3 fund vs Target

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
mrgeeze
Posts: 80
Joined: Wed Nov 04, 2015 11:09 am

3 fund vs Target

Post by mrgeeze » Wed Dec 06, 2017 4:00 pm

To me the Target funds are very much like the 3 fund approach with a moving rebalance.
The mix varies from the target year (further out = more stocks).

Also looks like the targets have a slightly higher Fee.

If one understands the "rebalancing" on the targets, they look pretty appealing.

Any real big reason to choose one over the other.

Short and succinct responses are always preferred.

livesoft
Posts: 57317
Joined: Thu Mar 01, 2007 8:00 pm

Re: 3 fund vs Target

Post by livesoft » Wed Dec 06, 2017 4:04 pm

Tax differences is the main thing for me.
This signature message sponsored by sscritic: Learn to fish.

PFInterest
Posts: 457
Joined: Sun Jan 08, 2017 12:25 pm

Re: 3 fund vs Target

Post by PFInterest » Wed Dec 06, 2017 4:06 pm

Also they are 4 funds actually. Not everyone wants that mix.

mcraepat9
Posts: 775
Joined: Thu Jul 16, 2015 11:46 am

Re: 3 fund vs Target

Post by mcraepat9 » Wed Dec 06, 2017 4:06 pm

The very short and simple answer: if all your investments are in tax-advantaged accounts, a low-cost target fund is usually the best option because it automatically handles rebalancing and is more "set it and forget it". Once you spill over into taxable investments, it is usually advisable to utilize your taxable account for tax efficient investments (broad equity index funds) and use your tax-advantaged account for less tax efficient investments (taxable bond funds, REITs etc). A target date fund is not appropriate in a taxable account and is a bit of a ticking tax time bomb that is hard to undo once you have significant embedded capital gains in your taxable account holdings.
Amateur investors are not cool-headed logicians.

User avatar
mhc
Posts: 3503
Joined: Mon Apr 04, 2011 10:18 pm
Location: NoCo

Re: 3 fund vs Target

Post by mhc » Wed Dec 06, 2017 4:08 pm

the underlying funds in the Target Retirement Fund can change. I may not want the change.

taxes - don't want bond in taxable account
higher ER for TR
TR limits TLH

mega317
Posts: 1265
Joined: Tue Apr 19, 2016 10:55 am

Re: 3 fund vs Target

Post by mega317 » Wed Dec 06, 2017 4:09 pm

In addition to taxes, you get less control over what you hold. I use Vanguard, but I don't want international bonds, for example. If you use multiple custodians (my work plans are at Fidelity) then a mix of target date funds requires, to my mind, more effort to maintain the portfolio at desired allocations than just using individual funds.

rkhusky
Posts: 4545
Joined: Thu Aug 18, 2011 8:09 pm

Re: 3 fund vs Target

Post by rkhusky » Wed Dec 06, 2017 4:24 pm

No big difference in tax-advantaged accounts. Expense difference is minor. Portfolio management preference is the biggest difference in tax advantaged.

fortfun
Posts: 265
Joined: Tue Apr 19, 2016 7:31 pm

Re: 3 fund vs Target

Post by fortfun » Wed Dec 06, 2017 4:29 pm

mcraepat9 wrote:
Wed Dec 06, 2017 4:06 pm
The very short and simple answer: if all your investments are in tax-advantaged accounts, a low-cost target fund is usually the best option because it automatically handles rebalancing and is more "set it and forget it". Once you spill over into taxable investments, it is usually advisable to utilize your taxable account for tax efficient investments (broad equity index funds) and use your tax-advantaged account for less tax efficient investments (taxable bond funds, REITs etc). A target date fund is not appropriate in a taxable account and is a bit of a ticking tax time bomb that is hard to undo once you have significant embedded capital gains in your taxable account holdings.
How do you feel about target date in a Roth457? It's the lowest ER of my choices. Or, would you just go with a traditional 457? Also, before you reach retirement age, can you just move your target date into a 3 fund solution to avoid the higher taxes on bonds?

deltaneutral83
Posts: 438
Joined: Tue Mar 07, 2017 4:25 pm

Re: 3 fund vs Target

Post by deltaneutral83 » Wed Dec 06, 2017 4:51 pm

I get heartburn thinking about keeping bonds in a taxable account which of course doesn't matter if it's in a tax advantaged account. I also don't favor TF's allocation for international equities, i.e. it's too much for me. It's probably too much for Bogle too :happy . You obviously can't TLH a target fund. The expense increase is probably about 10bps which some purists will amputate a leg to avoid and others see it as value depending on their hypothetical willingness to rebalance on their own.

Texanbybirth
Posts: 607
Joined: Tue Apr 14, 2015 12:07 pm

Re: 3 fund vs Target

Post by Texanbybirth » Wed Dec 06, 2017 4:54 pm

I read Vanguard's paper on TDF, and they made a seemingly good case to me for VFIFX - TDF 2050. It's also a good investment vehicle for my wife if I pass away suddenly.

It's literally our only investment.

(We are simple people of modest means. :beer )

mcraepat9
Posts: 775
Joined: Thu Jul 16, 2015 11:46 am

Re: 3 fund vs Target

Post by mcraepat9 » Wed Dec 06, 2017 5:09 pm

fortfun wrote:
Wed Dec 06, 2017 4:29 pm
mcraepat9 wrote:
Wed Dec 06, 2017 4:06 pm
The very short and simple answer: if all your investments are in tax-advantaged accounts, a low-cost target fund is usually the best option because it automatically handles rebalancing and is more "set it and forget it". Once you spill over into taxable investments, it is usually advisable to utilize your taxable account for tax efficient investments (broad equity index funds) and use your tax-advantaged account for less tax efficient investments (taxable bond funds, REITs etc). A target date fund is not appropriate in a taxable account and is a bit of a ticking tax time bomb that is hard to undo once you have significant embedded capital gains in your taxable account holdings.

How do you feel about target date in a Roth457? It's the lowest ER of my choices. Or, would you just go with a traditional 457? Also, before you reach retirement age, can you just move your target date into a 3 fund solution to avoid the higher taxes on bonds?
I think the question of Roth 457 vs. traditional 457 should be determined first based on your projected tax rates. Once you make that decision, then picking a target date fund vs 3 fund option depends largely on the few things others have mentioned in this thread: (i) whether you have any taxable accounts or if all your investments are in tax-advantaged accounts, (ii) whether you are comfortable with the asset allocations of the target date funds available to you or do you want more control over the investments? and (iii) do you want to save some expenses by doing it yourself (depends largely on how big the expense ratio gap is between target date and 3 fund options).

I'm not sure I understand your last question. If this is all happening inside your 457, then you should be able to change investments without tax implications.
Amateur investors are not cool-headed logicians.

Post Reply