pros and cons of target date funds?

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tennisplyr
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Re: pros and cons of target date funds?

Post by tennisplyr » Sun Nov 25, 2018 6:15 pm

One procedural thing is when you want to let's say sell a portion of bonds in retirement, you can't target bonds to sell. Not a huge deal though.
Those who move forward with a happy spirit will find that things always work out.

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vineviz
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Re: pros and cons of target date funds?

Post by vineviz » Sun Nov 25, 2018 6:26 pm

banook wrote:
Sat Nov 24, 2018 5:53 pm
Being a little nit-picky but Vanguard target date funds is many exceed the suggested/data-driven 20% international stock (all of the more recent target dates exceed 30% and even go as high as 35% - e.g. VT 2030-2050)? Granted you can always choose a different target date fund based on the starting AA you like but the slice of domestic index for equities may not be what you want (see reasons above).
Sorry, but no.

Virtually all experts on asset allocation have found the optimal international allocation for US investors to be between 30% and 50%, which is why virtually all target date funds have an international allocation within that range.

The 20% allocation touted by many participants on this forum is, at best, a compromise between what the experts recommend and the recklessly conservative proclivity of some investors to ignore international diversification altogether.

International under-diversification is one of the behavioral biases that target date funds so elegantly resolve.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

banook
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Re: pros and cons of target date funds?

Post by banook » Sun Nov 25, 2018 8:47 pm

Sorry, but no.

Virtually all experts on asset allocation have found the optimal international allocation for US investors to be between 30% and 50%, which is why virtually all target date funds have an international allocation within that range.

The 20% allocation touted by many participants on this forum is, at best, a compromise between what the experts recommend and the recklessly conservative proclivity of some investors to ignore international diversification altogether.

International under-diversification is one of the behavioral biases that target date funds so elegantly resolve.
I'm not necessarily disagreeing - I hold a target date fund myself - 2045, which has close to 35% allocation to international. I just mean to emphasize that if you choose a target date fund - you'll have more international than some advise or want. It does seem at least from this data set of the most popular 401k index and mutual funds that international for returns on the past 10 years (inclusive of 2008 crash) - a summary of the top 10 in terms of assets (bonds excluded) and open to new investors below: https://www.kiplinger.com/article/inves ... vings.html

Code: Select all

Rank	Fund Name	Symbol	1-yr	3-yr	5-yr	10-yr	Total Assets (billions)	Fund Type
23	Vanguard Total Stock Mkt Idx Inv	VTSMX	6.9	11.1	10.5	14.4	756.6	Large Blend
6	Vanguard 500 Index Investor	VFINX	7.7	11.4	11.1	14.2	459.3	Large Blend
14	Vanguard Total Intl Stock Index Inv	VGTSX	-8.7	3.7	1.6	8.1	359.6	Foreign Large Blend
1	Vanguard Institutional Index I	VINIX	7.8	11.5	11.2	14.3	235.2	Large Blend
5	Vanguard Total Bond Market Index Inv	VBMFX	-1.7	0.9	1.7	3.7	199.7	Intermediate-Term Bond
17	American Funds Growth Fund of Amer A	AGTHX	9.4	12.4	11.4	14.6	180.8	Large Growth
2	Fidelity 500 Index Investor	FUSEX	7.8	11.4	11.2	14.3	166.6	Large Blend
3	American Funds Europacific Growth A	AEPGX	-10.7	3.4	2.8	9.1	146.6	Foreign Large Growth
35	American Funds American Balanced A	ABALX	3.5	7.4	7.5	10.9	135.3	Allocation--50 to 70 Equity
4	Fidelity Contrafund	FCNTX	10.6	13.0	12.1	15.2	134.9	Large Growth
Even if you eliminate this past year's returns (1 year returns) - it still seems lower. I'm cherry picking here, no doubt. Very interested in hearing or seeing data on "optimal allocation" for international equities in the 30-50% that "virtually all experts agree on"- I am legitimately curious, and am thinking about switching away from target date for this very reason.

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BroIceCream
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Re: pros and cons of target date funds?

Post by BroIceCream » Sat Jan 12, 2019 11:34 pm

Target Date funds typically miss out on other asset classes (small cap, value, etc). However I learned much from this Paul Merriman article on how to tilt a target date fund (by adding one more position). I recommend reading the article.

http://twofundsforlife.com

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unclescrooge
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Re: pros and cons of target date funds?

Post by unclescrooge » Sat Jan 12, 2019 11:36 pm

banook wrote:
Sat Nov 24, 2018 5:53 pm
Taylor Larimore wrote:
Sat Nov 24, 2018 11:43 am
jayk238 wrote:
Tue Jan 16, 2018 8:54 am
What is wrong with target date funds? What are some cons for those who choose not to use them and why others who use them feel the pros outweigh the cons?

I see a lot of investors utilizing multiple funds - the lists are long on these posts and I dont know one from the other vtsx this vtsy that- its very confusing.

Would a target date fund provide me that much worse performance?

Is the whole fund selection process that eschews the target funds simply a hobbyists pasttime ?
otherwise what am I missing?
jayk238:

If I could start over, and all my investments were in tax-advantaged accounts, I would have my investments in maintenance-free Target Date Funds designed by Vanguard experts.

If I could start over, and had both tax-advantaged and taxable accounts, I would have my investments in The Three-Fund Portfolio which allows me to place tax-efficient funds in taxable accounts and tax-inefficient funds in tax-advantaged accounts.

Best wishes
Taylor
Being a little nit-picky but Vanguard target date funds is many exceed the suggested/data-driven 20% international stock (all of the more recent target dates exceed 30% and even go as high as 35% - e.g. VT 2030-2050)? Granted you can always choose a different target date fund based on the starting AA you like but the slice of domestic index for equities may not be what you want (see reasons above).

See post from Taylor here on 20%: viewtopic.php?t=196956
Vanguard just announced everyone should have 40% exposure to international.

Lastrun
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Re: pros and cons of target date funds?

Post by Lastrun » Sun Jan 13, 2019 8:14 am

vineviz wrote:
Sun Nov 25, 2018 6:26 pm

The 20% allocation touted by many participants on this forum is, at best, a compromise between what the experts recommend and the recklessly conservative proclivity of some investors to ignore international diversification altogether.

International under-diversification is one of the behavioral biases that target date funds so elegantly resolve.
For the record, I have a VG TDF in my tax-deferred accounts. I am still in accumulation mode and don't lose any sleep over the international allocation therein BUT . . . .

In my taxable accounts, I have a 20% allocation to international stock and I do no view it as a compromise, but more a value versus cost decision.

Per the VG Target Date white paper, 85% of the diversification benefit of an international stock is achieved at a 20% allocation.


Here is the quote:

"Our research has shown that allocations of 20% non-U.S. equities have provided about 85% of the maximum diversification benefit. Higher amounts such as 30% and 40% have provided more than 95% of this benefit. Allocations exceeding 40% would not have historically added significant additional diversification benefits, particularly when costs are taken into account. We believe non-U.S. equity allocations between 20% and full market-cap can be appropriate." https://personal.vanguard.com/pdf/icrtdf.pdf at page 10.


So for me, adding another 20% more international, effectively doubling down, for a total of 40%, is NOT worth it for the extra (15%) diversification benefit. And yes, this is a compromise, but not between the experts and the reckless BH home bias masses, but (to me) on achieving the most international diversification at the least cost (cost defined here as being my biases, both home and recency).

Am I wrong on this? I freely admit my thinking could be in error.

Is VG wrong on this?

These are not rhetorical, I really want to know.

averagedude
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Re: pros and cons of target date funds?

Post by averagedude » Sun Jan 13, 2019 9:27 am

I don't use target dated funds but i believe they are the best choice for novice investors. The beauty of these funds is that you need to know nothing about investing, you never need to tend to it, you don't have to pay asset under management fees, your money is invested in a reasonable aporoach, and you can be confident that your returns will more than likely be in the top half of performance of all investors. There are many smart and knowledgeable investors who would have done better if they had simply used a target dated fund.

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Horton
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Re: pros and cons of target date funds?

Post by Horton » Sun Jan 13, 2019 2:30 pm

I am a fan of DFA's Target Retirement Income funds and use one as my target asset allocation benchmark. These funds are more oriented towards those following a lifecycle investing approach intent on building Liability Matching Portfolios. I'm too cheap to hire an advisor to get access to these funds, so I basically create it myself using a simple blend of global equity funds (e.g., VT, VTI, VXUS) and TIPS funds (VTAPX, VAIPX, LTPZ).

Here are some links to learn more.

https://us.dimensional.com/target-date- ... come-funds

https://retirementresearcher.com/using- ... etirement/

viewtopic.php?t=219470

https://finpage.blog/2016/12/04/a-three ... -spending/

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CWRadio
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Re: pros and cons of target date funds?

Post by CWRadio » Sun Jan 13, 2019 3:29 pm

Horton wrote:
Sun Jan 13, 2019 2:30 pm
I am a fan of DFA's Target Retirement Income funds and use one as my target asset allocation benchmark. These funds are more oriented towards those following a lifecycle investing approach intent on building Liability Matching Portfolios. I'm too cheap to hire an advisor to get access to these funds, so I basically create it myself using a simple blend of global equity funds (e.g., VT, VTI, VXUS) and TIPS funds (VTAPX, VAIPX, LTPZ).

Here are some links to learn more.

https://us.dimensional.com/target-date- ... come-funds

https://retirementresearcher.com/using- ... etirement/

viewtopic.php?t=219470

https://finpage.blog/2016/12/04/a-three ... -spending/
Any advice on how to buy DFA Retirement income funds without going to advisor? Thanks

DrGoogle2017
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Re: pros and cons of target date funds?

Post by DrGoogle2017 » Sun Jan 13, 2019 3:53 pm

My kid’s 401k retirement plan offers very high ER for Target date, something more than 1.00, if memory serves. Biggest con for me. So I advice her to put in SP500.

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Horton
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Re: pros and cons of target date funds?

Post by Horton » Sun Jan 13, 2019 5:15 pm

CWRadio wrote:
Sun Jan 13, 2019 3:29 pm
Horton wrote:
Sun Jan 13, 2019 2:30 pm
I am a fan of DFA's Target Retirement Income funds and use one as my target asset allocation benchmark. These funds are more oriented towards those following a lifecycle investing approach intent on building Liability Matching Portfolios. I'm too cheap to hire an advisor to get access to these funds, so I basically create it myself using a simple blend of global equity funds (e.g., VT, VTI, VXUS) and TIPS funds (VTAPX, VAIPX, LTPZ).

Here are some links to learn more.

https://us.dimensional.com/target-date- ... come-funds

https://retirementresearcher.com/using- ... etirement/

viewtopic.php?t=219470

https://finpage.blog/2016/12/04/a-three ... -spending/
Any advice on how to buy DFA Retirement income funds without going to advisor? Thanks
Unfortunately not, that’s why I build it myself.

I suppose it makes some sense from DFA’s perspective - they want someone knowledgeable of Liability Matching Portfolios and Lifecycle Investing (i.e., an advisor) to help you understand how much income the fund may generate.

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Re: pros and cons of target date funds?

Post by texasdiver » Sun Jan 13, 2019 6:14 pm

Vanguard's Target date funds have a 40% Int'l allocation
The TSP's Target date funds have a 35% Int'l allocation

Between my wife and myself we have roughly equal amounts distributed between those two funds so we have approximately 37.5% in Int'l stocks.

Would our Int'l allocation be that high if I were building up our portfolio by scratch? Honestly probably not because I would be inclined to look at recent results and would be loath to rebalance back into Int'l. Am I confident enough in deciding to overrule the managers at Vanguard and the TSP to tilt my portfolio more towards domestics? No am not. So I just let things ride and because I monitor share prices and total net worth and not the performance of each individual component of the funds I don't really notice or fret about it like I might if I held each component in separate funds.

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Re: pros and cons of target date funds?

Post by BrooklynInvest » Sun Jan 13, 2019 6:26 pm

I'm a convert to TDF.

As I got closer to retirement I slowly allocated from very high equity exposure to a TDF that's aligned to when I need to make RMDs rather than actual retirement date.

With hindsight would have been simpler to have TDF augmented with allocation to S&P index (given my risk tolerances) from day 1.

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Re: pros and cons of target date funds?

Post by vineviz » Thu Jan 17, 2019 1:42 pm

Lastrun wrote:
Sun Jan 13, 2019 8:14 am
So for me, adding another 20% more international, effectively doubling down, for a total of 40%, is NOT worth it for the extra (15%) diversification benefit. And yes, this is a compromise, but not between the experts and the reckless BH home bias masses, but (to me) on achieving the most international diversification at the least cost (cost defined here as being my biases, both home and recency).

Am I wrong on this? I freely admit my thinking could be in error.
The point of maximum diversification can be considered to the point at which the costs and benefits of changing the asset allocation are already balanced.

Counting "I don't want to" as a cost is putting your finger on the scale, so to speak: a risk that you cannot expect to be rewarded since it is so easily diversifiable.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Earl Lemongrab
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Re: pros and cons of target date funds?

Post by Earl Lemongrab » Fri Jan 18, 2019 1:37 pm

I don't use them for a few reasons:

1. They don't fit my desired asset allocation.

2. My portfolio is about 45% taxable and I don't want tax-inefficient holdings there.

3. My 401(k) has great low-cost index CITS, but the TD equivalent funds are not so great.

4. I don't want to use Roth space for bonds when I have plenty of deferred space.

So for me, fixed income in 401(k), tax-inefficient stock funds in Roth, the rest in taxable.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: pros and cons of target date funds?

Post by NoHeat » Fri Jan 18, 2019 4:34 pm

JustinR wrote:
Sat Nov 24, 2018 12:50 am
Tax efficiency: By separating out the funds, you can optimize your tax efficiency, such as putting bonds in 401k, international in Roth, total stock market in taxable, etc.
I agree that tax optimization is an argument against target date funds, because it prevents placement to optimize tax efficiency, but I just don't see why you and others are prescribing the placement of international equities in tax advantaged accounts, instead of in taxable.

Shouldn't it be the reverse? After all, the foreign tax credit is enjoyed only if the security is in a taxable account -- why throw it away by putting the international equity entirely in IRAs?

"Note that only taxable investors can claim the deduction or credit. You cannot claim the deduction or credit for foreign tax paid by mutual funds held in a tax-advantaged account such as an IRA, 401(k), variable annuity, etc. "
https://www.bogleheads.org/wiki/Foreign_tax_credit

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Davinci
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Re: pros and cons of target date funds?

Post by Davinci » Fri Jan 18, 2019 4:55 pm

pros and cons of target date funds?
OP,

They are age based assumptions that do not work for everyone, one size does not fit all that is a con. When the lowest ER in a plan they are fine, pro. I also Iike the fact that they do not need to be touched for many years and that is another pro.

Good luck
" Simplicity is the ultimate sophistication" Leonardo Da Vinci.

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Re: pros and cons of target date funds?

Post by celia » Fri Jan 18, 2019 5:04 pm

Windylotus wrote:
Sat Nov 24, 2018 5:05 am
JustinR wrote:
Sat Nov 24, 2018 12:50 am
- Tax efficiency: By separating out the funds, you can optimize your tax efficiency, such as putting bonds in 401k, international in Roth, total stock market in taxable, etc. You can't do this with a target fund since all three would be in the same fund.
I'm curious on you rational behind this? I understand wanting bonds in tax advantaged accounts and equities in your Roth with the higher probability of tax free growth potential. What would be the benefit if international is in Roth and total stock market in taxable? Is total stock market somehow more tax efficient and how does one know or understand the tax efficiency of different funds? I'm not disagreeing, just trying to learn something. Cheers!
This is what I would have said too, but with a different example. According to Tax-efficient Fund Placement, you would want to put bonds in tax-deferred accounts, the stocks funds with the most expected future growth in Roths (so the growth can be tax-free), and international in taxable, so your can claim the Foreign Tax credit on your tax return. If everything is in a Target fund, you lose out on getting the maximum benefit for each case.

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Re: pros and cons of target date funds?

Post by JustinR » Fri Jan 18, 2019 5:10 pm

NoHeat wrote:
Fri Jan 18, 2019 4:34 pm
JustinR wrote:
Sat Nov 24, 2018 12:50 am
Tax efficiency: By separating out the funds, you can optimize your tax efficiency, such as putting bonds in 401k, international in Roth, total stock market in taxable, etc.
I agree that tax optimization is an argument against target date funds, because it prevents placement to optimize tax efficiency, but I just don't see why you and others are prescribing the placement of international equities in tax advantaged accounts, instead of in taxable.

Shouldn't it be the reverse? After all, the foreign tax credit is enjoyed only if the security is in a taxable account -- why throw it away by putting the international equity entirely in IRAs?

"Note that only taxable investors can claim the deduction or credit. You cannot claim the deduction or credit for foreign tax paid by mutual funds held in a tax-advantaged account such as an IRA, 401(k), variable annuity, etc. "
https://www.bogleheads.org/wiki/Foreign_tax_credit
You're correct that you lose the foreign tax credit in tax-advantaged accounts.

However, some international funds (such as the typical VG ones) are still less tax efficient even with the foreign tax credit. See the spreadsheet here: viewtopic.php?f=10&t=242137

That's why you would still prioritize international in tax-advantaged accounts over US total stock market.

JustinR
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Re: pros and cons of target date funds?

Post by JustinR » Fri Jan 18, 2019 5:13 pm

celia wrote:
Fri Jan 18, 2019 5:04 pm
Windylotus wrote:
Sat Nov 24, 2018 5:05 am
JustinR wrote:
Sat Nov 24, 2018 12:50 am
- Tax efficiency: By separating out the funds, you can optimize your tax efficiency, such as putting bonds in 401k, international in Roth, total stock market in taxable, etc. You can't do this with a target fund since all three would be in the same fund.
I'm curious on you rational behind this? I understand wanting bonds in tax advantaged accounts and equities in your Roth with the higher probability of tax free growth potential. What would be the benefit if international is in Roth and total stock market in taxable? Is total stock market somehow more tax efficient and how does one know or understand the tax efficiency of different funds? I'm not disagreeing, just trying to learn something. Cheers!
This is what I would have said too, but with a different example. According to Tax-efficient Fund Placement, you would want to put bonds in tax-deferred accounts, the stocks funds with the most expected future growth in Roths (so the growth can be tax-free), and international in taxable, so your can claim the Foreign Tax credit on your tax return. If everything is in a Target fund, you lose out on getting the maximum benefit for each case.
That wiki page is just general advice. You should use this spreadsheet for actual values on what you should put into which account: viewtopic.php?f=10&t=242137

You should put money into accounts in this order:

Lowest tax efficiency -> Highest
Traditional 401k -> Roth IRA -> Taxable

Using the spreadsheet, you can see it turns out to be (using the 3 fund as an example):
Bonds -> International -> US

NoHeat
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Re: pros and cons of target date funds?

Post by NoHeat » Fri Jan 18, 2019 6:27 pm

JustinR wrote:
Fri Jan 18, 2019 5:10 pm

You're correct that you lose the foreign tax credit in tax-advantaged accounts.

However, some international funds (such as the typical VG ones) are still less tax efficient even with the foreign tax credit. See the spreadsheet here: viewtopic.php?f=10&t=242137

That's why you would still prioritize international in tax-advantaged accounts over US total stock market.
Maybe I misunderstand that spreadsheet, but at a glance it appears that a higher dividend yield for international stocks mainly accounts for the supposedly lower tax efficiency.

In fact, a higher dividend yield might just indicate a relatively undervalued market. In other words, I’m suggesting this so-called “tax efficiency” rating is possibly not what it is claimed to be. Maybe it is a mistakenly interpreted measure of valuation inefficiency that may very well be corrected when domestic markets underperform international markets in the future.

JustinR
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Re: pros and cons of target date funds?

Post by JustinR » Fri Jan 18, 2019 6:50 pm

NoHeat wrote:
Fri Jan 18, 2019 6:27 pm
JustinR wrote:
Fri Jan 18, 2019 5:10 pm

You're correct that you lose the foreign tax credit in tax-advantaged accounts.

However, some international funds (such as the typical VG ones) are still less tax efficient even with the foreign tax credit. See the spreadsheet here: viewtopic.php?f=10&t=242137

That's why you would still prioritize international in tax-advantaged accounts over US total stock market.
Maybe I misunderstand that spreadsheet, but at a glance it appears that a higher dividend yield for international stocks mainly accounts for the supposedly lower tax efficiency.

In fact, a higher dividend yield might just indicate a relatively undervalued market. In other words, I’m suggesting this so-called “tax efficiency” rating is possibly not what it is claimed to be. Maybe it is a mistakenly interpreted measure of valuation inefficiency that may very well be corrected when domestic markets underperform international markets in the future.
Well, he's done the spreadsheet for the last 3 years and international has been less efficient than US every year.

If you think they're mistaken about something you should post in that thread and ask.

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