Jason Zweig in Today's WSJ Discusses Target Retirement Funds

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Munir
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Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Munir »

https://www.wsj.com/articles/the-funds- ... eatst_pos1

Jason Zweig in today's WSJ "The Intelligent Investor" column describes how Target Retirement Funds, including Vanguard and Fidelity, have increased their equity allocations in recent years. Equity losses can be partially masked because they are balanced by the fixed-income positive numbers in the fund.

"Among the 652 target-date funds that existed as of Dec. 31, 2018, every single one lost money last year, according to Morningstar. The average drop among these funds, which are customized for retirement savers, was 6.2% in a year when the S&P 500 fell 4.4%."

Access to the article may require a WSJ subscription.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by rkhusky »

Interesting that the reason given by Fidelity’s TDF manager for raising their stock allocation was that their TDF investors stayed the course at a higher rate than Fidelity expected.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by sergio »

Using VTIAX as a proxy for international returns, a return of -6.6% doesn't seem awful for a target date fund in 2018 especially considering many of them have now shifted to 60/40 US/International for the equity component, and VTIAX was down -14.4% in 2018.

The amount of tinkering is really worrying me given that my largest holding is the American Funds 2050 R6 target date fund, and I also have TRowe 2050 target retirement in my Roth IRA. Vanguard, Fidelity and so on have tinkered with the glide path, tinkered with the US/Int'l allocation, and so on. So much for hands off, stay the course investing with Vanguard being one of the worst offenders.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by delamer »

Vanguard’s Target Retirement funds range from a stock allocation of 90% to one of 51%, depending on time until retirement.

So what insight does a 6.2% average drop provide?
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Northern Flicker »

rkhusky wrote: Fri Aug 30, 2019 11:12 am Interesting that the reason given by Fidelity’s TDF manager for raising their stock allocation was that their TDF investors stayed the course at a higher rate than Fidelity expected.
“Interesting” would be the polite description.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Tyler Aspect »

Vanguard Target Retirement Funds start off at 90% stock / 10% bond. At 25 years until retirement the stock allocation starts dropping, reaching 50% stock / 50% bond at retirement. Stock allocation continues to drop until 10 years after retirement at 30% stock / 70% bond allocation. This was a snapshot of the Spring 2019 semi-annual report.

This glide path is about maximizing return up to the point of retirement. Then goal shifts to asset preservation after retirement. The end point could be a bit too conservative.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Silence Dogood »

Munir wrote: Fri Aug 30, 2019 10:43 am "Among the 652 target-date funds that existed as of Dec. 31, 2018, every single one lost money last year, according to Morningstar. The average drop among these funds, which are customized for retirement savers, was 6.2% in a year when the S&P 500 fell 4.4%."
I think that it may potentially be misleading to go by the number of funds.

For example, Vanguard has a total of 12 Target Retirement funds:

Edit to include 2018 (nominal) returns (in parenthesis).

Vanguard Target Retirement 2065 (-7.95%)
Vanguard Target Retirement 2060 (-7.87%)
Vanguard Target Retirement 2055 (-7.89%)
Vanguard Target Retirement 2050 (-7.90%)
Vanguard Target Retirement 2045 (-7.90%)
Vanguard Target Retirement 2040 (-7.32%)
Vanguard Target Retirement 2035 (-6.58%)
Vanguard Target Retirement 2030 (-5.86%)
Vanguard Target Retirement 2025 (-5.15%)
Vanguard Target Retirement 2020 (-4.24%)
Vanguard Target Retirement 2015 (-2.97%)
Vanguard Target Retirement Income (-1.99%)

There are essentially several funds in the accumulation stage (with more aggressive asset allocations) and just one fund in the decumulation stage (with a more conservative asset allocation).

So, for example:

A 20 year old, 25 year old, 30 year old, 35 year old, and 40 year old would theoretically be invested in 5 separate funds (2065, 2060, 2055, 2050, 2045) whereas a 70 year old, 75 year old, 80 year old, 85 year old, and 90 year old would theoretically be invested in 1 single fund (Target Retirement Income).

Ten investors, invested in six funds.

The average return (2018) for these six funds would be -6.92% but the average return (2018) for these 10 investors would be -4.95%.
Last edited by Silence Dogood on Sat Aug 31, 2019 12:29 pm, edited 6 times in total.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Rick Ferri »

2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.

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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Silence Dogood »

Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Is there any way to avoid that (without market timing)?
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by rkhusky »

Silence Dogood wrote: Sat Aug 31, 2019 8:22 am
Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Is there any way to avoid that (without market timing)?
Buy a TDF that adjusts its glidepath more than once per year. However, even if the adjustment is once per year, the adjustment should be small - less than 5% of the portfolio. For example, Vanguard's funds go from 50/50 to 30/70 over their last 7 years, which is their steepest adjustment and is about 3%/yr. So, I don't think the effect is something to worry about. And it could work in your favor too - the TDF could sell stocks right before a big decline or right after a big gain. It should average out over time.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

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Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Target date funds are not managed this way. It’s a non-issue.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Silence Dogood »

There are a lot of Target Retirement funds that Bogleheads would generally not recommend. Seems useless to bunch them all together.

We don't tell people to not invest in mutual funds just because there are a lot of garbage mutual funds.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Boatguy »

I have a considerable amount of my retirement investments in Vanguard 2020 (I’m 66 and still working), but I must admit that I have no idea how often the fund rebalances. Would someone be kind enough to explain?
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by vineviz »

Boatguy wrote: Sat Aug 31, 2019 9:21 am I have a considerable amount of my retirement investments in Vanguard 2020 (I’m 66 and still working), but I must admit that I have no idea how often the fund rebalances. Would someone be kind enough to explain?
Every day, using a continuous glide path.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Boatguy »

Wow, I had no idea it was daily. Thanks for the reply.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by UpperNwGuy »

2018 was not a good year for bonds either, so that had to have an impact on the target date funds.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by dharrythomas »

The Thrift Savings Plan adjusts the asset allocation of their LifeCycle Funds on a quarterly basis (well not right now, as the way they are adjusting their glide path is by not adjusting their asset allocation as the cohort ages in order to increase the stock allocation). It is laid out at tsp.gov.

We’re being a little sloppy with language. Some are referring to rebalancing the way that I understand it and it is continuous on a daily basis. Others are using rebalancing to refer to periodic adjustments to a particular funds asset allocation as the fund ages and moves along the glide path. That is part of the disagreement. Both appear to be correct about the details as the understand the language.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Rick Ferri »

vineviz wrote: Sat Aug 31, 2019 9:02 am
Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Target date funds are not managed this way. It’s a non-issue.
Correct, the market has already taken the portfolio down, rebalancing to a lower allocation just locks in the loss.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

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Rick Ferri wrote: Sat Aug 31, 2019 11:35 am
vineviz wrote: Sat Aug 31, 2019 9:02 am
Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Target date funds are not managed this way. It’s a non-issue.
Correct, the market has already taken the portfolio down, rebalancing to a lower allocation just locks in the loss.
Also not the way target date funds work.

They don’t go to bed on 12/31 with one allocation and wake up on 1/1 with a completely different allocation: the allocation glide path is continuous and gradual.

If stocks drop by 20% one day, a TDF will rebalance that day or the next to get back to its allocation.

A financial advisor or individual investor might make a blunder like the one you hypothesized but no one at Vanguard, Schwab, or Fidelity running a TDF is that naive or uneducated.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Day9 »

The fact that analysts were surprised at how target date fund investors did not panic sell is a good sign because it means more Americans will have a successful retirement, which we all wish for. On the other hand, for the aggressive folk who have an extremely high stock allocation and/or tilt deeply and aggressively, if they think they deserve to be rewarded because their gut is so much stronger than the average dumb money retail investor, then they may need to question that assumption. Normal folk might have just as strong stomachs as these 'sophisticated' investors.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by UpperNwGuy »

Day9 wrote: Sat Aug 31, 2019 12:40 pm The fact that analysts were surprised at how target date fund investors did not panic sell is a good sign because it means more Americans will have a successful retirement, which we all wish for. On the other hand, for the aggressive folk who have an extremely high stock allocation and/or tilt deeply and aggressively, if they think they deserve to be rewarded because their gut is so much stronger than the average dumb money retail investor, then they may need to question that assumption. Normal folk might have just as strong stomachs as these 'sophisticated' investors.
This comment assumes that the holders of target date funds even know that they lost money in 2018. My late-30s daughter probably has no idea that she lost money, and I think she is fairly typical of a person in her age bracket. Sometimes ignorance is bliss.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

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vineviz wrote: Sat Aug 31, 2019 11:47 am
Rick Ferri wrote: Sat Aug 31, 2019 11:35 am
vineviz wrote: Sat Aug 31, 2019 9:02 am
Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Target date funds are not managed this way. It’s a non-issue.
Correct, the market has already taken the portfolio down, rebalancing to a lower allocation just locks in the loss.
Also not the way target date funds work.

They don’t go to bed on 12/31 with one allocation and wake up on 1/1 with a completely different allocation: the allocation glide path is continuous and gradual.

If stocks drop by 20% one day, a TDF will rebalance that day or the next to get back to its allocation.

A financial advisor or individual investor might make a blunder like the one you hypothesized but no one at Vanguard, Schwab, or Fidelity running a TDF is that naive or uneducated.
It's hard to find on the Vanguard website but according to this Vanguard literature they appear to change the target allocation quarterly:

http://wealthadvisors.com/wp-content/up ... d-TRFs.pdf
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Rick Ferri »

vineviz wrote: Sat Aug 31, 2019 11:47 am
Rick Ferri wrote: Sat Aug 31, 2019 11:35 am
vineviz wrote: Sat Aug 31, 2019 9:02 am
Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Target date funds are not managed this way. It’s a non-issue.
Correct, the market has already taken the portfolio down, rebalancing to a lower allocation just locks in the loss.
Also not the way target date funds work.

They don’t go to bed on 12/31 with one allocation and wake up on 1/1 with a completely different allocation: the allocation glide path is continuous and gradual.

If stocks drop by 20% one day, a TDF will rebalance that day or the next to get back to its allocation.

A financial advisor or individual investor might make a blunder like the one you hypothesized but no one at Vanguard, Schwab, or Fidelity running a TDF is that naive or uneducated.
Fine, let's use 2007 and 2008. The market goes down and near-term Target Date funds are reducing their allocation to stocks AS IT GOES DOWN, thereby locking in the loss. Makes no sense. But, I suppose it's better than what most 401(k) investors would have otherwise done, which is stay in cash their entire lives.

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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by prd1982 »

Rick Ferri wrote: Sat Aug 31, 2019 8:12 pm
Fine, let's use 2007 and 2008. The market goes down and near-term Target Date funds are reducing their allocation to stocks AS IT GOES DOWN, thereby locking in the loss. Makes no sense.

Rick Ferri
I'm confused. As stocks are dropping more than bonds, the TDF would be selling bonds and buying stocks. If the glide path had the percentage of bonds going up, it would be selling fewer bonds. So how is this different than people who had the 3-fund portfolio and an Investment Policy Statement that said in 2007 the percentage of stocks was to be reduced as they got closer to retirement? If they keep their original stock percentage, isn't that market timing?
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by tooluser »

Bogle's advice was to have a higher allocation to equities if one can stay the course. To me, Vanguard's approach to TDFs sounds very consistent with that advice. I don't see where any hoodwinking is being done. Perhaps some poor timing as circumstances worked out. Are people suggesting that TDFs should market-time in an attempt to be optimal at all time points?

I avoid TDFs because I want to control my asset allocation. LifeStrategy or Balanced funds work well for me for now because they maintain an asset allocation and I can mix two of them to get exactly what I want. But when I retire I will likely move to a three- or four-fund portfolio so I can avoid selling equities when the stock market is down. In a tax-deferred or -free account it will be simple to make the transition.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Rick Ferri »

prd1982 wrote: Sat Aug 31, 2019 9:28 pm
Rick Ferri wrote: Sat Aug 31, 2019 8:12 pm
Fine, let's use 2007 and 2008. The market goes down and near-term Target Date funds are reducing their allocation to stocks AS IT GOES DOWN, thereby locking in the loss. Makes no sense.

Rick Ferri
I'm confused. As stocks are dropping more than bonds, the TDF would be selling bonds and buying stocks. If the glide path had the percentage of bonds going up, it would be selling fewer bonds. So how is this different than people who had the 3-fund portfolio and an Investment Policy Statement that said in 2007 the percentage of stocks was to be reduced as they got closer to retirement? If they keep their original stock percentage, isn't that market timing?
Let's try this again. Target Date Funds are on a set glidepath to reduce equity exposure regardless of what the market is doing. As stocks prices fall, near-term TDFs are reducing their asset allocation to stocks. I would not recommend investors do that. They should maintain their asset allocation.

Again, TDFs are great for people who know nothing about investing and would otherwise be in cash. For everyone else, have a fixed allocation to stocks and bonds and keep it there until YOU'RE ready to reduce equity exposure.

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Last edited by Rick Ferri on Sat Aug 31, 2019 9:47 pm, edited 1 time in total.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by abuss368 »

Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.

Rick Ferri
I never thought of that. This is a risk with target funds.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by KarenC »

nps wrote: Sat Aug 31, 2019 5:08 pm
vineviz wrote: Sat Aug 31, 2019 11:47 am
Rick Ferri wrote: Sat Aug 31, 2019 11:35 am
vineviz wrote: Sat Aug 31, 2019 9:02 am
Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Target date funds are not managed this way. It’s a non-issue.
Correct, the market has already taken the portfolio down, rebalancing to a lower allocation just locks in the loss.
Also not the way target date funds work.

They don’t go to bed on 12/31 with one allocation and wake up on 1/1 with a completely different allocation: the allocation glide path is continuous and gradual.

[…]
It's hard to find on the Vanguard website but according to this Vanguard literature they appear to change the target allocation quarterly:

http://wealthadvisors.com/wp-content/up ... d-TRFs.pdf
Hmmmm. Perhaps the target allocation is updated quarterly, but in my experience the actual allocation (as reported on the summary page for fund, e.g. the one for the 2020 fund) changes every month. (I have an AA that attempts to mirror a TR by way of the underlying funds, so I am looking these values every month.)

In fact, sometimes the reported allocation would actually go “backwards” (in that an allocation to one of the underlying stock funds would increase from the previous month); I assume this reflects some transitory opportunity to reduce transaction costs and not a little bit of market timing.

Given all this variation in reported month-to-month allocation, I’m dubious about the “double-whammy” effect.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by vineviz »

KarenC wrote: Sat Aug 31, 2019 10:04 pm Given all this variation in reported month-to-month allocation, I’m dubious about the “double-whammy” effect.
As you should be.

I’m not sure why the fear mongering around TDFs is so strong.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by typical.investor »

vineviz wrote: Sat Aug 31, 2019 11:22 pm
KarenC wrote: Sat Aug 31, 2019 10:04 pm Given all this variation in reported month-to-month allocation, I’m dubious about the “double-whammy” effect.
As you should be.

I’m not sure why the fear mongering around TDFs is so strong.
It doesn't seem like there should be much room for a “double-whammy”.

At it's steepest (at retirement), Vanguard glides down 2.6% in equities per year for 5 years.

Assuming they did it all in January, and equities fell hard in the preceding December by 50%, so what? If you were previously 50% equities and scheduled to rebalance down to 47.4%, you'd be far below 47.4% due to the Dec. crash, and no selling of equities would be necessary. Actually, you would be buying because after a 50% fall of your 50% equities, you'd be 33% equities and 67% bonds (or more if bonds appreciated due to scariness of a big crash). Time to buy.

Sure if stocks only fall 5%, you'd be at 48.7% equities and scheduled to rebalance down to 47.4%. So you'd be selling 1.3% of your portfolio at a 5% loss. That'd be at most a 0.065% loss per year. But who is to say sometimes stocks won't be up when the rebalancing happens and it averages out to zero. And who is to say that your rebalancing scheme would be any better in terms of timing your sales to adjust equity percentages that the retirement fund.

Is my math wrong?
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by typical.investor »

Rick Ferri wrote: Sat Aug 31, 2019 11:35 am
vineviz wrote: Sat Aug 31, 2019 9:02 am
Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Target date funds are not managed this way. It’s a non-issue.
Correct, the market has already taken the portfolio down, rebalancing to a lower allocation just locks in the loss.
Why?

At retirement Vanguard has you at about 51%-49% and scheduled to reallocate equities down to about 46.6% (by the next year).

If equities had dropped 20%, you'd have been at a 44.4% equity allocation. So any subsequent rebalancing would have been buying equities to bring you back to the scheduled 46.6% level. Is my math wrong?
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by dodecahedron »

typical.investor wrote: Sun Sep 01, 2019 1:04 am
Rick Ferri wrote: Sat Aug 31, 2019 11:35 am
vineviz wrote: Sat Aug 31, 2019 9:02 am
Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Target date funds are not managed this way. It’s a non-issue.
Correct, the market has already taken the portfolio down, rebalancing to a lower allocation just locks in the loss.
Why?

At retirement Vanguard has you at about 51%-49% and scheduled to reallocate equities down to about 46.6% (by the next year).

If equities had dropped 20%, you'd have been at a 44.4% equity allocation. So any subsequent rebalancing would have been buying equities to bring you back to the scheduled 46.6% level. Is my math wrong?
Typical.investor, your math sounds right to me.

Effectively what TDFs seem to do during market dives is not so much ¨locking in losses¨ as Rick suggested above, but simply not fully rebalancing back into stocks because the desired equity percentage is now lower than before. So, as you point out with your numerical example, those whose TDFs had them gliding down last winter were actually rebalancing back into stocks but not as much as they would have if they´d been pursuing a fixed asset allocation.

Back in the 2008 meltdown, Rick himself memorably suggested that those who were in his category (3), ¨near retirees and retirees,¨ not rebalance at all back into equities.

In retrospect, retirees and near retirees back in 2007-2008 would have been better served by sticking with a TDF than by following Rick´s advice *at that time* not to rebalance at all. Of course, once again in retrospect, retirees and near retirees back in 2007-2008 would have been even better served if they´d followed his *current* advice to stick with a fixed asset allocation during downturns.

Since we don´t have benefit of hindsight, of course, not at all obvious what we should do in general, going forward. TDFs are certainly not perfect and I am less than delighted about some of the ad hoc tinkering that Vanguard and other providers have done with theirs over the years.

But having talked to an awful lot of folks (including many supposedly ¨smart¨ folks with MBAs, PhDs, MDs, JDs, etc.), my impression is that many folks spend a lot of time and energy and money on advisors and not at all obvious that any of them will do better than TDFs over the long haul.

That said, I personally do not have a TDF myself. (Since about 50% of my portfolio is in a taxable account and donating appreciated securities from my taxable account to charity is a significant portion of my budget, it is more tax efficient for me to place different asset classes in different locations.)

But for my friends and relatives whose portfolios are almost entirely in tax-deferred vehicles, I tell that I think low cost index TDFs are perfectly fine choice. They could do much worse, and I don´t have any sure fire alternative plan for them to do much better. Their time and energies are best spent elsewhere (e.g., improving their human capital, making sensible decisions about spending, prudent choices of insurance, mortgages, etc.) or simply enjoying their lives, and trying to stay as philosophical as possible about the random slings and arrows of life.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by HootingSloth »

dodecahedron wrote: Sun Sep 01, 2019 2:36 am
Effectively what TDFs seem to do during market dives is not so much ¨locking in losses¨ as Rick suggested above, but simply not fully rebalancing back into stocks because the desired equity percentage is now lower than before. So, as you point out with your numerical example, those whose TDFs had them gliding down last winter were actually rebalancing back into stocks but not as much as they would have if they´d been pursuing a fixed asset allocation.

Back in the 2008 meltdown, Rick himself memorably suggested that those who were in his category (3), ¨near retirees and retirees,¨ not rebalance at all back into equities.

In retrospect, retirees and near retirees back in 2007-2008 would have been better served by sticking with a TDF than by following Rick´s advice *at that time* not to rebalance at all. Of course, once again in retrospect, retirees and near retirees back in 2007-2008 would have been even better served if they´d followed his *current* advice to stick with a fixed asset allocation during downturns.

Since we don´t have benefit of hindsight, of course, not at all obvious what we should do in general, going forward. TDFs are certainly not perfect and I am less than delighted about some of the ad hoc tinkering that Vanguard and other providers have done with theirs over the years.
I completely agree with this. Taking the Great Recession as an example, the worst case scenario was that a Vanguard TDF glidepath would have reduced its stock allocation by about 4% from the peak in Oct 2007 to the trough in March 2009. That seems like a perfectly acceptable amount of allocation drift, rather than a double-whammy. I would bet that many investors allowed their equity allocation to fall by much more than 4% during that time period. The TDF did its rebalancing automatically, which prevented behavioral biases from coming into play.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Stormbringer »

Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
While I'm not certain, I'm skeptical that it happens exactly like that. TDFs never increase their target allocation to stocks, they always decrease it as the target date approaches. Thus, you would predictably have billions in market sell orders on the final trading day of the year -- certainly enough to move the market a bit, and at the expense of the TDF investors.

I suspect the fund companies know this, and are stealthier about it in some way. Perhaps they adjust the allocation more frequently and less predictably, and maybe when possible they try to achieve the new allocation not by selling assets, but by buying assets of the under-allocated class with in-flows into the fund. I looked at Vanguard's TDF prospectus and they make no mention of when the allocation changes, or how. Probably for a reason.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Random Walker »

Rick Ferri wrote: Sat Aug 31, 2019 11:35 am
vineviz wrote: Sat Aug 31, 2019 9:02 am
Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Target date funds are not managed this way. It’s a non-issue.
Correct, the market has already taken the portfolio down, rebalancing to a lower allocation just locks in the loss.
This is why I’m not a huge fan to target date funds. There’s not a lot we have control over in investing. We certainly can’t control equity markets with their 15-20% annual standard deviation. But we do know our own goals and where we stand relative to those goals. Every year we are one year older, a target fund takes 1-2% off the equities, but the stock market has most likely made some extreme moves. I think the investor may be better off sort of customizing his own glide path to the retirement portfolio. William Bernstein talks about this in his Lifecycle Investing e-book. After the huge decade long bull market we’ve experienced, many people may happily be much closer to their goals than anticipated. Why not make a more definitive step towards taking risk off the table than just 1-2% per year? I’m not so much talking about market timing as I am opportunistically making the unidirectional move to the retirement portfolio. When past returns are high due to increased valuations, future expected returns modest, and the whole potential future distribution of returns shifted left, I think one approaching retirement might want to take more definitive action than auto pilot argent date fund.

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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Silence Dogood »

Random Walker wrote: Sun Sep 01, 2019 8:55 am I’m not so much talking about market timing as I am opportunistically making the unidirectional move to the retirement portfolio.
Hmmm...
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by rkhusky »

Random walker,
Seems like what you’re suggesting is basing your AA on the difference between your current account balance and your target retirement account balance. While TDF’s base their AA’s on the time to retirement.

Both seem like reasonable approaches, but the latter seems easier to implement. And I prefer smaller yearly adjustments to my AA.

In a market crash, the balance-based approach would have you buying a lot more stock than a time-based approach. And you would have to estimate future inflation to come up with a good ending portfolio balance target.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Random Walker »

Silence Dogood wrote: Sun Sep 01, 2019 11:29 am
Random Walker wrote: Sun Sep 01, 2019 8:55 am I’m not so much talking about market timing as I am opportunistically making the unidirectional move to the retirement portfolio.
Hmmm...
Big difference between moving in and out versus just moving out with an eye on where one is relative to goals, current valuations, expected returns. Behavioral finance shows pain of loss twice as great as happiness from equal sized gain. And the ratio increases dramatically with net worth.

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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by elainet7 »

kitces and pfau stated that the best glidepath in retirement is 10% equities and continue to 50% over 3oyrs
sequence of risk will ruin your retirement so one author suggests CASH as does Bernstein to cover the first 10yrs(bonds, cash, etc)
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by JAZZISCOOL »

TDF’s may not be the ideal solution for everyone, especially those who are more actively involved with their portfolios like BH’s. However, I think they may be a better solution for many.

One data point: I have a family member who is now 40 and is essentially 100% in stocks via 10 to 15 different (mostly) active mutual funds in his 401(k) because he probably thought it was best to “diversify” across many names. I recommended to the family member’s wife they might consider a passive TDF instead, but I sense they have not made any changes yet. I would worry about the outcome if we have another year e.g. 2008 or if he does nothing to his AA and has no meaningful exposure to bonds in the coming years. The point is, many individual investors are not very knowledgeable at the outset and may have no interest in learning about investments, proper asset allocation, rebalancing, fees, etc., so a TDF may be the best solution for this type of investor. It is a single fund with a simple solution and low fees.

That said, in the Vanguard 2045 TDF (VTIVX for a typical 40-year-old), the bond allocation is 10.15% currently but at least the fees are much lower than he is paying through all the active equity MF’s he has now.

Vanguard 2045 TDF (VTIVX) - Top 4 Holdings (99.98% of Total Assets)

Vanguard Total Stock Mkt Idx Inv VTSMX 54.34%
Vanguard Total Intl Stock Index Inv VGTSX 35.49%
Vanguard Total Bond Market II Idx Inv VTBIX 7.14%
Vanguard Total Intl Bd Idx Investor VTIBX 3.01%

I was curious about Vanguard’s actual TDF rebalancing policy (timing) but did not find anything specific in the statutory prospectus on the website, unfortunately. I assume they keep very close to targets. T. Rowe had a similar bond allocation for their 2045 TDF but with an additional 2.1% in cash (TRRKX).

The other extreme is represented by some 401(k) investors who get so spooked after markets like 2008 or employee stock events in their plans (e.g. Enron) that they may put 100% of their assets in MM or stable value and lose out on any stock/bond returns which may have material impacts on their retirement.

Most BH’s understand the importance of total returns but many 401(k) investors are probably just looking at actual dollars in their accounts and do not truly understand the significance of total returns and volatility measures over time or the need to compare their active MF’s with passive indices
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Rick Ferri »

dodecahedron wrote: Sun Sep 01, 2019 2:36 am
typical.investor wrote: Sun Sep 01, 2019 1:04 am
Rick Ferri wrote: Sat Aug 31, 2019 11:35 am
vineviz wrote: Sat Aug 31, 2019 9:02 am
Rick Ferri wrote: Sat Aug 31, 2019 8:18 am 2018 was a double-whammy for near-term target-date funds because the allocation to stocks was automatically reduced at the end of the year, right after the market dropped 20% and had not recovered much of that loss.
Target date funds are not managed this way. It’s a non-issue.
Correct, the market has already taken the portfolio down, rebalancing to a lower allocation just locks in the loss.
Why?

At retirement Vanguard has you at about 51%-49% and scheduled to reallocate equities down to about 46.6% (by the next year).

If equities had dropped 20%, you'd have been at a 44.4% equity allocation. So any subsequent rebalancing would have been buying equities to bring you back to the scheduled 46.6% level. Is my math wrong?
Typical.investor, your math sounds right to me.

Effectively what TDFs seem to do during market dives is not so much ¨locking in losses¨ as Rick suggested above, but simply not fully rebalancing back into stocks because the desired equity percentage is now lower than before. So, as you point out with your numerical example, those whose TDFs had them gliding down last winter were actually rebalancing back into stocks but not as much as they would have if they´d been pursuing a fixed asset allocation.

Back in the 2008 meltdown, Rick himself memorably suggested that those who were in his category (3), ¨near retirees and retirees,¨ not rebalance at all back into equities.

In retrospect, retirees and near retirees back in 2007-2008 would have been better served by sticking with a TDF than by following Rick´s advice *at that time* not to rebalance at all. Of course, once again in retrospect, retirees and near retirees back in 2007-2008 would have been even better served if they´d followed his *current* advice to stick with a fixed asset allocation during downturns.
NEGATIVE! This was ONLY if a person was panicking and contemplating selling it all. Here is what I wrote:
If you are not sleeping at night because you are worried sick about your portfolio, and you are on the verge of making an emotional decision to ‘sell it all”, then you should consider permanently reducing your equity position to see if that helps.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by dodecahedron »

Rick Ferri wrote: Sun Sep 01, 2019 4:35 pm
dodecahedron wrote: Sun Sep 01, 2019 2:36 am
Back in the 2008 meltdown, Rick himself memorably suggested that those who were in his category (3), ¨near retirees and retirees,¨ not rebalance at all back into equities.

In retrospect, retirees and near retirees back in 2007-2008 would have been better served by sticking with a TDF than by following Rick´s advice *at that time* not to rebalance at all. Of course, once again in retrospect, retirees and near retirees back in 2007-2008 would have been even better served if they´d followed his *current* advice to stick with a fixed asset allocation during downturns.
NEGATIVE! This was ONLY if a person was panicking and contemplating selling it all. Here is what I wrote:
If you are not sleeping at night because you are worried sick about your portfolio, and you are on the verge of making an emotional decision to ‘sell it all”, then you should consider permanently reducing your equity position to see if that helps.
Rick Ferri
I was not referring to the paragraph you quoted above, but rather to your more general advice (higher up in the same 2008 post) aimed at folks in general (not just to those who were not sleeping at night nor considering selling it all), broken down into three categories:
¨Rick Ferri in his classic 2008¨ wrote:Here is how I believe people should handle the current situation based on how I classify investors;

* 1) Early Savers (20s and 30s) - buy equities index funds like crazy with what you can and do not look at your account balance for 10 years.

* 2) Mid-life Accumulators (40s and 50s) - rebalance your portfolio back into equities when it needs to be rebalanced, and you will be very happy you did by the time you retire.

* 3) Near Retirees and retirees (60s and 70s) - live off your cash flows from dividends, interests, Social Security, pensions, annuities, and other. Leave your principal alone.
It seems to me that you were advising older folks (those in category 3) generally to just take a break (at least for a while) from rebalancing at all during the downward dive. Given that nobody knew how long the downward spiral was going to take, I think your advice was quite reasonable (even if, with benefit of hindsight and the actual relatively short time to turnaround, they might have been better off rebalancing, at least partially.)

If those category 3 people had been in a TDF with a downward glide path might have automated some partial rebalancing (albeit to a lower than original AA) and might in retrospect have turned out better than just not rebalancing at all, but ex ante, I still thought your advice was quite reasonable.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Rick Ferri »

I did not and do not advise anyone to reduce their allocation to equity in a bear market unless they are on the verge of panicking. "Leave your principal alone."
but ex ante, I still thought your advice was quite reasonable.
Thank you.

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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by nedsaid »

Rick Ferri wrote: Sun Sep 01, 2019 5:02 pm I did not and do not advise anyone to reduce their allocation to equity in a bear market unless they are on the verge of panicking. "Leave your principal alone."
but ex ante, I still thought your advice was quite reasonable.
Thank you.

Rick Ferri
Buy low and sell high is so simple and fundamental that even some Bogleheads don't seem to understand it. I remember a thread where I got lectured that buy low, sell high was dangerous thinking and that I was practicing market timing! So many folks out there buy stocks after they have gone up and sell them after they have gone down and are convinced that the markets are rigged against them.

To be successful as an investor, you have to do things that are uncomfortable. Stocks always seem "safe" after they have gone up a lot and everyone is enthused; stocks always seem "dangerous" after they have gone down a lot and everybody is scared. The reality is that safety in regard to stocks is an emotional state, the actual risk from stocks has nothing to do whether or not things feel safe. I am not even sure that risk tolerance is a correct concept, a Doctor never asks about cast tolerance after he resets a broken bone, he just slaps the thing on and doesn't care too much about what the patient thinks. I would rather deal with some itching for a few months rather than live with a misshaped limb for the rest of my life. We should be willing to trade a bit of emotional discomfort for escaping poverty in retirement.

In recent years, I have been very slowly reducing my allocation to stocks. Over the last 6 years, I have gone from 69% stocks down to 61% stocks. I did a lot of mild rebalancing from stocks to bonds over that time as the market kept hitting new highs. It was something that I didn't like to do but I did it nevertheless. Bonds yield about 2% now, not excited about it, but I was not excited either about the 2000-2002 and the 2008-2009 bear markets, both were 50% or more down. I am getting older and really need to get serious about de-risking my portfolio whether it feels good or not.
Last edited by nedsaid on Mon Sep 02, 2019 6:40 pm, edited 1 time in total.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Random Walker »

nedsaid wrote: Mon Sep 02, 2019 10:18 am
In recent years, I have been very slowly reducing my allocation to stocks. Over the last 6 years, I have gone from 69% stocks down to 61% stocks. I did a lot of mild rebalancing from stocks to bonds over that time as the market kept hitting new highs. It was something that I didn't like to do but I did it nevertheless. Bonds yield about 2% now, not excited about it, but I was not excited either about the 2000-2002 and the 2008-2009 bear markets, both were 50% or more down. I am getting older and really need to get serious about de-risking my portfolio whether it feels good or not.
Hi Nedsaid,
Your derisking 69% equity to 61% equity over 6 years seems pretty close to what a Target date fund would do. In hindsight, it must have worked very well for you so far since the market has been pretty much all up over that timeframe. But I’m curious about your thoughts on derisking more aggressively. Do you have a final target allocation? Ever think of just making a big move to the target portfolio? As you’ve seen me write in the past, with the market having an SD in the range of 15-20%, and in light of current valuations, I took a big tax hit a couple years ago to get risk off the table more quickly. To this point, your path has certainly been more profitable. Thanks,

Dave
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by nedsaid »

Random Walker wrote: Mon Sep 02, 2019 10:37 am
nedsaid wrote: Mon Sep 02, 2019 10:18 am
In recent years, I have been very slowly reducing my allocation to stocks. Over the last 6 years, I have gone from 69% stocks down to 61% stocks. I did a lot of mild rebalancing from stocks to bonds over that time as the market kept hitting new highs. It was something that I didn't like to do but I did it nevertheless. Bonds yield about 2% now, not excited about it, but I was not excited either about the 2000-2002 and the 2008-2009 bear markets, both were 50% or more down. I am getting older and really need to get serious about de-risking my portfolio whether it feels good or not.
Hi Nedsaid,
Your derisking 69% equity to 61% equity over 6 years seems pretty close to what a Target date fund would do. In hindsight, it must have worked very well for you so far since the market has been pretty much all up over that timeframe. But I’m curious about your thoughts on derisking more aggressively. Do you have a final target allocation? Ever think of just making a big move to the target portfolio? As you’ve seen me write in the past, with the market having an SD in the range of 15-20%, and in light of current valuations, I took a big tax hit a couple years ago to get risk off the table more quickly. To this point, your path has certainly been more profitable. Thanks,

Dave
Dave, what I did was rebalance when the stock market was hitting new highs. At least I could tell myself that I was profit taking. Thing is, I did it even though I didn't like it a bit. The whole reason for my campaign of mild rebalancing from stocks to bonds was to lessen the pain of doing it all at once, sort of like taking a band-aid off slowly rather than just ripping it off suddenly. My target asset allocation as defined in my Investment Policy Statement is 60/40 but obviously it has been higher than that, in large part because bond yields were so darned low.

Last month, I moved 30% of my retirement portfolio over to a managed portfolio service and they put me into a Conservative Portfolio. This move brought my stock allocation from 64% down to 61%. I had some differences of opinion with them on asset allocation but decided to just go with it. For one thing, I wanted help and sought advice. Comprehensive financial planning and retirement planning is part of the package so I went with it.

My target allocation at retirement is probably 50% stocks/50% bonds. In some ways I don't want to think about it too much. But yes, I will probably work down my stock allocation. The thing is, if you don't rebalance your portfolio, the market eventually will do it for you. Bear markets are a very painful way to rebalance.

Last I looked, the Vanguard/Fidelity/T. Rowe Price allocations for Target Date 2025 funds were about 58% stocks so I guess I am still pushing the envelope! I guess I was born to be mild.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Rudedog »

I don't use Target Date Retirement Funds, they are too conservative for me. However, a friend of ours swears by them, and I've talked to financial "advisors" who claim that they have many clients who use them.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by pyld76 »

Random Walker wrote: Sun Sep 01, 2019 8:55 am I think the investor may be better off sort of customizing his own glide path to the retirement portfolio. William Bernstein talks about this in his Lifecycle Investing e-book. After the huge decade long bull market we’ve experienced, many people may happily be much closer to their goals than anticipated. Why not make a more definitive step towards taking risk off the table than just 1-2% per year? I’m not so much talking about market timing as I am opportunistically making the unidirectional move to the retirement portfolio. When past returns are high due to increased valuations, future expected returns modest, and the whole potential future distribution of returns shifted left, I think one approaching retirement might want to take more definitive action than auto pilot argent date fund.
I'm going to crawl way out on a completely unsupported limb and suggest that the TDF taking "1-2% off the table" to meet it's glide path every year will be significantly less a destructor of return than the average investor trying to time their move into "a retirement portfolio."

The Bogleheads population might get that right. Or, might have enough in the bank that they've "won the game" no matter what. But people who don't life and breathe this stuff or those that do who are prone to fiddle? Take the autopilot and live with it.
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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by Random Walker »

pyld76 wrote: Mon Sep 02, 2019 2:35 pm
Random Walker wrote: Sun Sep 01, 2019 8:55 am I think the investor may be better off sort of customizing his own glide path to the retirement portfolio. William Bernstein talks about this in his Lifecycle Investing e-book. After the huge decade long bull market we’ve experienced, many people may happily be much closer to their goals than anticipated. Why not make a more definitive step towards taking risk off the table than just 1-2% per year? I’m not so much talking about market timing as I am opportunistically making the unidirectional move to the retirement portfolio. When past returns are high due to increased valuations, future expected returns modest, and the whole potential future distribution of returns shifted left, I think one approaching retirement might want to take more definitive action than auto pilot argent date fund.
I'm going to crawl way out on a completely unsupported limb and suggest that the TDF taking "1-2% off the table" to meet it's glide path every year will be significantly less a destructor of return than the average investor trying to time their move into "a retirement portfolio."

The Bogleheads population might get that right. Or, might have enough in the bank that they've "won the game" no matter what. But people who don't life and breathe this stuff or those that do who are prone to fiddle? Take the autopilot and live with it.
Good point. I myself took substantial risk off the table a couple of years ago, and in retrospect I’m poorer for it :-) But can’t time a market and shouldn’t confuse strategy and outcome. No one is more expert on his own personal circumstance than the investor himself. In that sense, I do think the investor should perhaps be more proactive. I just envision some guy at 65% equities now, 5 years from his retirement, and current lofty valuations collapse just as he is about to enter withdrawal phase.

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Re: Jason Zweig in Today's WSJ Discusses Target Retirement Funds

Post by nedsaid »

Rudedog wrote: Mon Sep 02, 2019 12:00 pm I don't use Target Date Retirement Funds, they are too conservative for me. However, a friend of ours swears by them, and I've talked to financial "advisors" who claim that they have many clients who use them.
There are disadvantages to Target Date Retirement Funds, something that I and many others have posted about. The first two that come to mind is that fund companies have changed their mind on asset allocation and glide paths. These funds trend towards being more aggressive in bull markets and trend more conservative in bear markets, they get caught up in the performance derby as fund companies don't want to be seen trailing their competitors. We can talk all day about asset allocation, diversification, and risk but all most people see is that Target Date 2035 from Company A returned 8% a year vs. Target Date 2035 from Company B that returned 7%. Folks will pick A over B even if you point out that A took on more risk to get the return. You try to tell them about risk adjusted return and their eyes just glaze over.

All of that being said, Target Date Funds with their imperfect asset allocation and glide path strategies are still vastly superior to what most individuals would come up with their own. Most people understand that you take less risk as you get older and close to retirement, much more explanation than that is met with the "deer in the headlights" look. Like Charlie Brown's teacher, it just sounds like wah-wah, wah-wah-wah to them. Just easier to tell them to pick the fund with the date closest to their retirement date and be done with it.
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