5 ways target-date funds let investors down

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kotsp
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5 ways target-date funds let investors down

Post by kotsp » Wed Oct 10, 2018 1:47 pm

Very interesting read https://www.marketwatch.com/story/5-way ... 2018-10-10

Let me hear what members think about this perspective.

deltaneutral83
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Re: 5 ways target-date funds let investors down

Post by deltaneutral83 » Wed Oct 10, 2018 2:02 pm

Didn't read article but just off the top of my head:
(1) Can't utilize placement of assets based on tax efficiency across all accounts (bonds in tax advantaged accounts only for example); moreoever,
(1B) some people can genuinely withstand 100/0 AA in the beginning. 10% bonds at the beginning of the TDF isn't doing much anyway.
(2) Amount of international in the allocation is not something most people would ordinarily choose (think Vanguard is currently 38ish% of the equity %)
(3) Can't TLH any fund of funds
(4) Expense ratio is more than double what it would cost to part out a 3F and re balance once a year across all portfolio accounts but going from a portfolio that is 8 bps avg. to 20 bps isn't the end of the world as compared to some other alternatives.

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vineviz
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Re: 5 ways target-date funds let investors down

Post by vineviz » Wed Oct 10, 2018 2:09 pm

kotsp wrote:
Wed Oct 10, 2018 1:47 pm
Very interesting read https://www.marketwatch.com/story/5-way ... 2018-10-10

Let me hear what members think about this perspective.
This article was originally titled " 5 ways target-date funds let Merriman Wealth Management down", but the editors changed the headline at the last minute.

Half of it reads like sour grapes (target date funds don't invest the way Merriman would) and the other half reads like errors and mischaracterizations (Merriman mumbles some erroneous claims too many times to count).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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galeno
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Re: 5 ways target-date funds let investors down

Post by galeno » Wed Oct 10, 2018 2:10 pm

I did read the article. Disadvantages 1-5 were all about slice and dice and complicating what is supposed to be a SIMPLE one-stop-shop.

Our retirement port uses Vanguard Target Date 2015 as a model. All I do is add "seasoning". I love it.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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fortfun
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Re: 5 ways target-date funds let investors down

Post by fortfun » Wed Oct 10, 2018 2:10 pm

Still way better for the average investor, that's thinking about using EJ, because they believe investing is too complicated.

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Re: 5 ways target-date funds let investors down

Post by S_Track » Wed Oct 10, 2018 2:14 pm

I will be curious what two funds Mr. Merriman selects for his two fund portfolio. Question, Doesn't VG's Total Stock contain some small and Med sized companies?

alex_686
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Re: 5 ways target-date funds let investors down

Post by alex_686 » Wed Oct 10, 2018 2:15 pm

Yawn.

1. Some target date funds don't overweight asset classes that I think they should overweight. i.e. small caps. We will ignore this is highly debated.

2 & 3. The great advantage of target date funds is that they are simple. However, target date funds use generic target dates to set allocations. Different people of the same age have different risk tolerances and goals. Ergo, the correct answer is that each person should create their own custom index and follow that. O.K., yeah, that is the correct answer. It is also a very complex answer. So a contradiction on the author's part. You can't have a complex and simple answer at the same time.

4. Target date funds are a "fund of funds" and as such have an extra layer of fees, and passes these fees on to the investor. Author suggests that it is irrational. Fails to address that they FoF is legally obligated to pass these fees along.

5. Some target date fund invest in active funds, not passive. Not exactly a criticism of target date funds, just a criticism of how some fund families choose to run them.

lifeisinmirrors
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Re: 5 ways target-date funds let investors down

Post by lifeisinmirrors » Wed Oct 10, 2018 2:18 pm

Nobody thinks a target date fund is perfect, but it serves its purpose of being better than 90% of the portfolios people come up with on their own.

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Re: 5 ways target-date funds let investors down

Post by bottlecap » Wed Oct 10, 2018 2:19 pm

I'm not sure there is anything to discuss. Much of it is self-evident.

My two thoughts are 1) that the author puts way too much faith in the effect of small caps and 2) it weird to say in one breath that target date funds treat every the same regardless of age and in the next say that different allocations based on age don't reflect each individual's risk tolerance. The former statement is not true and is demonstrated by the basis for the latter observation. I guess he keeps coming back to small caps.

JT

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Re: 5 ways target-date funds let investors down

Post by Phineas J. Whoopee » Wed Oct 10, 2018 2:22 pm

Target-date funds let investment advisers, who don't know where next month's boat payment is coming from, down.
PJW

kotsp
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Re: 5 ways target-date funds let investors down

Post by kotsp » Wed Oct 10, 2018 2:23 pm

alex_686 wrote:
Wed Oct 10, 2018 2:15 pm

2 & 3. The great advantage of target date funds is that they are simple. However, target date funds use generic target dates to set allocations. Different people of the same age have different risk tolerances and goals. Ergo, the correct answer is that each person should create their own custom index and follow that. O.K., yeah, that is the correct answer. It is also a very complex answer. So a contradiction on the author's part. You can't have a complex and simple answer at the same time.
I assume what author intended to say is that lack of choices in Target date funds just as we do have in some 529 plans, where there are broad categories of Conservative/Moderate/Aggressive risk based portfolio with rolling AA as the student nears the college age.

MichCPA
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Re: 5 ways target-date funds let investors down

Post by MichCPA » Wed Oct 10, 2018 2:28 pm

1. The inability to put 50% in small caps is good for most people. The small and value outperformance has not held up more recently. There is no reason to make insane tilts like that.

2. I have no idea what his point is here. The point of a target date is that you CAN adjust based on age by adjusting the target date and it isn't necessarily true that all TD funds use the same equity classes.

3. Seems mostly like a re-hash of 2. If you want to be more aggressive, adjust the date.

4. The extra expenses are real, but for the majority of users, getting AA wrong will cost way more.

5. A re-hash of 4. Yes there is extra cost, but it doesn't have to be anywhere close to the .5 he quotes.

kotsp
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Re: 5 ways target-date funds let investors down

Post by kotsp » Wed Oct 10, 2018 2:30 pm

bottlecap wrote:
Wed Oct 10, 2018 2:19 pm
I'm not sure there is anything to discuss. Much of it is self-evident.

My two thoughts are 1) that the author puts way too much faith in the effect of small caps and 2) it weird to say in one breath that target date funds treat every the same regardless of age and in the next say that different allocations based on age don't reflect each individual's risk tolerance. The former statement is not true and is demonstrated by the basis for the latter observation. I guess he keeps coming back to small caps.

JT
Not that I am supporting the author -- but your observation is not correct. The former statement does not contradict later one. When he says "Target date funds treats everyone the same regardless of age " it meant the risk tolerance of different people in the same age group was not factored in terms of how the AA is uniform for everyone in that age group.

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Re: 5 ways target-date funds let investors down

Post by livesoft » Wed Oct 10, 2018 2:31 pm

The article is relatively benign. I suspect the 2-fund portfolio will be a target date fund and a small-cap value fund. :twisted:
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GoldStar
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Re: 5 ways target-date funds let investors down

Post by GoldStar » Wed Oct 10, 2018 2:36 pm

Points 1 and 2 seem redundant (Tilt to small Cap and Value to get more return is what he is saying). Many threads here on possible advantages and disadvantages of tilting. Only time will tell.
Point 3 can be overcome by investing in a different target date fund than that of your age (if you want to be more aggressive add some years to your target date / less aggressive - subtract them).
Point 4 is moot - simply look at the expense ratios - if the difference isn't significant to you for what you get in return (Paying X more per year to not have to rebalance or keep checking in) don't worry about it.
Point 5 is easily avoided - just make sure your fund doesn't include expensive managed funds.

He says:
In the third article, I’ll outline some dynamite ways to overcome these shortcomings.
and
Stay tuned for my next article in this series, which will present a simple and easy two-fund solution to these problems.
I can't wait to see how his two fund-choice will be less expensive, have the value and small tilts he is talking about, and accommodate all investment preferences for aggressive/conservative levels and meet the point of a target date fund (not having to rebalance).

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Re: 5 ways target-date funds let investors down

Post by willthrill81 » Wed Oct 10, 2018 3:02 pm

galeno wrote:
Wed Oct 10, 2018 2:10 pm
I did read the article. Disadvantages 1-5 were all about slice and dice and complicating what is supposed to be a SIMPLE one-stop-shop.
Only #1 and #2 had anything to do with slice-and-dice (i.e. tilting toward small and value).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 5 ways target-date funds let investors down

Post by willthrill81 » Wed Oct 10, 2018 3:07 pm

MichCPA wrote:
Wed Oct 10, 2018 2:28 pm
1. The inability to put 50% in small caps is good for most people. The small and value outperformance has not held up more recently. There is no reason to make insane tilts like that.
It's hardly an "insane tilt" to tilt toward small and value. If you're basing your decisions on "recent" performance, you're setting yourself up for disappointment indeed.
MichCPA wrote:
Wed Oct 10, 2018 2:28 pm
2. I have no idea what his point is here. The point of a target date is that you CAN adjust based on age by adjusting the target date and it isn't necessarily true that all TD funds use the same equity classes.
True. No one is obligated to buy the TDF that corresponds to their retirement (or any other event).
MichCPA wrote:
Wed Oct 10, 2018 2:28 pm
3. Seems mostly like a re-hash of 2. If you want to be more aggressive, adjust the date.
I agree.
MichCPA wrote:
Wed Oct 10, 2018 2:28 pm
4. The extra expenses are real, but for the majority of users, getting AA wrong will cost way more.
Getting your AA right is a big deal, but avoiding unnecessarily high ERs is a big deal too.
MichCPA wrote:
Wed Oct 10, 2018 2:28 pm
5. A re-hash of 4. Yes there is extra cost, but it doesn't have to be anywhere close to the .5 he quotes.
It depends on the investor's 401k plan (the main thrust of the article). Many investors don't have the option of investing in lower cost TDFs (or any low cost of any kind for that matter).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 5 ways target-date funds let investors down

Post by hoppy08520 » Wed Oct 10, 2018 3:53 pm

deltaneutral83 wrote:
Wed Oct 10, 2018 2:02 pm
Didn't read article but just off the top of my head:
(1) Can't utilize placement of assets based on tax efficiency across all accounts (bonds in tax advantaged accounts only for example); moreoever,
(1B) some people can genuinely withstand 100/0 AA in the beginning. 10% bonds at the beginning of the TDF isn't doing much anyway.
(2) Amount of international in the allocation is not something most people would ordinarily choose (think Vanguard is currently 38ish% of the equity %)
(3) Can't TLH any fund of funds
(4) Expense ratio is more than double what it would cost to part out a 3F and re balance once a year across all portfolio accounts but going from a portfolio that is 8 bps avg. to 20 bps isn't the end of the world as compared to some other alternatives.
These might apply to Bogleheads, but for the vast majority of US investors, their only investment account might be a Roth IRA or a 401(k) and other than your item 1b, none of this matters to those investor profiles and they could do a heck of a lot worse picking random funds which is what most regular people did before target date funds.

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Re: 5 ways target-date funds let investors down

Post by Jordan4FI » Wed Oct 10, 2018 4:06 pm

Why is anyone part of this community and still reading your general finance articles. We all should know that it is all a bunch of BS with scare tactics. Everything is bad all the time if you read the news and main stream finance reports.. BTW, I feel that there will be a 73% crash in the future..

MichCPA
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Re: 5 ways target-date funds let investors down

Post by MichCPA » Wed Oct 10, 2018 6:57 pm

willthrill81 wrote:
Wed Oct 10, 2018 3:07 pm

It's hardly an "insane tilt" to tilt toward small and value. If you're basing your decisions on "recent" performance, you're setting yourself up for disappointment indeed.

[...]

Getting your AA right is a big deal, but avoiding unnecessarily high ERs is a big deal too.

[...]

It depends on the investor's 401k plan (the main thrust of the article). Many investors don't have the option of investing in lower cost TDFs (or any low cost of any kind for that matter).
I am going to disagree about the small caps. According to my Vanguard account analyzer screen, small caps are 7% of the market, so 50% is more than 7x the market weight. Seems like a bad idea. I believe Bogle has spoken about the small cap and value tilt not persisting recently. Most of that advantage has eroded over the trailing 20 years, so I don''t think that is just a transitory thing. If you are a believer in efficient markets, it would seem to follow that the difference wouldn't persist once identified.

Not saying ERs don't matter, but I got a chance to see actual data on my company's 401k and 25% of the non TD participants are within 10% of the recommended equity allocation. If stocks return 7% real and bonds 2% real, then the .5 of expense savings goes away in one fell swoop. To your point, I admit I will take every extra 50 bps I can get. BTW, that number goes up to 79% when TD participants are included.

I will readily admit that YMMV on the 401k options, but it should be noted that the Vanguard TD or Fidelity Freedom Index options are available to a significant portion of plan participants. That point is for 401k's in general and isn't specific to TDFs though and Merriman representing it as such is a bit of a non sequitur. For example, I don't hold any international funds in my 401k because it only has mediocre active funds with .7 ER. I go to a Roth IRA for that and go with a .015 bp S&P fund, .025 bond fund, and .04 Extended Market fund in the 401k. It doesn't mean anything is wrong with international funds as a group.

The one or two times someone has asked me to help them with their 401k, I have started to explain mutual funds and stopped 30 seconds in and just pointed at the TD because the eyes glazed over. They are also critically important because they are the default option for most 401k's. TDFs and auto-enroll together are very good things for the average person.

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Re: 5 ways target-date funds let investors down

Post by TropikThunder » Wed Oct 10, 2018 8:10 pm

Jordan4FI wrote:
Wed Oct 10, 2018 4:06 pm
Why is anyone part of this community and still reading your general finance articles. We all should know that it is all a bunch of BS with scare tactics. Everything is bad all the time if you read the news and main stream finance reports.. BTW, I feel that there will be a 73% crash in the future..
BTW, I feel that there will be a 73% crash in the future..

BTW, I feel that there will be a 73% crash in the near future..

BTW, I feel that there will be a 73% crash in the very near future..

You too could be a MarketWatch writer, and these could be your first three headlines. :beer

Oh, and I say there should be a rule that you can't post a link to an article and just say "What do you all think?" without telling us what YOU think.

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Re: 5 ways target-date funds let investors down

Post by bradshaw1965 » Wed Oct 10, 2018 8:16 pm

MichCPA wrote:
Wed Oct 10, 2018 2:28 pm
1. The inability to put 50% in small caps is good for most people. The small and value outperformance has not held up more recently. There is no reason to make insane tilts like that.
Not so sure the referenced portfolio qualifies as insane. Small and value are recognized factors. Lots of roads to Dublin and if you stick to your plan there are a bunch of perfectly reasonable approaches with very similar long-term results. Not sticking to the plan? That's way more likely to cause sorrow and pain.

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Re: 5 ways target-date funds let investors down

Post by MichCPA » Wed Oct 10, 2018 8:30 pm

bradshaw1965 wrote:
Wed Oct 10, 2018 8:16 pm
MichCPA wrote:
Wed Oct 10, 2018 2:28 pm
1. The inability to put 50% in small caps is good for most people. The small and value outperformance has not held up more recently. There is no reason to make insane tilts like that.
Not so sure the referenced portfolio qualifies as insane. Small and value are recognized factors. Lots of roads to Dublin and if you stick to your plan there are a bunch of perfectly reasonable approaches with very similar long-term results. Not sticking to the plan? That's way more likely to cause sorrow and pain.
The insane part is that 50% is 7x the weight of that cap compared to a TSM. I get a small tilt, but 7x? Also Bogle himself has said that once small cap and value outperformance was identified 20 years ago, it hasn't held up. This makes sense if you assume any type of market efficiency.

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Taylor Larimore
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"Target Date Funds Are Underrated"

Post by Taylor Larimore » Wed Oct 10, 2018 8:51 pm

Bogleheads:

In my opinion, the introduction of Target Date Funds, designed by company experts, has been of great benefit to millions of investors. Harry Sit, The Finance Buff, explains:

Target Date Funds Are Underrated

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

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willthrill81
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Re: 5 ways target-date funds let investors down

Post by willthrill81 » Wed Oct 10, 2018 10:38 pm

MichCPA wrote:
Wed Oct 10, 2018 8:30 pm
bradshaw1965 wrote:
Wed Oct 10, 2018 8:16 pm
MichCPA wrote:
Wed Oct 10, 2018 2:28 pm
1. The inability to put 50% in small caps is good for most people. The small and value outperformance has not held up more recently. There is no reason to make insane tilts like that.
Not so sure the referenced portfolio qualifies as insane. Small and value are recognized factors. Lots of roads to Dublin and if you stick to your plan there are a bunch of perfectly reasonable approaches with very similar long-term results. Not sticking to the plan? That's way more likely to cause sorrow and pain.
The insane part is that 50% is 7x the weight of that cap compared to a TSM. I get a small tilt, but 7x? Also Bogle himself has said that once small cap and value outperformance was identified 20 years ago, it hasn't held up. This makes sense if you assume any type of market efficiency.
My guess is that you wouldn't like the Larry Portfolio. All of its equity is allocated to small cap value, both U.S. and international.

And for the record, from 1998 until today (20 years), SCV has outperformed TSM by 1.77% annualized.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

AlphaLess
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Re: 5 ways target-date funds let investors down

Post by AlphaLess » Wed Oct 10, 2018 10:54 pm

deltaneutral83 wrote:
Wed Oct 10, 2018 2:02 pm
Didn't read article but just off the top of my head:
(1) Can't utilize placement of assets based on tax efficiency across all accounts (bonds in tax advantaged accounts only for example); moreoever,
(1B) some people can genuinely withstand 100/0 AA in the beginning. 10% bonds at the beginning of the TDF isn't doing much anyway.
(2) Amount of international in the allocation is not something most people would ordinarily choose (think Vanguard is currently 38ish% of the equity %)
(3) Can't TLH any fund of funds
(4) Expense ratio is more than double what it would cost to part out a 3F and re balance once a year across all portfolio accounts but going from a portfolio that is 8 bps avg. to 20 bps isn't the end of the world as compared to some other alternatives.
Excellent points!

Despite being 'passive investors', we are all quite active:
- how we allocate assets in tax-specific accounts (after-tax, ROTH, 401K),
- how we tax-loss harvest,
- how we glide,
- how we allocate.
"You can get more with a kind word and a gun than with just a kind word." George Washington

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Re: 5 ways target-date funds let investors down

Post by DVMResident » Wed Oct 10, 2018 11:32 pm

Very shallow article. The whole thing reads like a series of titles rather any in-depth analysis. Let's take just the first claim:
1. The most important drawback, by far, of target-date funds is their failure to give investors significant access to some long-established equity asset classes with superior long-term track records.

Specifically, target-date funds have only minimal exposure to small-cap stocks and value stocks. Yet these asset classes over the years have consistently achieved significantly higher long-term returns ...
Personally I believe 20-something investors should have at least half their money in small-cap funds. Target-date funds don’t give them any option even remotely close to that.
:confused Consistent?!? Ha!

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Taylor Larimore
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Re: 5 ways target-date funds let investors down

Post by Taylor Larimore » Wed Oct 10, 2018 11:36 pm

And for the record, from 1998 until today (20 years), SCV has outperformed TSM by 1.77% annualized.
willthrill81

And for the record TSM has outperformed SCV for the past 1yr, 3yrs, 5yrs and 10yrs.

No one knows which fund will outperform in the future.

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

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Re: 5 ways target-date funds let investors down

Post by willthrill81 » Thu Oct 11, 2018 12:18 am

Taylor Larimore wrote:
Wed Oct 10, 2018 11:36 pm
And for the record, from 1998 until today (20 years), SCV has outperformed TSM by 1.77% annualized.
willthrill81

And for the record TSM has outperformed SCV for the past 1yr, 3yrs, 5yrs and 10yrs.

No one knows which fund will outperform in the future.

Best wishes
Taylor
True enough, although SCV has outperformed TSM in every 20 year period on record except one. We'll see if it can maintain that going forward.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 5 ways target-date funds let investors down

Post by bradshaw1965 » Thu Oct 11, 2018 2:13 pm

MichCPA wrote:
Wed Oct 10, 2018 8:30 pm
bradshaw1965 wrote:
Wed Oct 10, 2018 8:16 pm
MichCPA wrote:
Wed Oct 10, 2018 2:28 pm
1. The inability to put 50% in small caps is good for most people. The small and value outperformance has not held up more recently. There is no reason to make insane tilts like that.
Not so sure the referenced portfolio qualifies as insane. Small and value are recognized factors. Lots of roads to Dublin and if you stick to your plan there are a bunch of perfectly reasonable approaches with very similar long-term results. Not sticking to the plan? That's way more likely to cause sorrow and pain.
The insane part is that 50% is 7x the weight of that cap compared to a TSM. I get a small tilt, but 7x? Also Bogle himself has said that once small cap and value outperformance was identified 20 years ago, it hasn't held up. This makes sense if you assume any type of market efficiency.
I just don't think any plan that is thoughtful and you can stick to over the long term is insane. For example, I am allergic to gold but still think the permanent portfolio if adhered to over the lifetime of an investor is going to get you in the ballpark of a 3 fund portfolio. Here's a nice Bill Bernstein take on a long-term permanent portfolio with this caveat, "Thus, it will be nigh-impossible for even the most disciplined investors to adhere to the TPP in the long run. (And lord knows, most investors are unable to stick to even a 60/40 portfolio.)" http://www.efficientfrontier.com/ef/0adhoc/harry.htm.

Again, whatever portfolio allows you to stick to your plan is the portfolio that's going to work for you.

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Re: 5 ways target-date funds let investors down

Post by Random Walker » Thu Oct 11, 2018 2:24 pm

How is an investor just a few years away from retirement feeling about target date fund this week? Maybe he’s wishing he had customized his personal glide path a bit more then the target date funds decreasing equities 1-2% a year. I think it is wise for the investor to evaluate portfolio and future needs/wants on an ongoing basis and perhaps make opportunistic allocation moves on the way to the retirement portfolio.

Dave

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Re: 5 ways target-date funds let investors down

Post by vineviz » Thu Oct 11, 2018 3:21 pm

Random Walker wrote:
Thu Oct 11, 2018 2:24 pm
How is an investor just a few years away from retirement feeling about target date fund this week?
That investor might very well be grateful that their retirement portfolio has suffered only half the losses of the broad stock market, thanks to to the well-designed asset allocation glide path they delegated to their investment management firm's experts.

Or something.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: 5 ways target-date funds let investors down

Post by indexonlyplease » Thu Oct 11, 2018 6:35 pm

I believe if they had Target Dated Funds 30 plus years ago when I started in vesting, I would be far better off. Sure anyone can look in the past and state how they would do better. But they don't take into account all the mistakes they will make in their investment lives.

So, I will state most will be far better off with the Target Fund. Especially in a Roth IRA or 401k. Why because you never do anything but fund it. No bad mistakes.

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Re: 5 ways target-date funds let investors down

Post by 3feetpete » Thu Oct 11, 2018 7:16 pm

To me a big negative for target date funds occurs after retirement. I'm retired and drawing down my portfolio while I delay SS until 70. I like being able to choose whether I sell a stock fund or a bond fund when I need cash. With stocks at all time highs I've been selling stock funds. If the stock market were to crash I would sell bond funds when I needed cash. Compare that to selling a target date fund where maybe 50% of the cash you get is from stocks that just lost a large part of their value.

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Re: 5 ways target-date funds let investors down

Post by Rowan Oak » Thu Oct 11, 2018 7:28 pm

Taylor Larimore wrote:
Wed Oct 10, 2018 11:36 pm
And for the record, from 1998 until today (20 years), SCV has outperformed TSM by 1.77% annualized.
willthrill81

And for the record TSM has outperformed SCV for the past 1yr, 3yrs, 5yrs and 10yrs.

No one knows which fund will outperform in the future.

Best wishes
Taylor
For me, this is good news either way since I own all those SCVs in my Vanguard Total Stock Market Index Fund.
Last edited by Rowan Oak on Thu Oct 11, 2018 7:29 pm, edited 1 time in total.
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JBTX
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Re: 5 ways target-date funds let investors down

Post by JBTX » Thu Oct 11, 2018 7:28 pm

hoppy08520 wrote:
Wed Oct 10, 2018 3:53 pm
deltaneutral83 wrote:
Wed Oct 10, 2018 2:02 pm
Didn't read article but just off the top of my head:
(1) Can't utilize placement of assets based on tax efficiency across all accounts (bonds in tax advantaged accounts only for example); moreoever,
(1B) some people can genuinely withstand 100/0 AA in the beginning. 10% bonds at the beginning of the TDF isn't doing much anyway.
(2) Amount of international in the allocation is not something most people would ordinarily choose (think Vanguard is currently 38ish% of the equity %)
(3) Can't TLH any fund of funds
(4) Expense ratio is more than double what it would cost to part out a 3F and re balance once a year across all portfolio accounts but going from a portfolio that is 8 bps avg. to 20 bps isn't the end of the world as compared to some other alternatives.
These might apply to Bogleheads, but for the vast majority of US investors, their only investment account might be a Roth IRA or a 401(k) and other than your item 1b, none of this matters to those investor profiles and they could do a heck of a lot worse picking random funds which is what most regular people did before target date funds.
Agree. #1 (bonds in tax deferred)is greatly overrated. It will only make a material difference if you hold your stocks/funds decades and are able down the road to get to a zero cap gains rate. Otherwise the additional growth of stocks in tax advantaged will offset the tax inefficiency of bonds in taxable.

#2 the fact that "most" don't want to put 38% in international says nothing about whether it is or isn't an appropriate investing strategy.

#3 TLH probably isn't going to be a big factor for most. The only way it is:
- you make a lot of money such that you run out of tax advantaged opportunities
- you are older and in your early years didn't have the tax advantaged opportunities available now
- you make good money and are very frugal and have savings rates over 30%-40% of gross income.

#4 vanguard target dates are.15 I think and cheaper if you can get them at an institutional rate in some 401ks. I tend to think the benefits of automatic rebalancing far outweigh the additional 5-10 basis points you give up with target dates.

As to Merriman article the only one to me that has any merit is that you cant small cap tilt, but by definition target dates aren't tilting. It is like saying the worst thing about an apple is it isn't an orange.

JBTX
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Re: 5 ways target-date funds let investors down

Post by JBTX » Thu Oct 11, 2018 7:32 pm

willthrill81 wrote:
Thu Oct 11, 2018 12:18 am
Taylor Larimore wrote:
Wed Oct 10, 2018 11:36 pm
And for the record, from 1998 until today (20 years), SCV has outperformed TSM by 1.77% annualized.
willthrill81

And for the record TSM has outperformed SCV for the past 1yr, 3yrs, 5yrs and 10yrs.

No one knows which fund will outperform in the future.

Best wishes
Taylor
True enough, although SCV has outperformed TSM in every 20 year period on record except one. We'll see if it can maintain that going forward.
I kind of like the idea of SCV tilt and do to a small degree, but the question is how much more risk you take vs the extra return.

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Re: 5 ways target-date funds let investors down

Post by Grover » Thu Oct 11, 2018 7:35 pm

Good point! If it is in tax advantage account may be one should switch to 4 fund profolio that matches the target fund this way you can sell individually during retirement.
3feetpete wrote:
Thu Oct 11, 2018 7:16 pm
To me a big negative for target date funds occurs after retirement. I'm retired and drawing down my portfolio while I delay SS until 70. I like being able to choose whether I sell a stock fund or a bond fund when I need cash. With stocks at all time highs I've been selling stock funds. If the stock market were to crash I would sell bond funds when I needed cash. Compare that to selling a target date fund where maybe 50% of the cash you get is from stocks that just lost a large part of their value.

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Re: 5 ways target-date funds let investors down

Post by grabiner » Thu Oct 11, 2018 9:00 pm

3feetpete wrote:
Thu Oct 11, 2018 7:16 pm
To me a big negative for target date funds occurs after retirement. I'm retired and drawing down my portfolio while I delay SS until 70. I like being able to choose whether I sell a stock fund or a bond fund when I need cash. With stocks at all time highs I've been selling stock funds. If the stock market were to crash I would sell bond funds when I needed cash. Compare that to selling a target date fund where maybe 50% of the cash you get is from stocks that just lost a large part of their value.
Except that it isn't, because the fund rebalanced for you, so the net effect is the same.

Suppose that you have separate stock and bond funds with $500K in each. The stock market then drops, so you have $400K in stock and $500K in bonds. You need to spend $100K, and you choose to withdraw it from the bond fund, getting back to the 50/50 allocation with $400K in each.

Now suppose that you have a balanced fund with $1M. The stock market drops, and the fund sells bonds to buy stocks so that it now has $450K each in stocks and bonds. You need to spend $100K. While you did sell $50K in stocks, that was $50K in stocks that the fund bought after the decline, so you didn't lose anything on the sale. You still have $400K in each.

Meanwhile, even with target-date funds, you can change your allocation if appropriate. If you hold a 2025 fund and decide you should be holding more stock, you can sell the 2025 fund and buy a 2030 fund.
Wiki David Grabiner

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