pros and cons of target date funds?

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jayk238
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pros and cons of target date funds?

Post by jayk238 » Tue Jan 16, 2018 8:54 am

What is wrong with target date funds? What are some cons for those who choose not to use them and why others who use them feel the pros outweigh the cons?

I see a lot of investors utilizing multiple funds - the lists are long on these posts and I dont know one from the other vtsx this vtsy that- its very confusing.

Would a target date fund provide me that much worse performance?

Is the whole fund selection process that eschews the target funds simply a hobbyists pasttime ?
otherwise what am I missing?

RetireSomeday5
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Re: pros and cons of target date funds?

Post by RetireSomeday5 » Tue Jan 16, 2018 9:02 am

The expense ratio (the cost you pay to own a fund) is slightly higher than if you select the same funds yourself and re balance yourself. If you don't have a lot saved up yet, a Target Fund is a good way to get started, once you have maybe say 50K (or significantly more if you don't mind losing a few hundred a year) invested you might think about handling it yourself.

You also get the option to tilt one direction or the other if you disagree with the target fund allocation, but this does not seem to be the case for you.
Last edited by RetireSomeday5 on Tue Jan 16, 2018 9:06 am, edited 2 times in total.

Helo80
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Re: pros and cons of target date funds?

Post by Helo80 » Tue Jan 16, 2018 9:03 am

jayk238 wrote:
Tue Jan 16, 2018 8:54 am
Is the whole fund selection process that eschews the target funds simply a hobbyists pasttime ?
otherwise what am I missing?
I think your intuition is largely correct. Target funds are professionally managed ratios of large, mid, small cap funds, bonds, international funds and international bonds for people whom want to invest, but could not care less or do not care to understand what all these different funds are composed of. Target Retirement funds are theoretically more stable during tumultuous market times as they have professionally allocated stocks:bonds ratios of what expert feel is appropriate for a retirement group targeting retirement in that particular date.

For expenses, generally BHs and investing hobbyists can do a bit better on expense ratios tinkering their own unique composition of Target Retirement funds stocks for a lower expense ratio. That being said, that's not to say the hobbyists can do for $50 for year, and it would be $500 per year if they went with a Target Retirement fund.

The Vanguard Target Retirement funds have expense ratios of 0.16% compared to like 0.04% for Total Stock Market index --- so that's $16 versus $4 per year in fees per $10,000 invested..... for $100k, it's $160 versus $40..... let's put it this way... if you have $100 grand at Vanguard, you're doing enough things right in life that $120 difference in fees is not going to break your retirement and put you into the used 10 year old Toyota versus new Mercedes.

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jayk238
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Re: pros and cons of target date funds?

Post by jayk238 » Tue Jan 16, 2018 9:08 am

RetireSomeday5 wrote:
Tue Jan 16, 2018 9:02 am
The expense ratio (the cost you pay to own a fund) is slightly higher than if you select the same funds yourself and re balance yourself. If you don't have a lot saved up yet, a Target Fund is a good way to get started, once you have maybe say 50K (or significantly more if you don't mind losing a few hundred a year) invested you might think about handling it yourself.

You also get the option to tilt one direction or the other if you disagree with the target fund allocation, but this does not seem to be the case for you.
can you give me an example of the cost difference based on this ER? I ask not because I cant do it but because I dont trust myself to do it correctly and will have the nagging sensation my calculation will have errors. For example, the vanguard target date 2050 fund looks reasonable to me but I wonder if it is that expensive?

Lets play with the round number 1,000,000
what would the costs using it be?

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stemikger
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Re: pros and cons of target date funds?

Post by stemikger » Tue Jan 16, 2018 9:09 am

jayk238 wrote:
Tue Jan 16, 2018 8:54 am
What is wrong with target date funds? What are some cons for those who choose not to use them and why others who use them feel the pros outweigh the cons?

I see a lot of investors utilizing multiple funds - the lists are long on these posts and I dont know one from the other vtsx this vtsy that- its very confusing.

Would a target date fund provide me that much worse performance?

Is the whole fund selection process that eschews the target funds simply a hobbyists pasttime ?
otherwise what am I missing?
If you don't want to tinker the target date funds (with Vanguard) are an excellent choice. My only small complaint with them is that they changed their AA on at least one occasion and I believe they also changed the amount of international. I rather stick with the lifestyle funds that hold a fixed allocation, I'm not crazy about the glide path, but I still think they are excellent funds.

I'm in the rare minority that don't like international investing, so I hold the basic balanced index fund which has stood the test of time with its stodgy 60/40 (all U.S.) AA that invests like the TSM and the TBM but do not hold those two funds directly. Not quite sure why they do it this way. My guess might be this is the only way they can offer admiral shares, but that is just a guess.

My biggest complaint with the TR funds is they don't offer admiral shares.

I didn't read the other replies, so sorry if this was already covered.

Having said all that, you really can't go wrong with any of the balanced fund choices with Vanguard.
Last edited by stemikger on Tue Jan 16, 2018 9:11 am, edited 2 times in total.
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Topic Author
jayk238
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Re: pros and cons of target date funds?

Post by jayk238 » Tue Jan 16, 2018 9:10 am

Helo80 wrote:
Tue Jan 16, 2018 9:03 am
jayk238 wrote:
Tue Jan 16, 2018 8:54 am
Is the whole fund selection process that eschews the target funds simply a hobbyists pasttime ?
otherwise what am I missing?
I think your intuition is largely correct. Target funds are professionally managed ratios of large, mid, small cap funds, bonds, international funds and international bonds for people whom want to invest, but could not care less or do not care to understand what all these different funds are composed of. Target Retirement funds are theoretically more stable during tumultuous market times as they have professionally allocated stocks:bonds ratios of what expert feel is appropriate for a retirement group targeting retirement in that particular date.

For expenses, generally BHs and investing hobbyists can do a bit better on expense ratios tinkering their own unique composition of Target Retirement funds stocks for a lower expense ratio. That being said, that's not to say the hobbyists can do for $50 for year, and it would be $500 per year if they went with a Target Retirement fund.

The Vanguard Target Retirement funds have expense ratios of 0.16% compared to like 0.04% for Total Stock Market index --- so that's $16 versus $4 per year in fees per $10,000 invested..... for $100k, it's $160 versus $40..... let's put it this way... if you have $100 grand at Vanguard, you're doing enough things right in life that $120 difference in fees is not going to break your retirement and put you into the used 10 year old Toyota versus new Mercedes.
Thank you for this response! So if I have a million dollars in the future thats giong to amount to 1200 in fees basically? Thats not so bad tbh.

what are the risks of a target date fund? Are these risks controlled by diy funds?

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Re: pros and cons of target date funds?

Post by Helo80 » Tue Jan 16, 2018 9:12 am

jayk238 wrote:
Tue Jan 16, 2018 9:08 am

Lets play with the round number 1,000,000
what would the costs using it be?

I think all, or nearly all, of the Vanguard Target Retirements have an ER of 0.16%.... so $1600 per million invested.

RetireSomeday5
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Re: pros and cons of target date funds?

Post by RetireSomeday5 » Tue Jan 16, 2018 9:13 am

jayk238 wrote:
Tue Jan 16, 2018 9:08 am
RetireSomeday5 wrote:
Tue Jan 16, 2018 9:02 am
The expense ratio (the cost you pay to own a fund) is slightly higher than if you select the same funds yourself and re balance yourself. If you don't have a lot saved up yet, a Target Fund is a good way to get started, once you have maybe say 50K (or significantly more if you don't mind losing a few hundred a year) invested you might think about handling it yourself.

You also get the option to tilt one direction or the other if you disagree with the target fund allocation, but this does not seem to be the case for you.
can you give me an example of the cost difference based on this ER? I ask not because I cant do it but because I dont trust myself to do it correctly and will have the nagging sensation my calculation will have errors. For example, the vanguard target date 2050 fund looks reasonable to me but I wonder if it is that expensive?

Lets play with the round number 1,000,000
what would the costs using it be?
The poster below me gave an example of $120 difference per 100K invested. And it might not even be that much since he assumed 100% was invested in total stock market which has a low expense ratio.

Bottom line, for you, it sounds like unless you have multiple millions to invest then just go with the target date fund for now. While doing so, take a look at the bogleheads wiki pages, or "bogles guide to investing" and when you feel comfortable you can compile your own.

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Re: pros and cons of target date funds?

Post by BuckyBadger » Tue Jan 16, 2018 9:14 am

Don't forget availability as you get more and more accounts. My husband and I treat our portfolios as one big overall portfolio, so to only use target date funds would mean separate target date funds for 1) his 401k, 2) my 403b, 3) his HSA, and 4) our Roth and taxable accounts.

This doesn't work for several reasons:

1) Both of our employer accounts don't offer the same funds, and don't necessarily have good target date funds.
2) We don't want bonds in taxable accounts.
3) As others said, target date funds tend to have higher fees.

So it's easier to create our own simple target date fund using three funds that we do have available in our plans. Set an AA, automate deposits, check balances once a month, re-balance as necessary, create simple glide path.

If all our money were in one account it would be easy to have it in one target date fund. But with 6 accounts it's easier to create our own. Mine is super easy and a tiny little google doc is all I need:

Image

Super easy.

Before we got married and had fewer accounts (just a Roth each) they were in target date funds.

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Re: pros and cons of target date funds?

Post by livesoft » Tue Jan 16, 2018 9:15 am

I didn't see the word "tax" mentioned in this thread as I started typing this, so here goes ...

I think the main con to target date funds has to do with a tax situation that does not apply to all investors, namely a taxable account. A target date fund has some fixed income thus can have more ordinary dividends than a tax-efficient equity fund in taxable. It also doesn't have the losses of an equity fund which reduces the tax-loss harvesting opportunities in a taxable account.

I think a target date fund in a taxable account will cost one more in taxes than having tax-efficient equity funds in taxable and bonds/fixed income in a tax-deferred account. I have no problems with a target date fund in a tax-advantaged account where taxes play little, if any, annual role in investing.

Also I don't have a problem with a target date fund in a taxable account for those investors who do not pay income taxes.
Last edited by livesoft on Tue Jan 16, 2018 9:17 am, edited 1 time in total.
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Re: pros and cons of target date funds?

Post by BuckyBadger » Tue Jan 16, 2018 9:16 am

livesoft wrote:
Tue Jan 16, 2018 9:15 am
I didn't see the word "tax" mentioned in this thread as I started typing this, so here goes ...
I mentioned it at the same time you were posting! Great minds and all that ;-)

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Re: pros and cons of target date funds?

Post by bottlecap » Tue Jan 16, 2018 9:17 am

They can be slightly more expensive, but if you ask me, well worth it. If used in a taxable account, they incur more taxable events.

Sometimes you cant use just those funds because they are not offered in some of your accounts. People who have the option of using them that don’t, are usually hoping for a better return or more "control." Hope springs eternal.

JT

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Re: pros and cons of target date funds?

Post by livesoft » Tue Jan 16, 2018 9:18 am

@BuckyBadger, :sharebeer
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Re: pros and cons of target date funds?

Post by luminous » Tue Jan 16, 2018 9:34 am

All great points. Something not yet mentioned is that having your retirement money in target date funds may prevent you from making decisions you regret when the stock market starts to change course. I didn’t have a well thought out investment plan in 2008-2009 and I did some buys and sells that were not well thought out. Outside of massive market free fall events, day to day tinkering is largely prevented by all of the money in a given account being invested in a single target date fund.
50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2026.

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Re: pros and cons of target date funds?

Post by BuckyBadger » Tue Jan 16, 2018 9:39 am

luminous wrote:
Tue Jan 16, 2018 9:34 am
All great points. Something not yet mentioned is that having your retirement money in target date funds may prevent you from making decisions you regret when the stock market starts to change course. I didn’t have a well thought out investment plan in 2008-2009 and I did some buys and sells that were not well thought out. Outside of massive market free fall events, day to day tinkering is largely prevented by all of the money in a given account being invested in a single target date fund.
Agree! If you're not someone who can ignore the noise and keep on track, a target date fund - even if it's not necessarily the most maximized/efficient plan - might be the way to go. Higher fees and tax consequences are a small price to pay if the other option is that you freak out and sell everything, or that you suddenly find yourself a year before retirement and 90% stocks.

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Re: pros and cons of target date funds?

Post by jayk238 » Tue Jan 16, 2018 12:49 pm

BuckyBadger wrote:
Tue Jan 16, 2018 9:14 am
Don't forget availability as you get more and more accounts. My husband and I treat our portfolios as one big overall portfolio, so to only use target date funds would mean separate target date funds for 1) his 401k, 2) my 403b, 3) his HSA, and 4) our Roth and taxable accounts.

This doesn't work for several reasons:

1) Both of our employer accounts don't offer the same funds, and don't necessarily have good target date funds.
2) We don't want bonds in taxable accounts.
3) As others said, target date funds tend to have higher fees.

So it's easier to create our own simple target date fund using three funds that we do have available in our plans. Set an AA, automate deposits, check balances once a month, re-balance as necessary, create simple glide path.

If all our money were in one account it would be easy to have it in one target date fund. But with 6 accounts it's easier to create our own. Mine is super easy and a tiny little google doc is all I need:

Image

Super easy.

Before we got married and had fewer accounts (just a Roth each) they were in target date funds.
Thank you for response.
Im confused. Cant you choose to invest say in vanguard w your 401k and opt out of company plans or whatever?

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jayk238
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Re: pros and cons of target date funds?

Post by jayk238 » Tue Jan 16, 2018 12:52 pm

livesoft wrote:
Tue Jan 16, 2018 9:15 am
I didn't see the word "tax" mentioned in this thread as I started typing this, so here goes ...

I think the main con to target date funds has to do with a tax situation that does not apply to all investors, namely a taxable account. A target date fund has some fixed income thus can have more ordinary dividends than a tax-efficient equity fund in taxable. It also doesn't have the losses of an equity fund which reduces the tax-loss harvesting opportunities in a taxable account.

I think a target date fund in a taxable account will cost one more in taxes than having tax-efficient equity funds in taxable and bonds/fixed income in a tax-deferred account. I have no problems with a target date fund in a tax-advantaged account where taxes play little, if any, annual role in investing.

Also I don't have a problem with a target date fund in a taxable account for those investors who do not pay income taxes.
Thank you. This was very helpful and clears up a lot for me.

Why are bonds preferred in tax advantaged accounts. Does this include backdoor and 401k and hsa?
How does tax harvesting work if im not constantly paying attention to it.

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Re: pros and cons of target date funds?

Post by BuckyBadger » Tue Jan 16, 2018 12:57 pm

jayk238 wrote:
Tue Jan 16, 2018 12:49 pm
Thank you for response.
Im confused. Cant you choose to invest say in vanguard w your 401k and opt out of company plans or whatever?
To invest in your company's plan you must invest with their vendor and invest in the funds provided. You can't invest in anything you want.

My current company is great and offers a ton of awesome funds through Vanguard. My husband's company is also great and also invests through vanguard, but doesn't offer as many funds.

Do you see how he has no US Stock in his 401k? It's because his US Stock fund isn't as good as mine.

My old company ran their 403b through a crappy vendor with high fees. It was a real pain in the you-know-what. As soon as I left I transferred that money over into my new plan.

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jayk238
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Re: pros and cons of target date funds?

Post by jayk238 » Tue Jan 16, 2018 1:38 pm

BuckyBadger wrote:
Tue Jan 16, 2018 12:57 pm
jayk238 wrote:
Tue Jan 16, 2018 12:49 pm
Thank you for response.
Im confused. Cant you choose to invest say in vanguard w your 401k and opt out of company plans or whatever?
To invest in your company's plan you must invest with their vendor and invest in the funds provided. You can't invest in anything you want.

My current company is great and offers a ton of awesome funds through Vanguard. My husband's company is also great and also invests through vanguard, but doesn't offer as many funds.

Do you see how he has no US Stock in his 401k? It's because his US Stock fund isn't as good as mine.

My old company ran their 403b through a crappy vendor with high fees. It was a real pain in the you-know-what. As soon as I left I transferred that money over into my new plan.
So let me try to understand,

My future employer offers a 401k and a 6% match.
So when i sign up for the 401k i have to use their vendor?
I cant say sorry id like to use my own vanguard and have employer match the 6% to the place i want?
It has to be through the vendor to get the 401k and match?
Ive heard bad things about my future vendor. Hugh fees crappy allocation etc. what to do?!!!!

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Re: pros and cons of target date funds?

Post by livesoft » Tue Jan 16, 2018 1:53 pm

jayk238 wrote:
Tue Jan 16, 2018 12:52 pm
Why are bonds preferred in tax advantaged accounts.
That's not quite what I wrote. The details matter.
How does tax harvesting work if im not constantly paying attention to it.
See https://www.bogleheads.org/wiki/Tax_loss_harvesting
Last edited by livesoft on Tue Jan 16, 2018 1:53 pm, edited 1 time in total.
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Re: pros and cons of target date funds?

Post by BuckyBadger » Tue Jan 16, 2018 1:53 pm

jayk238 wrote:
Tue Jan 16, 2018 1:38 pm
BuckyBadger wrote:
Tue Jan 16, 2018 12:57 pm
jayk238 wrote:
Tue Jan 16, 2018 12:49 pm
Thank you for response.
Im confused. Cant you choose to invest say in vanguard w your 401k and opt out of company plans or whatever?
To invest in your company's plan you must invest with their vendor and invest in the funds provided. You can't invest in anything you want.

My current company is great and offers a ton of awesome funds through Vanguard. My husband's company is also great and also invests through vanguard, but doesn't offer as many funds.

Do you see how he has no US Stock in his 401k? It's because his US Stock fund isn't as good as mine.

My old company ran their 403b through a crappy vendor with high fees. It was a real pain in the you-know-what. As soon as I left I transferred that money over into my new plan.
So let me try to understand,

My future employer offers a 401k and a 6% match.
So when i sign up for the 401k i have to use their vendor?
I cant say sorry id like to use my own vanguard and have employer match the 6% to the place i want?
It has to be through the vendor to get the 401k and match?
Ive heard bad things about my future vendor. Hugh fees crappy allocation etc. what to do?!!!!
Unless something has changed in the last 6 years since I set up my last 403b, this is correct. You must use their vendor.

If the plan is really REALLY that bad, then maybe it's worth it to only contribute up to the max (which is 100% return, so even with terrible fees it is still free money) and then contribute the max to an IRA, then decide what to do.

It would have to be REALLY bad to still not be worth it to invest, though, considering the tax advantages. And when you change jobs some day in the future you can roll it over and then it's part of your (hopefully) better plan.

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Re: pros and cons of target date funds?

Post by BuckyBadger » Tue Jan 16, 2018 1:59 pm

And for what it's worth, I don't do tax loss harvesting. Just not worth the ROI for me personally. I figure if I do 95% of the boglehead way correctly I'll be okay. However easy it may be, I've decided that it's just not something that I want to deal with.

So nothing says you HAVE to do it.

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Re: pros and cons of target date funds?

Post by Tenesmus83 » Fri Nov 23, 2018 7:18 pm

what is a reasonable expense ratio for a target date fund. Unfortunately, my employer does not off vanguard
as part of the 401k lineup.

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Re: pros and cons of target date funds?

Post by Xrayman69 » Fri Nov 23, 2018 9:56 pm

I also noticed a $75 cost regularly for target date when I had one. This $75 was regardless of the value of the account. What’s up with that above and beyond the 0.16%

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Re: pros and cons of target date funds?

Post by luminous » Fri Nov 23, 2018 10:00 pm

Xrayman69 wrote:
Fri Nov 23, 2018 9:56 pm
I also noticed a $75 cost regularly for target date when I had one. This $75 was regardless of the value of the account. What’s up with that above and beyond the 0.16%
That $75 sounds like a fee from your 401k plan, not the fund itself. Do you recall what target date fund you were using, and who the 401k provider was? Vanguard target date funds definitely don't have flat fees like that.
50/20/30 US stock/international stock/bonds. Hope to semi-retire in 2026.

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Re: pros and cons of target date funds?

Post by Element » Fri Nov 23, 2018 10:20 pm

My employer switched 401k companies to Vanguard this past year. We have access to the institutional class target date funds. I put 100% of my contributions in VIRSX, which is the 2040 option. It only has a 0.09%ER

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Re: pros and cons of target date funds?

Post by Random Musings » Fri Nov 23, 2018 10:49 pm

As mentioned, tax efficiencies. If that is not a problem, you have to choose the target date that matches your portfolio need of risk. But then the problem is once your risk needs change, the target retirement fund you are in most likely will not be in the glide path that will have the asset allocation you need. If some investment dollars in taxable, then you could have tax problems if you are going to move to your new target asset allocation unless you can use new dollars to balance out your portfolio.

RM
Last edited by Random Musings on Fri Nov 23, 2018 11:18 pm, edited 1 time in total.
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Re: pros and cons of target date funds?

Post by steve roy » Fri Nov 23, 2018 10:58 pm

Xrayman69 wrote:
Fri Nov 23, 2018 9:56 pm
I also noticed a $75 cost regularly for target date when I had one. This $75 was regardless of the value of the account. What’s up with that above and beyond the 0.16%
It's probably an administrative fee the plan sponsor tacks on to pay for the provided 401(k) plan.

There's three ways (more or less) corporate 401(k) plans are paid for. 1) The company pays admin fees out of the goodness of its heart. 2) Plan participants pay the admin fees via a) additional basis points added to the basic cost of each fund, OR b) a flat participant fee is levied across the board (this favors long-time plan participants who have lots of assets). Sometimes it's a combination of the two (fee + added basis points.)

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Re: pros and cons of target date funds?

Post by Iorek » Fri Nov 23, 2018 11:32 pm

luminous wrote:
Tue Jan 16, 2018 9:34 am
All great points. Something not yet mentioned is that having your retirement money in target date funds may prevent you from making decisions you regret when the stock market starts to change course. I didn’t have a well thought out investment plan in 2008-2009 and I did some buys and sells that were not well thought out. Outside of massive market free fall events, day to day tinkering is largely prevented by all of the money in a given account being invested in a single target date fund.
To reiterate this point, I have chosen to pretty much just use target funds so I never have to rebalance. When stocks are doing great the temptation is strong to let the money ride and when there's a steep drop it is likewise hard (for me at least) to rebalance into stocks, but with a target fund I just pick my plan, save my money every month and check in once a year.

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Re: pros and cons of target date funds?

Post by inbox788 » Sat Nov 24, 2018 12:38 am

IMO, the slightly higher expense fee is a minor issue, especially for smaller accounts. In tax advantaged account, where there is no penalty to change in or out of, there isn't any really much difference until you decide you want more control. The biggest disadvantage in a taxable account is the taxes you have to pay to make some changes. For that reason, you may want to be sure you're committed for the long run before buying target date funds in a taxable account. And IMO, it's still a very good idea. If the account gets big enough, or you decide you want to make specific changes, you can keep the target date funds or change them depending on the scale of the taxes you'd pay.

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Re: pros and cons of target date funds?

Post by JustinR » Sat Nov 24, 2018 12:50 am

They're great for people who don't want to micromanage their investments. Like your grandparents, or just people who don't really understand investing but want a piece of the action (most of your coworkers).

Instead of calling them "cons", I'll say that there are benefits to separating out the funds and managing it yourself:

- Tax efficiency: By separating out the funds, you can optimize your tax efficiency, such as putting bonds in 401k, international in Roth, total stock market in taxable, etc. You can't do this with a target fund since all three would be in the same fund.

- Tax Loss/Gain Harvesting: this is kind of an advanced topic though, so if you know what that is and want to do that, you already wouldn't be using a target fund anyway.

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Re: pros and cons of target date funds?

Post by sergio » Sat Nov 24, 2018 1:20 am

Disadvantage is that, while you may not be able to tinker with your asset allocation, the fund company can. At the very least do an annual "check up" to make sure the target date fund hasn't drifted too much from what you were expecting.

Case in point: Vanguard, the "stay the course" flag bearer, increased the amount of Intl stock in their target date funds in 2015. Their timing was awful on this move, and their funds have not done well as a consequence. But you wouldn't know unless you kept an eye on the funds.

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Re: pros and cons of target date funds?

Post by BL » Sat Nov 24, 2018 2:04 am

You could consider using a balanced fund like Target date to be getting professional assistance at a very low cost. They are set up and managed by professionals.

There is always the temptation to tinker with the funds or AA, so having a balanced fund helps you not to do that. This means you may very well do better than if you kept changing things.

retire2022
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Location: NYC

Re: pros and cons of target date funds?

Post by retire2022 » Sat Nov 24, 2018 2:10 am

Asset allocation table dated June 2018 by Morningstar is basically a target fund which you can tweak to your age and liking, based on agressive, moderate or conservative choices.

https://corporate.morningstar.com/US/do ... ummary.pdf

This is based on Pascal Probability:

https://www.storyofmathematics.com/17th_pascal.html

Also shown in following links:

a good PBS news hour on this concept Probability:

Transcript

https://www.pbs.org/newshour/show/world ... half-story

Video
https://www.youtube.com/watch?v=gblX4Pzf3WU

On Vanguard website

https://retirementplans.vanguard.com/VG ... ggCalc.jsf

As explained in Monte Carlo simulation

http://www.investopedia.com/terms/m/mon ... lation.asp

As Quincunx

https://en.wikipedia.org/wiki/Quincunx

or Bean Counting machine

https://en.wikipedia.org/wiki/Bean_machine

see video of bean machine in action

https://www.youtube.com/watch?v=AUSKTk9ENzg

Or as explained using investments backward calculation:

https://www.portfoliovisualizer.com/backtest-portfolio

Stormbringer
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Re: pros and cons of target date funds?

Post by Stormbringer » Sat Nov 24, 2018 3:45 am

jayk238 wrote:
Tue Jan 16, 2018 8:54 am
What is wrong with target date funds?
Here is what is wrong with them, IMO:

The audience for a target date fund is the person who wants things on autopilot -- make regular contributions, and at the end of their career they have a secure retirement without having to micromanage things along the way or know much about personal finance. TDFs come up short in achieving this because a secure retirement depends on having enough income to live on and TDFs don't even attempt to achieve this goal. All they do is provide an asset allocation glide path for however much you may have saved. A person could make regular contributions, and then come up short.

Remember, we're not talking about Bogleheads here, constantly crunching numbers and optimizing their finances. We're talking about the average person who doesn't know or care much about personal finance and doesn't really want to know. They just want to make a regular contribution and have everything turn out fine in the end.

TDFs would be better if they were paired with a tool where:
  1. They started with an income goal expressed in real terms.
  2. They accounted for other sources of income (e.g. social security).
  3. Based on the difference, told the person how much they need to contribute each month to reach that goal.
  4. Provided statements that expressed progress in real income terms.
  5. Periodically adjust to market conditions or changes in income to let the person know if they need to contribute more, or could contribute less.
Example: Bill is 30 and makes $75,000 a year. The TDF suggests that he'll need 80% of that ($60,000) during retirement, and that $30,000 will be covered by social security. To meet his goal, he needs to contribute $600 a month until he is 65. Each year when he gets his statement, it should update him on his progress towards that income goal, and recommend any adjustments that he needs to make in his contributions to account for changes in market conditions.

Don't get me wrong, I'm not saying TDFs are terrible or anything like that. It's just that for the person that wants a path to secure retirement to be easy and on autopilot, they don't necessary achieve that.
"Compound interest is the most powerful force in the universe." - Albert Einstein

Windylotus
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Re: pros and cons of target date funds?

Post by Windylotus » Sat Nov 24, 2018 5:05 am

JustinR wrote:
Sat Nov 24, 2018 12:50 am
- Tax efficiency: By separating out the funds, you can optimize your tax efficiency, such as putting bonds in 401k, international in Roth, total stock market in taxable, etc. You can't do this with a target fund since all three would be in the same fund.
I'm curious on you rational behind this? I understand wanting bonds in tax advantaged accounts and equities in your Roth with the higher probability of tax free growth potential. What would be the benefit if international is in Roth and total stock market in taxable? Is total stock market somehow more tax efficient and how does one know or understand the tax efficiency of different funds? I'm not disagreeing, just trying to learn something. Cheers!

Triple digit golfer
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Re: pros and cons of target date funds?

Post by Triple digit golfer » Sat Nov 24, 2018 8:02 am

Windylotus wrote:
Sat Nov 24, 2018 5:05 am
JustinR wrote:
Sat Nov 24, 2018 12:50 am
- Tax efficiency: By separating out the funds, you can optimize your tax efficiency, such as putting bonds in 401k, international in Roth, total stock market in taxable, etc. You can't do this with a target fund since all three would be in the same fund.
I'm curious on you rational behind this? I understand wanting bonds in tax advantaged accounts and equities in your Roth with the higher probability of tax free growth potential. What would be the benefit if international is in Roth and total stock market in taxable? Is total stock market somehow more tax efficient and how does one know or understand the tax efficiency of different funds? I'm not disagreeing, just trying to learn something. Cheers!
I am guessing because of the foreign tax credit, although lately the presence of ordinary dividends in international stock funds have largely negated it. In this case I think it is a bit of dancing on the head of a pin; both Total Stock and Total Internstional are fine in a taxable account.

warner25
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Re: pros and cons of target date funds?

Post by warner25 » Sat Nov 24, 2018 8:21 am

sergio wrote:
Sat Nov 24, 2018 1:20 am
Disadvantage is that, while you may not be able to tinker with your asset allocation, the fund company can... Case in point: Vanguard, the "stay the course" flag bearer, increased the amount of Intl stock in their target date funds in 2015.
This is my biggest concern too. An even more egregious example is what they did in 2006, dramatically increasing the total allocation to stocks, seemingly chasing performance for marketing reasons. Not good for a fund that's supposed to be "set and forget" while reducing risk. Nisiprius wrote this post exposing it in detail (and I think he showed in another post that Fidelity and T Rowe Price did the same thing): viewtopic.php?t=149101#p2229225

Otherwise, I'm a big proponent of balanced funds like VBIAX that have been stable for a long time.
Last edited by warner25 on Sat Nov 24, 2018 8:26 am, edited 1 time in total.

JustinR
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Re: pros and cons of target date funds?

Post by JustinR » Sat Nov 24, 2018 8:25 am

Windylotus wrote:
Sat Nov 24, 2018 5:05 am
JustinR wrote:
Sat Nov 24, 2018 12:50 am
- Tax efficiency: By separating out the funds, you can optimize your tax efficiency, such as putting bonds in 401k, international in Roth, total stock market in taxable, etc. You can't do this with a target fund since all three would be in the same fund.
I'm curious on you rational behind this? I understand wanting bonds in tax advantaged accounts and equities in your Roth with the higher probability of tax free growth potential. What would be the benefit if international is in Roth and total stock market in taxable? Is total stock market somehow more tax efficient and how does one know or understand the tax efficiency of different funds? I'm not disagreeing, just trying to learn something. Cheers!
Bonds are the least tax efficient, then international, with US (total stock market) being the most efficient.

Because of that, this is the setup you want:

Traditional (401k or IRA) -> Roth -> Taxable
Bonds -> International -> US

You can compare the tax efficiencies using this spreadsheet, from this thread.

HEDGEFUNDIE
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Re: pros and cons of target date funds?

Post by HEDGEFUNDIE » Sat Nov 24, 2018 8:32 am

Stormbringer wrote:
Sat Nov 24, 2018 3:45 am
jayk238 wrote:
Tue Jan 16, 2018 8:54 am
What is wrong with target date funds?
Here is what is wrong with them, IMO:

The audience for a target date fund is the person who wants things on autopilot -- make regular contributions, and at the end of their career they have a secure retirement without having to micromanage things along the way or know much about personal finance. TDFs come up short in achieving this because a secure retirement depends on having enough income to live on and TDFs don't even attempt to achieve this goal. All they do is provide an asset allocation glide path for however much you may have saved. A person could make regular contributions, and then come up short.

Remember, we're not talking about Bogleheads here, constantly crunching numbers and optimizing their finances. We're talking about the average person who doesn't know or care much about personal finance and doesn't really want to know. They just want to make a regular contribution and have everything turn out fine in the end.

TDFs would be better if they were paired with a tool where:
  1. They started with an income goal expressed in real terms.
  2. They accounted for other sources of income (e.g. social security).
  3. Based on the difference, told the person how much they need to contribute each month to reach that goal.
  4. Provided statements that expressed progress in real income terms.
  5. Periodically adjust to market conditions or changes in income to let the person know if they need to contribute more, or could contribute less.
Example: Bill is 30 and makes $75,000 a year. The TDF suggests that he'll need 80% of that ($60,000) during retirement, and that $30,000 will be covered by social security. To meet his goal, he needs to contribute $600 a month until he is 65. Each year when he gets his statement, it should update him on his progress towards that income goal, and recommend any adjustments that he needs to make in his contributions to account for changes in market conditions.

Don't get me wrong, I'm not saying TDFs are terrible or anything like that. It's just that for the person that wants a path to secure retirement to be easy and on autopilot, they don't necessary achieve that.
No funds come with advice. That’s what advisors are for, you know, the ones who charge fees and are “worthless” in the eyes of most BHs.

TDFs assume the only driver of risk tolerance is years left to retirement. What if 30 year old Bill gets spooked by volatility like we’ve seen lately and goes to all cash? A 90/10 TDF would be unyielding in its imperative to stay the course, and yet have no recourse when its owner decides to sell at the most inopportune moment.

If only Bill had someone whose job it was to walk him through why he should hold, indeed, increase his investments...

Iorek
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Re: pros and cons of target date funds?

Post by Iorek » Sat Nov 24, 2018 8:41 am

JustinR wrote:
Sat Nov 24, 2018 12:50 am


- Tax Loss/Gain Harvesting: this is kind of an advanced topic though, so if you know what that is and want to do that, you already wouldn't be using a target fund anyway.
I disagree with this comment-- both the idea that anyone who understands TLH is "advanced" enough in their understanding to avoid target funds and the idea that you can't TLH with target funds.

It's perfectly possible to look at this list of pros and cons and think the pros outweigh the cons taking into account behaviorial issues etc (although I guess target funds, esp "later" in the cycle less volatile than stock only funds).

kjsammy
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Re: pros and cons of target date funds?

Post by kjsammy » Sat Nov 24, 2018 9:05 am

OP, Target date funds are great for many years.
When you get near retirement or are in retirement you may find that the allocations are not to your liking. Many people want to stay 50 or 60 percent in stocks even in retirement. However, by the time you reach retirement you may have saved quite a bit in Roth IRA's in stock so your total allocation is what you want.
Target date 2015 = 40% stocks, 60% bonds
Wasn't able to find if there is an increase beyond 60% bonds.

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CWRadio
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Re: pros and cons of target date funds?

Post by CWRadio » Sat Nov 24, 2018 10:38 am

What is the best Target date fund for someone that is in retirement (has no pension) and needs to take money out for RMD?
Thanks Paul

Cody
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Re: pros and cons of target date funds?

Post by Cody » Sat Nov 24, 2018 10:39 am

kjsammy

Not quite sure what you mean.

Cody

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vineviz
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Re: pros and cons of target date funds?

Post by vineviz » Sat Nov 24, 2018 10:54 am

CWRadio wrote:
Sat Nov 24, 2018 10:38 am
What is the best Target date fund for someone that is in retirement (has no pension) and needs to take money out for RMD?
Thanks Paul
I generally would advise holding a target date fund that is close to your retirement dates, even if that date is in the past. Vanguard Target Retirement 2015 Fund (VTXVX) is still available to purchase, for instance, and is about 45% stocks and 55% bonds.

After a while, most mutual fund companies will transition to a dedicated retirement income fund like Vanguard Target Retirement Income Fund (VTINX). It's possible, though, that you might be just as well served by another balanced fund from the same company, since their retirement income funds generally have static allocations anyway.

Vanguard LifeStrategy Conservative Growth Fund (VSCGX) would be a slightly more aggressive allocation than Vanguard Target Retirement Income Fund, with higher expected return but definitely more volatility.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Stormbringer
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Re: pros and cons of target date funds?

Post by Stormbringer » Sat Nov 24, 2018 11:05 am

HEDGEFUNDIE wrote:
Sat Nov 24, 2018 8:32 am
No funds come with advice.
Well, that's the problem. TDFs are discussed and marketed as some sort of "easy button", but in reality it is more complex and requires more input and attention than people think.
Charles Schwab wrote:Simply choose a fund based on your target retirement date, and we'll do all the rest. It's an all-in-one solution you don't have to manage or adjust.
Blackrock wrote:Simply put, a TDF is a kind of fund that helps take the guesswork out of saving for retirement.
Barrons wrote:As the investors, the only real decision you have to make is when you plan to retire, a.k.a. your “target date.”
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Taylor Larimore
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Re: pros and cons of target date funds?

Post by Taylor Larimore » Sat Nov 24, 2018 11:43 am

jayk238 wrote:
Tue Jan 16, 2018 8:54 am
What is wrong with target date funds? What are some cons for those who choose not to use them and why others who use them feel the pros outweigh the cons?

I see a lot of investors utilizing multiple funds - the lists are long on these posts and I dont know one from the other vtsx this vtsy that- its very confusing.

Would a target date fund provide me that much worse performance?

Is the whole fund selection process that eschews the target funds simply a hobbyists pasttime ?
otherwise what am I missing?
jayk238:

If I could start over, and all my investments were in tax-advantaged accounts, I would have my investments in maintenance-free Target Date Funds designed by Vanguard experts.

If I could start over, and had both tax-advantaged and taxable accounts, I would have my investments in The Three-Fund Portfolio which allows me to place tax-efficient funds in taxable accounts and tax-inefficient funds in tax-advantaged accounts.

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

rixer
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Re: pros and cons of target date funds?

Post by rixer » Sat Nov 24, 2018 1:37 pm

We're retired and prefer to use Lifestrategy CG because the TD gets below the equity level we want to maintain forever.
We take out our annual draw from the LS fund and we're always maintaining our desired allocation.

banook
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Re: pros and cons of target date funds?

Post by banook » Sat Nov 24, 2018 5:53 pm

Taylor Larimore wrote:
Sat Nov 24, 2018 11:43 am
jayk238 wrote:
Tue Jan 16, 2018 8:54 am
What is wrong with target date funds? What are some cons for those who choose not to use them and why others who use them feel the pros outweigh the cons?

I see a lot of investors utilizing multiple funds - the lists are long on these posts and I dont know one from the other vtsx this vtsy that- its very confusing.

Would a target date fund provide me that much worse performance?

Is the whole fund selection process that eschews the target funds simply a hobbyists pasttime ?
otherwise what am I missing?
jayk238:

If I could start over, and all my investments were in tax-advantaged accounts, I would have my investments in maintenance-free Target Date Funds designed by Vanguard experts.

If I could start over, and had both tax-advantaged and taxable accounts, I would have my investments in The Three-Fund Portfolio which allows me to place tax-efficient funds in taxable accounts and tax-inefficient funds in tax-advantaged accounts.

Best wishes
Taylor
Being a little nit-picky but Vanguard target date funds is many exceed the suggested/data-driven 20% international stock (all of the more recent target dates exceed 30% and even go as high as 35% - e.g. VT 2030-2050)? Granted you can always choose a different target date fund based on the starting AA you like but the slice of domestic index for equities may not be what you want (see reasons above).

See post from Taylor here on 20%: viewtopic.php?t=196956

petulant
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Re: pros and cons of target date funds?

Post by petulant » Sat Nov 24, 2018 8:08 pm

Another issue that’s a bit more esoteric is that target date funds rebalance on a continuous basis, while investing yourself can involve annual rebalancing. Over long periods of time recently, annual rebalancing has outperformed continuous, monthly, and band-based rebalancing strategies.

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