Target Date Funds

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Taylor Larimore
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Target Date Funds

Post by Taylor Larimore »

Bogleheads:

Christine Benz, Director of Personal Finance for Morningstar and a Director of the John C. Bogle Center for Financial Literacy, has written an insightful article about Target-Date Funds. These are excerpts:
"People love to hate target-date funds."

"Oftentimes, target-date critics are selling some type of investment advice themselves; they may not admit it, but they view target-date funds as competition."

"Target-date funds have been nothing short of the biggest positive development for investors since the index fund."

"They provide an element of inexpensive, quite reasonable investment advice for people who might not otherwise be able to afford it and might otherwise be making kooky choices."

"They provide their investors with an element of advice, and they do so at a very low cost."

"Prior to the advent of target-date funds, it wasn't unusual for investors to select investments in their 401(k) lineups based on which ones had the highest returns or star ratings, or to put 10% weightings into each of the 10 holdings in the lineup. By embedding some basic asset-allocation advice and ongoing oversight, target-date funds serve people who don't have investment backgrounds incredibly well."

"Thanks to positive timing decisions (they didn't buy high and sell low), the owners of allocation funds actually enjoyed slightly better returns than the funds' total returns."

"Target-date fund investors stay put."
Bogleheads can read the full article here.

Best wishes.
Taylor
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David Jay
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Re: Target Date Funds

Post by David Jay »

For those wanting to explore further, there is a multi-page thread on the so-called "One Fund Portfolio" (holding a single, asset allocating fund of funds) here: viewtopic.php?t=287967
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Re: Target Date Funds

Post by anil686 »

Thanks for this article Taylor. My spouse and I have been married for over 20 years. I will never forget - we both had jobs with a 401K in the early 2000s - I was foolishly confident that I knew how to invest and could pick good investments in the 401K while my spouse just used a VG TR 2040 fund. Her return has been fantastic and mine lagged through 2001 to 2008 - I ended up switching to a TR fund from Vanguard at that time and we have used nothing but LS or TR funds in both our IRAs and 401Ks - they make investing simpler, and do what I find hard to do - sell high and buy low....
DB2
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Re: Target Date Funds

Post by DB2 »

I think the Vanguard TG funds are awesome for behavior alone.
Triple digit golfer
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Re: Target Date Funds

Post by Triple digit golfer »

DB2 wrote: Fri Apr 30, 2021 5:38 pm I think the Vanguard TG funds are awesome.
Agree completely. Cheap, super diversified, and maybe most importantly, remove emotion and decision making.
Silence Dogood
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Re: Target Date Funds

Post by Silence Dogood »

Thanks for sharing, Taylor!

My Roth IRA has exclusively held the Vanguard Target Retirement 2055 fund (VFFVX) since I first opened it, ~10 years ago.
Adam Mundorf
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Re: Target Date Funds

Post by Adam Mundorf »

It's funny you posted this Taylor. Just last week I consolidated my 401k and Roth IRA into Vanguard Target Retirement 2065. My risk tolerance matches that of 90/10 and I never need to worry about rebalancing. When Vanguard Target Retirement 2070 comes out, I'll transfer to that.

For me the price of simplicity and peace of mind is worth it.
Element
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Re: Target Date Funds

Post by Element »

I'm all in on the 2045 Vanguard fund through my work (VITLX) with only a .09 ER. I've become more of a believer in International funds so I'm good with the AA.
1moreyr
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Re: Target Date Funds

Post by 1moreyr »

Does anyone use 2 Target date funds?
for example if you were retiring in 2021 put X % in the 2020 fund but realize that a good portion of your money will not be needed for another 10 years so you put that in the 2030 fund?

effectively puts some of your money at say50/50 and another portion at 60/40 or 70/30 depending on your choices
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vineviz
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Re: Target Date Funds

Post by vineviz »

1moreyr wrote: Sat May 01, 2021 5:14 am Does anyone use 2 Target date funds?
for example if you were retiring in 2021 put X % in the 2020 fund but realize that a good portion of your money will not be needed for another 10 years so you put that in the 2030 fund?

effectively puts some of your money at say50/50 and another portion at 60/40 or 70/30 depending on your choices
People do this, yes.

It’s unnecessarily busy, but otherwise there is probably no harm in doing it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
mrc
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Re: Target Date Funds

Post by mrc »

1moreyr wrote: Sat May 01, 2021 5:14 am Does anyone use 2 Target date funds?
for example if you were retiring in 2021 put X % in the 2020 fund but realize that a good portion of your money will not be needed for another 10 years so you put that in the 2030 fund?

effectively puts some of your money at say50/50 and another portion at 60/40 or 70/30 depending on your choices
Back when spouse and I used target date funds, we didn't split among TD funds, but we did choose a date farther out than the actual date we expected to retire to force a higher proportion of equity.
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1moreyr
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Re: Target Date Funds

Post by 1moreyr »

mrc wrote: Sat May 01, 2021 5:53 am
1moreyr wrote: Sat May 01, 2021 5:14 am Does anyone use 2 Target date funds?
for example if you were retiring in 2021 put X % in the 2020 fund but realize that a good portion of your money will not be needed for another 10 years so you put that in the 2030 fund?

effectively puts some of your money at say50/50 and another portion at 60/40 or 70/30 depending on your choices
Back when spouse and I used target date funds, we didn't split among TD funds, but we did choose a date farther out than the actual date we expected to retire to force a higher proportion of equity.
yes, i have considered this as the 2020 fund allocation at 50/50 feels a little too conservative to me as I retire at 58
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vineviz
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Re: Target Date Funds

Post by vineviz »

1moreyr wrote: Sat May 01, 2021 5:57 am
mrc wrote: Sat May 01, 2021 5:53 am Back when spouse and I used target date funds, we didn't split among TD funds, but we did choose a date farther out than the actual date we expected to retire to force a higher proportion of equity.
yes, i have considered this as the 2020 fund allocation at 50/50 feels a little too conservative to me as I retire at 58
In theory, most investors should prefer a relatively constant asset allocation in retirement so (depending on tax implications) you might be just as well served to move some or all your money from Target 2020 to a fixed allocation fund like Vanguard LifeStrategy Growth Fund (VASGX) or Vanguard LifeStrategy Moderate Growth Fund (VSMGX).

Another approach would be to stick with the Target 2020 fund as your core holding and simply move 10% or 20% (whatever is right for you) into Vanguard Total World Stock Index Fund (VTWAX)
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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nedsaid
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Re: Target Date Funds

Post by nedsaid »

As I get older, I do like the Target Date funds more and more. They do have flaws but even then they are vastly superior to what most investors would come up with on their own.

Here are some criticisms:

1) In bull markets, Target Date Funds tend to get more aggressive as they compete with Target Date Funds offered by competitors.
2) Target Date Funds are subject to investing fads, Fidelity experimented with Commodities not so many years ago.
3) Target Funds can change certain parts of their investment approach over time. Vanguard once had 20% of Stocks in International, they later went to 30% and are now at 40%. Vanguard now has 30% of bonds in International.
4) Glide paths can change.

In other words, "stay the course" investments don't always stay the course.

5) You might not get the best funds from your fund family in your Target Date Fund.
6) Expense ratios of the Target Date Fund might be slightly higher than expense ratios of their underlying funds.
7) I think the Target Funds are getting to be too aggressive, particularly for older investors.

These criticisms are valid but they are more mild criticisms. I still believe such funds are superior to most do-it-yourself portfolios.

A couple of big positives. You get the best thinking of the experts from your fund company. You don't have to worry about rebalancing or de-risking your portfolio over time.
A fool and his money are good for business.
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CardinalRule
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Re: Target Date Funds

Post by CardinalRule »

1moreyr wrote: Sat May 01, 2021 5:14 am Does anyone use 2 Target date funds?
for example if you were retiring in 2021 put X % in the 2020 fund but realize that a good portion of your money will not be needed for another 10 years so you put that in the 2030 fund?

effectively puts some of your money at say50/50 and another portion at 60/40 or 70/30 depending on your choices
It was probably overkill in my case, but I bought into Vanguard 2025 and 2030 funds a few years ago, basically creating a 2027 fund (the 2025 purchase percentage was a little a higher). I eventually simplified and went all-in on my workplace 401(k) with the 2025 fund for payroll deductions.
happypediatrician
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Re: Target Date Funds

Post by happypediatrician »

Wife and I just started our retirement investing and education on retirement (teacher and pediatrician respectively) 8 months ago, maximizing contributions to ROTH-IRA and 401k accounts into VG TDF 2065. Just finished reading Guide to 3 fund portfolio, and felt this was a better path for me. Mainly b/c I want control over the glide path and want to be less aggressive on international allocation.

I had two questions:

1.With TDF’s is it assumed that changing asset allocation during the glide path would be done at appropriate times, i.e. not lowering allocation from stocks and increasing in bonds when the stocks are doing poorly?

2.When switching from TDF 2065 to 70% VTSAX / 20% VTIAX / 10% VBTLX, given that they are fairly similar, is there any reason not to do this all in one transaction?

Thanks so much!

-Rob
Kids are not little adults
sycamore
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Re: Target Date Funds

Post by sycamore »

happypediatrician wrote: Sun May 02, 2021 1:39 am 1.With TDF’s is it assumed that changing asset allocation during the glide path would be done at appropriate times, i.e. not lowering allocation from stocks and increasing in bonds when the stocks are doing poorly?

2.When switching from TDF 2065 to 70% VTSAX / 20% VTIAX / 10% VBTLX, given that they are fairly similar, is there any reason not to do this all in one transaction?
1. That's not a safe assumption. In general no one knows what "appropriate" is -- it all depends on the future. E.g., maybe stocks have done poorly in the past couple of months, but it's possible they could do even more poorly in the coming months, in which case it would be better to increase bonds.

2. No reason. Best to make the switch from TDF to the 3-funder all on the same day.
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Re: Target Date Funds

Post by Silverado »

nedsaid wrote: Sat May 01, 2021 10:30 am
Here are some criticisms:

1) In bull markets, Target Date Funds tend to get more aggressive as they compete with Target Date Funds offered by competitors.
I very much dislike this one. Pretty much shows the allocation they have are based at least somewhat on marketing. When it comes to my money, I don’t like anything related to marketing.
adestefan
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Re: Target Date Funds

Post by adestefan »

Silverado wrote: Sun May 02, 2021 7:19 am
nedsaid wrote: Sat May 01, 2021 10:30 am
Here are some criticisms:

1) In bull markets, Target Date Funds tend to get more aggressive as they compete with Target Date Funds offered by competitors.
I very much dislike this one. Pretty much shows the allocation they have are based at least somewhat on marketing. When it comes to my money, I don’t like anything related to marketing.
Hate to break it to you, but it’s all based on marketing. Even the beloved VTSAX.

“Own the entire stock market for one low, low price! Can’t beat it!”
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Re: Target Date Funds

Post by nedsaid »

adestefan wrote: Sun May 02, 2021 7:28 am
Silverado wrote: Sun May 02, 2021 7:19 am
nedsaid wrote: Sat May 01, 2021 10:30 am
Here are some criticisms:

1) In bull markets, Target Date Funds tend to get more aggressive as they compete with Target Date Funds offered by competitors.
I very much dislike this one. Pretty much shows the allocation they have are based at least somewhat on marketing. When it comes to my money, I don’t like anything related to marketing.
Hate to break it to you, but it’s all based on marketing. Even the beloved VTSAX.

“Own the entire stock market for one low, low price! Can’t beat it!”
There is the old quote that says that if you build a better mousetrap that the world will beat a path to your door. That old quote is just false. The world won't beat a path to your door if it doesn't know that you built a better mousetrap. The way the world knows is through advertising, marketing. If you don't like anything related to marketing, you probably don't like much of anything at all. There is a purpose for advertising and marketing, it can be informative and it can be manipulative. My gosh, if it wasn't for good marketing, I would never have heard of Vanguard.
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Re: Target Date Funds

Post by dukeblue219 »

1moreyr wrote: Sat May 01, 2021 5:14 am Does anyone use 2 Target date funds?
for example if you were retiring in 2021 put X % in the 2020 fund but realize that a good portion of your money will not be needed for another 10 years so you put that in the 2030 fund?

effectively puts some of your money at say50/50 and another portion at 60/40 or 70/30 depending on your choices
I do it in the 529 and it helps me segregate the risk a bit. We expect to pay $20k for kindergarten (split over 2 calendar years of course), then public school until college, so I have a big chunk in the nearest term fund and he rest in the 2036 fund I think.
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Re: Target Date Funds

Post by RadAudit »

vineviz wrote: Sat May 01, 2021 6:51 am In theory, most investors should prefer a relatively constant asset allocation in retirement so (depending on tax implications) you might be just as well served to move some or all your money from Target 2020 to a fixed allocation fund like Vanguard LifeStrategy Growth Fund (VASGX) or Vanguard LifeStrategy Moderate Growth Fund (VSMGX).

Another approach would be to stick with the Target 2020 fund as your core holding and simply move 10% or 20% (whatever is right for you) into Vanguard Total World Stock Index Fund (VTWAX)
If I recall correctly, VG's Target Date Funds had a glidepath that decreased to about 30 / 70 stocks / bonds during the early years of retirement and remain at that ratio. I was somewhat concerned with, after my demise, leaving DW with a smallish allocation to stocks. So, as you suggest, I used LifeStrategy Funds to give most of the portfolio a fixed allocation. Additionally, I contribute the yearly remainder of unspent funds (RMDs - SWRs) to VTWSX for a slightly positive upward glidepath on the portfolio AA.
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DB2
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Re: Target Date Funds

Post by DB2 »

nedsaid wrote: Sat May 01, 2021 10:30 am As I get older, I do like the Target Date funds more and more. They do have flaws but even then they are vastly superior to what most investors would come up with on their own.

Here are some criticisms:

1) In bull markets, Target Date Funds tend to get more aggressive as they compete with Target Date Funds offered by competitors.
2) Target Date Funds are subject to investing fads, Fidelity experimented with Commodities not so many years ago.
3) Target Funds can change certain parts of their investment approach over time. Vanguard once had 20% of Stocks in International, they later went to 30% and are now at 40%. Vanguard now has 30% of bonds in International.
4) Glide paths can change.

In other words, "stay the course" investments don't always stay the course.

5) You might not get the best funds from your fund family in your Target Date Fund.
6) Expense ratios of the Target Date Fund might be slightly higher than expense ratios of their underlying funds.
7) I think the Target Funds are getting to be too aggressive, particularly for older investors.

These criticisms are valid but they are more mild criticisms. I still believe such funds are superior to most do-it-yourself portfolios.

A couple of big positives. You get the best thinking of the experts from your fund company. You don't have to worry about rebalancing or de-risking your portfolio over time.
One of the other possible negatives to a Target Date fund: if there is a prolonged bear market during the more aggressive glide down period, losses might be locked in as the fund more aggressively moves into bonds. When/if the market turns around in a few years, you wouldn't be able to recapture that kind of gain given you're so much heavily allocated into bonds. This is one of the benefits of LifeStrategy.
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nedsaid
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Re: Target Date Funds

Post by nedsaid »

DB2 wrote: Sun May 02, 2021 12:28 pm
One of the other possible negatives to a Target Date fund: if there is a prolonged bear market during the more aggressive glide down period, losses might be locked in as the fund more aggressively moves into bonds. When/if the market turns around in a few years, you wouldn't be able to recapture that kind of gain given you're so much heavily allocated into bonds. This is one of the benefits of LifeStrategy.
This is an excellent point. Thanks for bringing it up.

As for my own portfolio, I rebalance from stocks to bonds when the stock market hits new highs. When the stock market is down, I just sit tight and wait for the markets to rebound. I have about 30% of my portfolio managed in a "Cautious" portfolio which is about 45% stocks, they maintain a steady asset allocation so this gets around the problem mentioned above.

All that being said, I still like Target Date Retirement funds, their drawbacks are there but minor in comparison to the errors that individual investors often make.
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Re: Target Date Funds

Post by GaryA505 »

The one (and only) thing I like about Target Date funds is they give me something to suggest when people ask, "what should I invest my 401K or IRA in?"
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Re: Target Date Funds

Post by tennisplyr »

Like them...a minor nuisance for me is when you buy into one or sell out of one you can’t select the sector you want to buy/sell.
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Re: Target Date Funds

Post by GaryA505 »

tennisplyr wrote: Mon May 03, 2021 6:20 pm Like them...a minor nuisance for me is when you buy into one or sell out of one you can’t select the sector you want to buy/sell.
Some people would see that as an advantage because it keeps people from making knee jerk decisions.
"Get most of it right and don't make any big mistakes."
Drovor
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Re: Target Date Funds

Post by Drovor »

My wife is not interested at all in investing so a TDR is appealing. I plan to eventually move to Target Date Fund/LifeStrategy to make it easier for her.
Coopsdaddy
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Re: Target Date Funds

Post by Coopsdaddy »

Me and my wife are 45,we plan to semi retire at 52 so our contributions will go way down as we work part time.We will be 59.5 in 2035.We are in 2030 vanguard td fund as of now,would you suggest changing to 2040,2050 etc.Is there going to be a lot of difference
thanks
tallgrass
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Re: Target Date Funds

Post by tallgrass »

I'm hoping to retire in a year or so and we've switched all our tax advantaged accounts to target date funds.

I did this to:
- avoid the temptation to meddle with things too much and just screw it up
- make things simpler for my spouse to take over if anything happens to me

I think it's still important to check in every year or two and make sure the asset allocation agrees with your desired risk level, and that the fund hasn't changed it's asset allocation in a way you didn't expect.
DB2 wrote: Sun May 02, 2021 12:28 pm One of the other possible negatives to a Target Date fund: if there is a prolonged bear market during the more aggressive glide down period, losses might be locked in as the fund more aggressively moves into bonds. When/if the market turns around in a few years, you wouldn't be able to recapture that kind of gain given you're so much heavily allocated into bonds. This is one of the benefits of LifeStrategy.
I'm not sure this is a huge deal. The glide path of the funds I've looked at are gradually reducing equity allocations by about 7% every 5 years as they get close to, and into retirement. That's only about 1.5% a year.

The biggest thing that bothers me is what was mentioned above about how the makeup of these funds seems to change based on whatever trend is current. Glide paths alter, International allocations went from 15% in the early 2000's up to 40%. Someone above mentioned commodities.

I console myself with the notion that small differences in international %, or glide path changes will be offset by behavioral mistakes I'm likely to avoid if I start tinkering with discrete funds too much.
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Horton
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Re: Target Date Funds

Post by Horton »

tallgrass wrote: Wed May 05, 2021 10:17 am The biggest thing that bothers me is what was mentioned above about how the makeup of these funds seems to change based on whatever trend is current. Glide paths alter, International allocations went from 15% in the early 2000's up to 40%. Someone above mentioned commodities.

I console myself with the notion that small differences in international %, or glide path changes will be offset by behavioral mistakes I'm likely to avoid if I start tinkering with discrete funds too much.
I wouldn’t worry about it. You should look at how often other fund companies make changes. For instance, State Street and JP Morgan seem to make a change every year. It makes Vanguard’s pace seem glacial (in a good way).
DB2
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Re: Target Date Funds

Post by DB2 »

tallgrass wrote: Wed May 05, 2021 10:17 am I'm hoping to retire in a year or so and we've switched all our tax advantaged accounts to target date funds.

I did this to:
- avoid the temptation to meddle with things too much and just screw it up
- make things simpler for my spouse to take over if anything happens to me

I think it's still important to check in every year or two and make sure the asset allocation agrees with your desired risk level, and that the fund hasn't changed it's asset allocation in a way you didn't expect.
DB2 wrote: Sun May 02, 2021 12:28 pm One of the other possible negatives to a Target Date fund: if there is a prolonged bear market during the more aggressive glide down period, losses might be locked in as the fund more aggressively moves into bonds. When/if the market turns around in a few years, you wouldn't be able to recapture that kind of gain given you're so much heavily allocated into bonds. This is one of the benefits of LifeStrategy.
I'm not sure this is a huge deal. The glide path of the funds I've looked at are gradually reducing equity allocations by about 7% every 5 years as they get close to, and into retirement. That's only about 1.5% a year.

The biggest thing that bothers me is what was mentioned above about how the makeup of these funds seems to change based on whatever trend is current. Glide paths alter, International allocations went from 15% in the early 2000's up to 40%. Someone above mentioned commodities.

I console myself with the notion that small differences in international %, or glide path changes will be offset by behavioral mistakes I'm likely to avoid if I start tinkering with discrete funds too much.
There are certain bear periods where TD glides would have hurt more than others. Someone once posted some data and examples from bear market periods - I don't recall which thread. But I think the pros of the TG fund being totally hands off by an investor outweigh the possible negatives by a long shot. Many hands-on investors are also more likely to cause themselves issues in a long bear market I think. BUT, LifeStrategy does give the investor more control, but again that behavior too may or may not be an issue. However, one can decide when he or she is ready to for that next allocation change and might want to remain heavier or lighter in equities versus where TG eventually takes them. I really like both funds though.

I think Vanguard has slowly been trying to warm investors into something close to global market cap weighting in regards to equities and these funds. They also believe there is an 80% chance International will outperform U.S. over the next ten years.
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Re: Target Date Funds

Post by willthrill81 »

DB2 wrote: Thu May 06, 2021 12:24 pm There are certain bear periods where TD glides would have hurt more than others. Someone once posted some data and examples from bear market periods - I don't recall which thread. But I think the pros of the TG fund being totally hands off by an investor outweigh the possible negatives by a long shot. Many hands-on investors are also more likely to cause themselves issues in a long bear market I think. BUT, LifeStrategy does give the investor more control, but again that behavior too may or may not be an issue. However, one can decide when he or she is ready to for that next allocation change and might want to remain heavier or lighter in equities versus where TG eventually takes them. I really like both funds though.
I believe that either TDF or fixed allocation funds are fine for most investors. Personally, I would prefer toward the latter since most TDFs seem to reduce stock allocations too much too quickly. For instance, VG's 2020 TDF is only at 47% stock right now.
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DB2
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Re: Target Date Funds

Post by DB2 »

willthrill81 wrote: Thu May 06, 2021 12:50 pm
DB2 wrote: Thu May 06, 2021 12:24 pm There are certain bear periods where TD glides would have hurt more than others. Someone once posted some data and examples from bear market periods - I don't recall which thread. But I think the pros of the TG fund being totally hands off by an investor outweigh the possible negatives by a long shot. Many hands-on investors are also more likely to cause themselves issues in a long bear market I think. BUT, LifeStrategy does give the investor more control, but again that behavior too may or may not be an issue. However, one can decide when he or she is ready to for that next allocation change and might want to remain heavier or lighter in equities versus where TG eventually takes them. I really like both funds though.
I believe that either TDF or fixed allocation funds are fine for most investors. Personally, I would prefer toward the latter since most TDFs seem to reduce stock allocations too much too quickly. For instance, VG's 2020 TDF is only at 47% stock right now.
It feels that way to me a bit as well.
Coopsdaddy
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Re: Target Date Funds

Post by Coopsdaddy »

So if you plan to slowly start doing some withdraws around 2035 at 60 years old,would it be a better option to pick a 2040 or even 2050 fund ?
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Horton
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Re: Target Date Funds

Post by Horton »

Coopsdaddy wrote: Thu May 06, 2021 3:36 pm So if you plan to slowly start doing some withdraws around 2035 at 60 years old,would it be a better option to pick a 2040 or even 2050 fund ?
The Vanguard 2035 fund has a “through” glidepath, which implicitly assumes that you have some human capital remaining post-2035 and are not solely reliant on withdrawals from your financial capital.

If you are thinking about changing funds, you need to figure out why. Is it because the market has been doing really well lately and you feel like you are missing out? Or, is it because your situation has truly changed?
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Re: Target Date Funds

Post by hnd »

my issues with TDF are allocation wise. 30+% international is too much IMO and the bond allocation for the youngest of earners is too much for me for most of them (7-10% depending upon the fund family) the international is subjective obviously. I also feel investing in international bonds is unnecessary. the bond issue is solvable at a later date which just an initial investment in VTI/VXUS from ages 20-40 (or whenever your risk averse-ness kicks in)
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