behavioral. Using a target date funds avoids most of the behavioral issues.
This is why I believe target date funds are so effective. It addresses behavioral issues.

Otherwise, an investor will need to create a written IPS and AA to help curb emotional pull (the percentage that actually go through the process are comparatively small). My strategy is close enough to a target date fund that copying a company I respect (supported by independent third parties) makes sense to me.
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bottlecap
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Re: Why the love for target date funds?

Post by bottlecap »

You're essentially saying that instead of using target date funds, we should turn unsophisticated investors with no interest in investing into sophisticated investors who only make changes to their asset allocation for good, rational reasons. Good luck with that.

If everyone was like this, there would be no need for target date funds.

JT
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Re: Why the love for target date funds?

Post by steve_14 »

Ultimately a target fund is like a washing machine. A few cleaning geeks will hand wash their clothes and complain that washing machines just don't get the job done...perhaps they'll even set up an online forum to discuss the fine points of hand washing...but most folks will prefer to toss their clothes in the washer and live their lives.
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Re: Why the love for target date funds?

Post by dharrythomas »

I like Target Retirement and LifeStrategy because the most important thing a person can control is their savings rate and besides there are more important things in life than MONEY! :shock:

If I can get a young uneducated investor to save a reasonable percentage of salary AND invest in one of those options AND not look at the account for 5 to 20 years, they'll be in better shape than most and unless the country collapses will be just fine. If I put them in high maintenance options, there is a good chance that they'll make the same mistakes that many of us here made and be worse off than the first option. Plus they'll have more time for family and other priorities.

Good Luck!

Harry
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yatesd
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Re: Why the love for target date funds?

Post by yatesd »

dharrythomas wrote:and besides there are more important things in life than MONEY! :shock:
You are only allowed to make statements like this 3 times on this forum. Otherwise all evidence of your participation will be removed. :wink:

That being said, I wholeheartedly agree! :D
IPer
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Re: Why the love for target date funds?

Post by IPer »

Well the more I think about Target Funds and look at them and my portfolio the more I love them. The difference in expense between using Target vs Admiral shares assuming you have $10K or more in the smallest part of the Target fund is, well, around 100%, that means you get charged double for using Target. But you could get the same expense ratio if you use ETFs, but most people don't want to be bothered with that, and then you must rebalance. So I think I calculated on a Target (2035) that the whole amount would need to be $328K or greater, with yearly projected expenses of around $590.40 in Target or $291.18 in ETFs, so the real value question is is the ease of use, simplicity and the value of someone else doing the rebalancing worth $300/year in a portfolio with a value of $328K? And if I had $3Million in that portfolio would I mind paying those expenses or would I want to do it myself?! ;)
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