"Five Portfolio Lessons From Target Date Funds"

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Taylor Larimore
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"Five Portfolio Lessons From Target Date Funds"

Post by Taylor Larimore » Thu Aug 01, 2019 5:34 pm

Bogleheads:

I am a strong believer in Target Date Funds designed by company experts when all of an investor's portfolio is in tax-advantaged accounts (Target Date Funds are tax-inefficient).

Morningstar's Josh Charlson, has written an excellent analysis of Target Date Funds. These are excerpts:
"Vanguard (which has more target-date assets than any other firm) reports that 97% of its participants are in plans offering target-date funds, while 77% use a target-date fund as part of their retirement plan, and 52% are wholly invested in a single target-date investment."

"I’ve been impressed by target-date funds from when I first began researching them in 2009 as part of the team at Morningstar that launched our original target-date series ratings and reports. The funds manage to roll up a highly sophisticated investment process into a product that’s extremely easy to use for the average investor."

"Target-date series at the largest firms have been developed by asset-allocation teams with extensive resources and vast experience in retirement research, capital-market forecasting, asset allocation, and manager selection, and there’s no reason you can’t benefit from their insights even if you aren’t investing directly in their products."

"One of the niftier aspects of target-date funds is that they take over many of the laborious and technically challenging tasks associated with portfolio management. Two in particular are rebalancing and rolling down the glide path."

"Target-date funds also engage in an annual “rolldown” of the glide path, by which they incrementally shift the stock/bond balance in the portfolios so that investors move toward the appropriate allocation for their ages."

"Establishing a diversified investment plan and sticking with it, making regular contributions, and paying as little heed as possible to the noise of the markets around us, is likely to be a winning formula, whether we invest directly in a target-date fund or adopt its principles to our own portfolios."
Note: I prefer The Three-Fund Portfolio when an investor has both tax-advantaged accounts and taxable accounts. This allows the investor to place tax-efficient funds in taxable accounts and tax-inefficient funds in tax-advantaged accounts.

5 Portfolio Lessons From Target-Date Funds

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Target-date funds have proved to be the most powerful fund-industry-changing concept since the money market mutual fund and the index mutual fund."
Last edited by Taylor Larimore on Thu Aug 01, 2019 6:36 pm, edited 1 time in total.
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Re: "Five Portfolio Lessons From Target Date Funds"

Post by BeachPerson » Thu Aug 01, 2019 6:25 pm

I use the Vanguard 2030 in my Roth and an IRA.
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Re: "Five Portfolio Lessons From Target Date Funds"

Post by KESP » Thu Aug 01, 2019 6:34 pm

I encouraged my children to use a target date fund for their work 403b/401K and Roth. I think this will keep them from tinkering around at a later date and messing up like I did. They also are not interested in doing much reading about investing so I believe this is an excellent choice for them.

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Re: "Five Portfolio Lessons From Target Date Funds"

Post by abuss368 » Thu Aug 01, 2019 7:16 pm

I have invested in Vanguard Target funds both within an employer retirement plan and the College 529 plans. Simply they work and work well.

Too bad I can’t place it in our taxable account without the tax impact. I also would like the bonds to pay monthly.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: "Five Portfolio Lessons From Target Date Funds"

Post by tomwood » Thu Aug 01, 2019 7:50 pm

Taylor Larimore wrote:
Thu Aug 01, 2019 5:34 pm
Bogleheads:

I am a strong believer in Target Date Funds designed by company experts when all of an investor's portfolio is in tax-advantaged accounts (Target Date Funds are tax-inefficient).
Thank you for all your wonderful information.
How does the TSP Lifecycle Fund rate compared to VG Target Date Funds? Would you make any adjustments/tilts to the L-Fund, or is a 3 Fund portfolio in the TSP more comparable to a Target Date Fund than the L-Fund?

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Re: "Five Portfolio Lessons From Target Date Funds"

Post by 3wood » Thu Aug 01, 2019 8:04 pm

Thank you, Taylor. I am also a big advocate and have been investing in them for 15 years. Vanguard 2035 fund in my 401k and Roth. VTSMX and cash in my taxable. I realized the advantages written about here long ago. Another advantage I have experienced (and something you can't do with a 3 fund portfolio) is the ability to completely ignore the account in bear markets. I mean not look, or even act like it exists. In '08 I did not peek at my account for 2 years or so (maybe more). In fact, I only look when I hear the market has hit a new high. In my minds eye, I only see the last balance I saw. Mental games, I know, but it helps me stay the course. Everything is on autopilot so it's easy. All this for .14 expense ratio.

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Re: "Five Portfolio Lessons From Target Date Funds"

Post by peseta » Thu Aug 01, 2019 8:12 pm

tomwood wrote:
Thu Aug 01, 2019 7:50 pm
How does the TSP Lifecycle Fund rate compared to VG Target Date Funds? Would you make any adjustments/tilts to the L-Fund, or is a 3 Fund portfolio in the TSP more comparable to a Target Date Fund than the L-Fund?
I used to devote a lot of energy trying to “replicate” my TSP allocation in my Vanguard Roth accounts. However, the recent allocation changes to the TSP lifecycle funds to make them more similar to those in the marketplace led me to (1) move all TSP money to appropriate lifecycle fund (which was near my then-current AA anyway), and (2) put all Roth in parallel Vanguard lifecycle fund. Re: (2), there are minor differences in allocation and glidepath between TSP and Vanguard lifecycle funds, but I feel like they fall in the land of “close enough.”

peseta

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Re: "Five Portfolio Lessons From Target Date Funds"

Post by averagedude » Thu Aug 01, 2019 8:44 pm

Great post Taylor. Some ( or all) practitioners of active management bash target date funds to lure uneducated people to believe that they need a professional to manage their assets. These advisors or paid media journalists are doing a disservice to these people. I am also a big believer in target date funds, although I don't invest in then personally. I believe that i can beat the returns of target date funds because I keep up with the markets, and i am so much more "sophisticated" than the average investor. In reality, there is a good chance that at the end of the day, a person with no knowledge of investing, that puts all of their money in target dated funds will have better long term returns than me. I am certain that these same people will outperform 75% of all investors, including the "sophisticated" active managers that bash target dated funds.

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Re: "Five Portfolio Lessons From Target Date Funds"

Post by JBTX » Thu Aug 01, 2019 9:09 pm

averagedude wrote:
Thu Aug 01, 2019 8:44 pm
Great post Taylor. Some ( or all) practitioners of active management bash target date funds to lure uneducated people to believe that they need a professional to manage their assets. These advisors or paid media journalists are doing a disservice to these people. I am also a big believer in target date funds, although I don't invest in then personally. I believe that i can beat the returns of target date funds because I keep up with the markets, and i am so much more "sophisticated" than the average investor. In reality, there is a good chance that at the end of the day, a person with no knowledge of investing, that puts all of their money in target dated funds will have better long term returns than me. I am certain that these same people will outperform 75% of all investors, including the "sophisticated" active managers that bash target dated funds.
:confused

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Re: "Five Portfolio Lessons From Target Date Funds"

Post by Day9 » Thu Aug 01, 2019 9:23 pm

I do not use a target date fund and when I add new money to my account, I rebalance with contributions, meaning I add to the investment that is underweight. This involves updating my spreadsheet and "peeking" at how my investments are doing. I have to do this twice a month because I contribute to taxable with every pay period! That is way more often than I want to peek! I wish I could just have it all in a target date fund and set up automatic timed contributions (you can do this at vanguard!) and peek maybe twice a year.
I'm just a fan of the person I got my user name from

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Re: "Five Portfolio Lessons From Target Date Funds"

Post by JBTX » Thu Aug 01, 2019 9:34 pm

Taylor Larimore wrote:
Thu Aug 01, 2019 5:34 pm


Note: I prefer The Three-Fund Portfolio when an investor has both tax-advantaged accounts and taxable accounts. This allows the investor to place tax-efficient funds in taxable accounts and tax-inefficient funds in tax-advantaged accounts.
Unless you can realize the capital gains in a zero percent cap gains bracket (or hold them until death for basis step up) the tax advantage really isn't there over the long run. The S&p has a dividend yield about 2%, which will be taxed at 15% every year. Total bond market has about 2% yield, that would likely be taxed at 22/24%. So the you get a modest tax advantage starting out, but the stocks will likely grow more than the bonds, and before long the dividends will generate as much tax as the interest. Plus eventually when you sell the stocks you will have further capital gains.

Under such a scenario stocks in Roth and bonds in taxable wins.

Now if you are currently or eventually will be in a zero capital gains rate bracket, then the bonds in ira may be more favorable, albeit still modestly.

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