Target Retirement Funds Allocation

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What is your opinion of the target retirement funds allocation?

Are too aggressive, and I realized it when I first noticed
19
29%
Are too aggressive, and I realized this after the 2008 crash but used to think they were ok or conservative
6
9%
Are too aggressive, and I realized this after the 2008 crash but used to think they were ok or conservative
6
9%
Are too conservative
1
2%
Are too conservative
1
2%
Are just right
16
25%
Are just right
16
25%
 
Total votes: 65

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mikep
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Target Retirement Funds Allocation

Post by mikep » Tue Jun 09, 2009 11:36 am

All,

I see a lot on this forum the opinion of the Vanguard Target retirement funds are too aggressive for their retirement year. On these very same boards I saw some of the opposite from posts before 2008. Therefore, I'm trying to gauge the amount of recency bias when looking at the opinions of the allocations of the TR funds. For the purpose of this poll, please consider the allocation as they are now (after they were changed in 2006).

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Mel Lindauer
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Re: Target Retirement Funds Allocation

Post by Mel Lindauer » Tue Jun 09, 2009 11:59 am

mikep wrote:All,

I see a lot on this forum the opinion of the Vanguard Target retirement funds are too aggressive for their retirement year. On these very same boards I saw some of the opposite from posts before 2008. Therefore, I'm trying to gauge the amount of recency bias when looking at the opinions of the allocations of the TR funds. For the purpose of this poll, please consider the allocation as they are now (after they were changed in 2006).
Remember, the allocations of the TR funds were actually changed to become more aggressive (possibly to more closely match the competition). So you need to compare apples to apples as to when those various recommendations were made.

I usually tell investors to ignore the date and select the TR fund that most closely matches their desired asset allocation, regardless of date.
Best Regards - Mel | | Semper Fi

pkcrafter
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Post by pkcrafter » Tue Jun 09, 2009 12:01 pm

When the TR funds were first introduced, the allocations were less aggressive across the board. Vanguard changed them to match the competition. I thought is was a mistake right then. Why did Vanguard change?

Feedback from customers saying the funds weren't aggressive enough?

Fear of underperformance compared to competition?

Second guessing their initial decision?

Whatever motivated the change, it was pretty much a common behavioral mistake in my opinion. They had it right the first time.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

dbr
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Post by dbr » Tue Jun 09, 2009 12:06 pm

I don't understand why anyone would think that a fund with an arbitrary "target date" on it would be expected to give the preferred AA evolution for any particular individual based on expected date of retirement.

It is fair enough that a range of TR funds gives a place to select a certain AA strategy provided the strategy is not changed mid-stream.

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mikep
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Post by mikep » Tue Jun 09, 2009 12:09 pm

Google search turned up this article giving reason for the change.

http://www.marketwatch.com/story/vangua ... und-lineup

"While the changes in the portfolio construction will result in modestly higher risk profiles for the funds, we believe that shareholders will benefit from broader equity diversification and higher return potential," said Brennan.

Vanguard spokeswoman Amy Chain in an email said the decision to increase the stock allocation in the target retirement funds "was based on a number of factors, such as the diminishing role of pensions, increasing medical costs, and continued increases in life expectancy."

dbr
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Post by dbr » Tue Jun 09, 2009 12:24 pm

mikep wrote:Google search turned up this article giving reason for the change.

http://www.marketwatch.com/story/vangua ... und-lineup

"While the changes in the portfolio construction will result in modestly higher risk profiles for the funds, we believe that shareholders will benefit from broader equity diversification and higher return potential," said Brennan.

Vanguard spokeswoman Amy Chain in an email said the decision to increase the stock allocation in the target retirement funds "was based on a number of factors, such as the diminishing role of pensions, increasing medical costs, and continued increases in life expectancy."
In short Vanguard decided to re-assess need, ability, and willingness to take risk associated with their assumed profile of investors.

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Target Retirement Funds Allocation

Post by YDNAL » Tue Jun 09, 2009 1:45 pm

dbr wrote:In short Vanguard decided to re-assess need, ability, and willingness to take risk associated with their assumed profile of investors.
But of course! :wink:

Target Retirement 2015 (Returns after taxes on distributions)
1 Year –25.81%
3 Year –6.73%
5 Year –1.77%
10 Year —
Since Inception –0.28%
(10/27/2003)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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Opponent Process
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Post by Opponent Process » Tue Jun 09, 2009 3:01 pm

dbr wrote:I don't understand why anyone would think that a fund with an arbitrary "target date" on it would be expected to give the preferred AA evolution for any particular individual based on expected date of retirement.
this is how they are marketed, and they will always be considered too aggressive during bear markets and too conservative during bull markets.

reminds me of a survey taken in the 90s, which showed that people expected the market to return low double digits (10-15%), but for their own personal portfolios to return 15-20%.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37

Triple digit golfer
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Post by Triple digit golfer » Wed Jun 10, 2009 11:19 pm

They may be just right if your allocation happens to match theirs, but they are far too aggressive for the "average" investor...that being one who will panic after a rough couple weeks in which the market tanks 10%, or after a year in which the market drops 30%.

Average investor, I'd say, should be age in bonds, with the assumption of retirement at age 65.

2050 = 24% bonds
2020 = 54% bonds

Bottom line is that those who save 5% of their income aren't going to be able to retire with their same lifestyle, regardless of how aggressive their fund is.

I'm not so sure "target retirement" is a good name. How about "Ideal fund if you save 20% of your income" retirement funds instead?

peter71
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Post by peter71 » Wed Jun 10, 2009 11:33 pm

While there's a lot of fretting on here about investors not being able to handle TR funds in a bear market it looks to me like investor returns in both 2020 and 2040 (the first two I checked) BEAT the total returns for the fund in the past year, so while investor returns data are problematic I'd say this is pretty good early evidence that the funds are working.

http://quicktake.morningstar.com/FundNe ... mbol=VTWNX

http://quicktake.morningstar.com/FundNe ... mbol=VFORX

All best,
Pete

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joe8d
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Post by joe8d » Wed Jun 10, 2009 11:56 pm

I'm not so sure "target retirement" is a good name. How about "Ideal fund if you save 20% of your income" retirement funds instead?
Actually I feel that these funds should be more properly called "Glide Path Funds" to better reflect their purpose.One need to take in account the whole Glide Path when picking a point of entry (date on fund )and resulting changes in AA composition going forward.
All the Best, | Joe

Milo
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Post by Milo » Thu Jun 11, 2009 1:05 am

I voted that they are just right. My reasoning is this.....if you are in the TR 2050 fund with an allocation of 90/10, and are uncomfortable with that level of risk, you can always add a bond fund to it to adjust your allocation. If they started the TR 2050 fund at 80/20 or 70/30 you would not have the option of going to 90/10 by taking away bonds.

Or, as others have suggested, ignore the year and just pick a TR fund that more closely reflects your risk tolerance. Although, that messes with your glide path.

rec7
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Post by rec7 » Thu Jun 11, 2009 10:52 am

I voted great just go by allocation instead of date.

norm
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Post by norm » Thu Jun 11, 2009 11:25 am

I went by allocation when I chose Target Retirement Income. The AA is 30/70 (I am 70) and I supplemented it by buying Total Int'l Stock Index.

Topic Author
mikep
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Post by mikep » Thu Jun 11, 2009 12:04 pm

Thanks all for your responses. I should have put "based on date" in the poll though

erak
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Re: Target Retirement Funds Allocation

Post by erak » Thu Jun 11, 2009 3:37 pm

YDNAL wrote:
dbr wrote:In short Vanguard decided to re-assess need, ability, and willingness to take risk associated with their assumed profile of investors.
But of course! :wink:

Target Retirement 2015 (Returns after taxes on distributions)
1 Year –25.81%
3 Year –6.73%
5 Year –1.77%
10 Year —
Since Inception –0.28%
(10/27/2003)
So I assume that you are trying to suggest the approach has been too aggressive?

The last year, in which nearly everything fell substantially, caused this type of return or worse for anyone investing and not simply hording cash in MM's or CD's.

I am more aggressively inclined at this point, and lost quite a bit more than this last year as a result, as I'd expect. I'd say the TR2015 did what it was supposed to do- be less volatile than a more aggressively set fund or investor.

YDNAL
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Re: Target Retirement Funds Allocation

Post by YDNAL » Thu Jun 11, 2009 4:11 pm

erak wrote:
YDNAL wrote:
dbr wrote:In short Vanguard decided to re-assess need, ability, and willingness to take risk associated with their assumed profile of investors.
But of course! :wink:

Target Retirement 2015 (Returns after taxes on distributions)
1 Year –25.81%
3 Year –6.73%
5 Year –1.77%
10 Year —
Since Inception –0.28%
(10/27/2003)
So I assume that you are trying to suggest the approach has been too aggressive?

The last year, in which nearly everything fell substantially, caused this type of return or worse for anyone investing and not simply hording cash in MM's or CD's.
erak,

Read the post in its entirety - not just what I said but the quote I responded-to.

TR2015 is (was) invested 62/38 Stocks/Bonds and only 6 years away from target date. So, assume retirement at 65yo which means a 58yo in 2008 is invested with 38% bonds. If you assume retirement pre-65, then it gets worse. I guess Vanguard's "assumed profile of investors" is a little off by my estimation! :)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

Milo
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Re: Target Retirement Funds Allocation

Post by Milo » Thu Jun 11, 2009 7:26 pm

YDNAL wrote: TR2015 is (was) invested 62/38 Stocks/Bonds and only 6 years away from target date. So, assume retirement at 65yo which means a 58yo in 2008 is invested with 38% bonds. If you assume retirement pre-65, then it gets worse. I guess Vanguard's "assumed profile of investors" is a little off by my estimation! :)

The target year on the Target Date Retirement Funds is actually the midpoint of a five year range. So someone in the TR2015 fund could be looking to retire somewhere between 2013 and 2017. Assuming a retirement age of 65, the investor in this particular fund could be anywhere from 56 to 60 in 2008. Someone looking to retire pre-65 would probably be in a different target date fund, like TR2010 maybe.

In Rick Ferri's "All About Asset Allocation", he displays a chart of "Preretirees and Active Retiree Allocation Range". In this chart he defines an "Aggressive" allocation as being 60% Equities plus REITs, 38% Fixed Income, 2% Cash. He defines a "Moderate" allocation as 50%/48%/2%. It seems to me that TR2015 is on a glide path to fall right between Rick's definition of "Aggressive" and "Moderate", perhaps shaded a touch towards aggressive, but not outrageously so.

The target date retirement funds are attempting to be a one-size-fits-all retirement fund in one package. As previous discussions of these funds have shown, can't be done. I think if someone, age 58, were feeling like TR2015 was a little risky for them, then hopefully they would have been at this long enough to know to supplement with a fixed income fund until they felt more comfortable with their allocation.

Respectfully,

Milo

maxwellthedog
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Post by maxwellthedog » Sat Jun 13, 2009 11:31 am

I voted too aggressive. And unfortunately, I would bet that one reason Vanguard made their funds more aggressive was because as the market rose through 2006, their funds lagged and investors were less interested. Now that the markets have been sucking wind for two years, everyone feels like they are too aggressive.

At the end of the day, I do believe Vanguard wants to do what is best for their customers. But if they design a fund and nobody buys it, it does not do much good. They are somewhat forced to follow the crowd in this case. And the crowd is highly influenced by whatever have happened over the last 12 months. So it goes.

As I have posted in other places, I think time to retirement is only one of the inputs needed for asset allocation plan. Another important factor is how much money you have (in terms of months or years of living expenses). It could be perfectly rational for a 25 year old to have a high allocation to bonds if they are just starting to save, they have unstable income, and want to build more reserves before venturing into the stock market. Conversely, it could be very reasonable for a 70 year old person to be 70% allocated to equities if she expected that 70% to be passed on to children, and the remaining 30% in cash and bonds was enough to cover all living expenses for 30 or more years.

In general, though, I think any allocation to equities over 70% or so, no matter how much money you have, is taking too much risk. It leaves the investor too vulnerable to the vagaries of the market. Life seldom plays out like we expect, and since we get only one go at it, a little prudence is worthwhile.

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