Individual funds versus Fund of Funds?

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Crow Hunter
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Individual funds versus Fund of Funds?

Post by Crow Hunter »

Is it "better" to have your entire portfolio in individual funds or is it better to have some in Target Date funds where available?

For instance, is it better to have Vanguard's Total Bond, Total International and Total US Stock market broken up within your overall portfolio of taxable and tax advantaged funds or would it be better to invest in a single Target Date fund where available and only invest in individual funds in taxable accounts where the ongoing dividends would be a significant tax drag.

I was wondering about this is both from a portfolio management standpoint and/or investor behavior standpoint.

This question came to me after a discussion with my wife about what to do if I somehow became incapacitated. She doesn't have the interest or inclination to learn about this. She asked, "Can't I just tell Vanguard when we want to retire and let them do it?" But I have this really intricate spreadsheet with notes and stuff and it changes colors and.....:|

After that conversation, I have toyed with the idea of just switching all our Roth, 401k, Rollover IRA, HSA accounts to one of the Target Retirement funds available to me targeted at our anticipated retirement date and only invest in the individual components such a VTSAX and VTIAX in my taxable account.

I believe that it would cost me a little more in ER because of added cost from the Fund of Funds ER but it seems like it would be much simpler to manage instead of trying to balance stock/bond between varying accounts with different funds available.

What is the B.org consensus on this?
alex_686
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Re: Individual funds versus Fund of Funds?

Post by alex_686 »

Crow Hunter wrote: Tue Jan 12, 2021 12:56 pm This question came to me after a discussion with my wife about what to do if I somehow became incapacitated. She doesn't have the interest or inclination to learn about this. She asked, "Can't I just tell Vanguard when we want to retire and let them do it?" But I have this really intricate spreadsheet with notes and stuff and it changes colors and.....:|
I think you have the argument in a nutshell. Target date funds are a high quality product where the biggest drawback is that it is a generic one size fits all strategy.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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arcticpineapplecorp.
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Re: Individual funds versus Fund of Funds?

Post by arcticpineapplecorp. »

for simplicity you can do target date in 401k and IRAs.

for taxable, you should not use target date because they not only throw off dividends they may throw off cap gains as well.

though this may or may not matter because it depends upon what other income you have, what tax rates/brackets are, etc.

to get the allocation right you can put stock funds in taxable and bond funds in 401k. may make rebalancing a little more challenging, but bonds in taxable (in addition to stocks) isn't the end of the world, especially if at low rates (not a lot of income to be generated). This could change if interest rates on bonds ever get back to where they used to be. Then the advice is don't put bonds in taxable.
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KlangFool
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Re: Individual funds versus Fund of Funds?

Post by KlangFool »

Crow Hunter wrote: Tue Jan 12, 2021 12:56 pm

After that conversation, I have toyed with the idea of just switching all our Roth, 401k, Rollover IRA, HSA accounts to one of the Target Retirement funds available to me targeted at our anticipated retirement date and only invest in the individual components such a VTSAX and VTIAX in my taxable account.

Crow Hunter,

It is a great idea! Instead of the target retirement date fund, you could use the life strategy fund too.


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Crow Hunter
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Re: Individual funds versus Fund of Funds?

Post by Crow Hunter »

KlangFool wrote: Tue Jan 12, 2021 1:10 pm
Crow Hunter wrote: Tue Jan 12, 2021 12:56 pm

After that conversation, I have toyed with the idea of just switching all our Roth, 401k, Rollover IRA, HSA accounts to one of the Target Retirement funds available to me targeted at our anticipated retirement date and only invest in the individual components such a VTSAX and VTIAX in my taxable account.

Crow Hunter,

It is a great idea! Instead of the target retirement date fund, you could use the life strategy fund too.


KlangFool
I actually played around with this a little bit.

Vanguard Life Strategy Income - Overall AA becomes ~50/50
Vanguard Target Retirement Income - Overall AA becomes ~55/45
Vanguard Life Strategy Conservative Growth - Overall AA becomes ~60/40

If I go any of the higher stock allocation funds will drive my AA much higher due to my taxable account.

The only problem I could see is that I would likely be getting progressively more aggressive over time rather than more conservative as I am putting significantly more into taxable than I can put into my tax advantaged accounts.

Interesting....
KlangFool
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Re: Individual funds versus Fund of Funds?

Post by KlangFool »

Crow Hunter wrote: Tue Jan 12, 2021 2:07 pm
KlangFool wrote: Tue Jan 12, 2021 1:10 pm
Crow Hunter wrote: Tue Jan 12, 2021 12:56 pm

After that conversation, I have toyed with the idea of just switching all our Roth, 401k, Rollover IRA, HSA accounts to one of the Target Retirement funds available to me targeted at our anticipated retirement date and only invest in the individual components such a VTSAX and VTIAX in my taxable account.

Crow Hunter,

It is a great idea! Instead of the target retirement date fund, you could use the life strategy fund too.


KlangFool
I actually played around with this a little bit.

Vanguard Life Strategy Income - Overall AA becomes ~50/50
Vanguard Target Retirement Income - Overall AA becomes ~55/45
Vanguard Life Strategy Conservative Growth - Overall AA becomes ~60/40

If I go any of the higher stock allocation funds will drive my AA much higher due to my taxable account.

The only problem I could see is that I would likely be getting progressively more aggressive over time rather than more conservative as I am putting significantly more into taxable than I can put into my tax advantaged accounts.

Interesting....
Crow Hunter,

But, if you need your spouse to manage the portfolio, you need to stop trying to optimize it. It needs to be simple and good enough.

Any of those 3 choices are good enough. But, starting with an AA of 50/50 is better since you do not need to do any adjustments longer.


KlangFool
livesoft
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Re: Individual funds versus Fund of Funds?

Post by livesoft »

Crow Hunter wrote: Tue Jan 12, 2021 12:56 pm I believe that it would cost me a little more in ER because of added cost from the Fund of Funds ER but it seems like it would be much simpler to manage instead of trying to balance stock/bond between varying accounts with different funds available.

What is the B.org consensus on this?
It might cost you a little more in terms of ER, but you might also gain from fewer behavioral errors and unemotional rebalancing in the fund-of-funds.

I suggest you start this experiment today: Go ahead and pick a LifeStrategy fund or Target Date fund to match your desired asset allocation and put a big chunk of your tax-advantaged portfolio in there. Then track the performance of that versus the performance of your individual remaining fund portfolio. I think you will find that you do worse in terms of performance, but you won't believe me until you set it up and track it. Keep enough of the individual funds in tax-advantaged to allow you to rebalance bonds/stocks in your fund of funds spread across all accounts while have the LifeStrategy / Target Date funds sequestered.

Since you have a colorful intricate spreadsheet, I think I am correct in assuming that you will track performance diligently and correctly.
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livesoft
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Re: Individual funds versus Fund of Funds?

Post by livesoft »

And one more thing: I suggest that if your AA is not 60/40, then change to that. 60/40 is a great AA because then you can also own 3 benchmark funds that are 60/40: VSMGX, VBIAX, and DGSIX. You will see that these three 60/40 funds can have performances that differ by more than 2% annually. That is, just because a fund is 60/40 does not mean that its performance will match the performance of another portfolio that is 60/40.
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Topic Author
Crow Hunter
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Re: Individual funds versus Fund of Funds?

Post by Crow Hunter »

arcticpineapplecorp. wrote: Tue Jan 12, 2021 1:04 pm for simplicity you can do target date in 401k and IRAs.

for taxable, you should not use target date because they not only throw off dividends they may throw off cap gains as well.

though this may or may not matter because it depends upon what other income you have, what tax rates/brackets are, etc.

to get the allocation right you can put stock funds in taxable and bond funds in 401k. may make rebalancing a little more challenging, but bonds in taxable (in addition to stocks) isn't the end of the world, especially if at low rates (not a lot of income to be generated). This could change if interest rates on bonds ever get back to where they used to be. Then the advice is don't put bonds in taxable.
This is what I am doing now and I have created a really cool spreadsheet that tracks it and shows what the asset allocation should be. But you do have to manually sell in one fund and buy in another and when the market gyrates I do TLH which adds another complication to it.

I have offered to show my wife a couple of times but she learns by doing and it is kind of hard to do a lot of repetition doing rebalancing. :)
matti
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Re: Individual funds versus Fund of Funds?

Post by matti »

Hello.

I am an investor with somewhat limited knowledge of investing. I have every single retirement dollar invested in a Vanguard Target Retirement fund because it is simple and makes it easier for me to potentially avoid emotional/behavioral mistakes in regard to tinkering with my portfolio. As I understand, if I picked individual funds that mirrored the Target Retirement fund, my expenses would be a bit lower, but I feel the "set it and forget it" aspect of the Target Retirement fund is worth the slightly higher expenses.

I'm not sure this is useful, but I wanted to share. Good luck!
sycamore
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Re: Individual funds versus Fund of Funds?

Post by sycamore »

Crow Hunter wrote: Tue Jan 12, 2021 12:56 pm Is it "better" to have your entire portfolio in individual funds or is it better to have some in Target Date funds where available?
...
For me, it's better to have some in Target Date funds. I asked a similar question of myself last year... and decided that Target Date and LifeStrategy (in another account) was going to keep the portfolio rebalanced better than I'd been able to do. It also helped cut down on the number of funds I used so it's easier to review/explain to my spouse. My portfolio's average expense ratio did go up but in dollar terms it's well worth it.
Topic Author
Crow Hunter
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Re: Individual funds versus Fund of Funds?

Post by Crow Hunter »

livesoft wrote: Tue Jan 12, 2021 2:19 pm And one more thing: I suggest that if your AA is not 60/40, then change to that. 60/40 is a great AA because then you can also own 3 benchmark funds that are 60/40: VSMGX, VBIAX, and DGSIX. You will see that these three 60/40 funds can have performances that differ by more than 2% annually. That is, just because a fund is 60/40 does not mean that its performance will match the performance of another portfolio that is 60/40.
Right now my overall is 60/40, although I had planned on it being 55/45 in retirement since that is the average AA at retirement for the 10 largest fund companies but I guess that is almost 60/40. :)
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Crow Hunter
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Re: Individual funds versus Fund of Funds?

Post by Crow Hunter »

matti wrote: Tue Jan 12, 2021 2:32 pm Hello.

I am an investor with somewhat limited knowledge of investing. I have every single retirement dollar invested in a Vanguard Target Retirement fund because it is simple and makes it easier for me to potentially avoid emotional/behavioral mistakes in regard to tinkering with my portfolio. As I understand, if I picked individual funds that mirrored the Target Retirement fund, my expenses would be a bit lower, but I feel the "set it and forget it" aspect of the Target Retirement fund is worth the slightly higher expenses.

I'm not sure this is useful, but I wanted to share. Good luck!
Thank you for sharing your experience.
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Crow Hunter
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Re: Individual funds versus Fund of Funds?

Post by Crow Hunter »

livesoft wrote: Tue Jan 12, 2021 2:15 pm
Crow Hunter wrote: Tue Jan 12, 2021 12:56 pm I believe that it would cost me a little more in ER because of added cost from the Fund of Funds ER but it seems like it would be much simpler to manage instead of trying to balance stock/bond between varying accounts with different funds available.

What is the B.org consensus on this?
It might cost you a little more in terms of ER, but you might also gain from fewer behavioral errors and unemotional rebalancing in the fund-of-funds.

I suggest you start this experiment today: Go ahead and pick a LifeStrategy fund or Target Date fund to match your desired asset allocation and put a big chunk of your tax-advantaged portfolio in there. Then track the performance of that versus the performance of your individual remaining fund portfolio. I think you will find that you do worse in terms of performance, but you won't believe me until you set it up and track it. Keep enough of the individual funds in tax-advantaged to allow you to rebalance bonds/stocks in your fund of funds spread across all accounts while have the LifeStrategy / Target Date funds sequestered.

Since you have a colorful intricate spreadsheet, I think I am correct in assuming that you will track performance diligently and correctly.
livesoft wrote: Tue Jan 12, 2021 2:19 pm And one more thing: I suggest that if your AA is not 60/40, then change to that. 60/40 is a great AA because then you can also own 3 benchmark funds that are 60/40: VSMGX, VBIAX, and DGSIX. You will see that these three 60/40 funds can have performances that differ by more than 2% annually. That is, just because a fund is 60/40 does not mean that its performance will match the performance of another portfolio that is 60/40.
If I did it, I would put his/her Roth, his/her Roll-over IRA, his inherited IRA in the Life Strategy Conservative Growth a 40/60.

My 401k would remain in Fidelity Bond Index and my wife's would be in SP500 fund since the ERs and tracking error on all her other funds are outrageous.

This combined with my taxable account (all VTSAX and VFWAX), my overall portfolio asset allocation would be right at 60/40.

Am I interpreting your suggestion correctly?
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Re: Individual funds versus Fund of Funds?

Post by livesoft »

Crow Hunter wrote: Tue Jan 12, 2021 3:27 pmAm I interpreting your suggestion correctly?
halfway. I think you should have at least three different benchmark funds that would be 40/60 then. That's because you will see that just having 40/60 asset allocation does not give a single performance number AND that different funds of funds with passively-managed index portfolios will still have quite a variation in performance. So besides LS conservative growth, what other two 40/60 funds are you gonna use?

And while we are at it: Can you please look up and post the 2020 returns of VSMGX, VBIAX, and DGSIX? Why are the returns so different for these three 60/40 funds? Hint: I know the answers.
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Re: Individual funds versus Fund of Funds?

Post by matthewbarnhart »

Crow Hunter wrote: Tue Jan 12, 2021 12:56 pm After that conversation, I have toyed with the idea of just switching all our Roth, 401k, Rollover IRA, HSA accounts to one of the Target Retirement funds available to me targeted at our anticipated retirement date and only invest in the individual components such a VTSAX and VTIAX in my taxable account.
This is almost exactly what my partner and I do. (She has absolutely zero interest in money, aside from being a good saver and not wanting to be broke.)

We have separate finances and different risk tolerances, so her tax-advantaged accounts are invested in Fidelity Freedom 2025 funds, while mine are in 2045 funds. Our taxable investing is all VTI/VXUS or VT. (If our accounts were at Vanguard I would choose LifeStrategy funds, but so it goes.)

I find myself tempted to toy around and optimize, but I rest easy knowing that if anything were to happen to me she would not have to unwind a more complex strategy, possibly with the "help" of a parasitic investment advisor. The higher ERs and less-exact AA are a small price to pay for peace of mind. What we have is 100% good enough.
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Crow Hunter
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Re: Individual funds versus Fund of Funds?

Post by Crow Hunter »

livesoft wrote: Tue Jan 12, 2021 3:37 pm
Crow Hunter wrote: Tue Jan 12, 2021 3:27 pmAm I interpreting your suggestion correctly?
halfway. I think you should have at least three different benchmark funds that would be 40/60 then. That's because you will see that just having 40/60 asset allocation does not give a single performance number AND that different funds of funds with passively-managed index portfolios will still have quite a variation in performance. So besides LS conservative growth, what other two 40/60 funds are you gonna use?

And while we are at it: Can you please look up and post the 2020 returns of VSMGX, VBIAX, and DGSIX? Why are the returns so different for these three 60/40 funds? Hint: I know the answers.
I am not sure what other 40/60 funds. I will have to do some research tonight.

2020 CAGR Comparison

VSMGX - 13.59%
VBIAX - 16.40%
DGSIX - 11.57%

Wow.

Asset mixes between them aren't similar at all. VBIAX has a lot more Tech (+4.63%) among other differences which probably drove much higher returns. The two Vanguard funds appear to have similar makeup of bonds. DFA appears to have less tech and shorter duration bonds and possibly fewer US Treasury related bonds.

I see what you mean about 60/40 can mean very different things.

How did I do? :D
livesoft
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Re: Individual funds versus Fund of Funds?

Post by livesoft »

Crow Hunter wrote: Tue Jan 12, 2021 4:51 pm How did I do? :D
My answer is different. You missed the big picture. :)

VBIAX -> No international at all, but otherwise totla market indexes.
VSMGX -> The drag of international was the problem, but still all total market index funds.
DGSIX -> This fund got hurt not only by international, but also by its small-cap and value tilt. Nevertheless, the fund is passively-managed.

So my main point is that even if one runs a passively-managed low-expense ratio fund of separate index funds that one wants to save on the e.r., the details will swamp any expense ratios differences. Just a slightly different amount of foreign and small-cap would be enough to overwhelm things.

BTW, I own VSMGX and FFEDX, but otherwise run a small-cap and value-tilted portfolio that is about 60/40. I've been tracking performance of my portfolio for years against such benchmarks. The spread among the 3 benchmarks funds is rather pronounced this year.

Bottom line: If you want to have the highest performance in 2021, then you had better predict the asset classes that will have the higher performance by 12/31/2021 and overweight them or conversely, predict the asset classes that will have the lower performance and underweight them. Good luck with that!

Also people often want to know "Did you beat the market?" Well, which market are you talking about? "OK, did you beat your benchmark?" I can write, "Yes, absolutely!" but only if my benchmark is DGSIX. :twisted:
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Re: Individual funds versus Fund of Funds?

Post by placeholder »

In my case tax deferred space (401k) is only about 40% of portfolio and since that's my fixed income allocation I just devote most of that account to FI and in the remaining roth and taxable have stock funds.
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Crow Hunter
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Re: Individual funds versus Fund of Funds?

Post by Crow Hunter »

As an update, I modified my spreadsheet to account for using one of the fund of funds and ran through several scenarios of outperformance/underperformance and I was very surprised how "stable" my asset allocation was with the fund of funds options.

It required extremely large changes in my single fund accounts to have any noticeable effect on my overall asset allocation, which would off course be impossible short some sort of a massive cash windfall for my other accounts to grow without also having the components of the fund of funds grow as well.

I greatly appreciate the advice from everyone. You may have made my (and my wife's) life much simpler. :sharebeer
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Re: Individual funds versus Fund of Funds?

Post by Jeepergeo »

Do the quoted fees on Life Strategy Funds include the fees associated with index funds it invests in?

The quoted expense for VSMGX is 0.13%. Does that include the cost to Vanguard for buying the index funds that make up VSMGX?

I've looked around and can't seem to find the answer.

If the VSMGX fee is (Mgmt Fee + Index 1 Fees + Index 2 Fees + Index 3 Fees = 0.13%), then it seems like a reasonable fee if not a bargain for doing all the balancing for me.

If the VSMGX fee is (Mgmt Fee of 0.13 + Index 1 Fees + Index 2 Fees + Index 3 Fees = A number bigger than 0.13%), then I'd probably opt to continue to actively manage my portfolio myself.

Thanks in advance for any insights.
livesoft
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Re: Individual funds versus Fund of Funds?

Post by livesoft »

Yes, the expense ratio of VSMGX include all the underlying fund expenses.
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Jeepergeo
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Re: Individual funds versus Fund of Funds?

Post by Jeepergeo »

livesoft wrote: Thu Jan 14, 2021 5:18 pm Yes, the expense ratio of VSMGX include all the underlying fund expenses.
Great, thanks. The 0.13% seems pretty reasonable then.
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