Bogle on Target Date Funds

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Gekko
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Bogle on Target Date Funds

Post by Gekko » Thu Jul 16, 2009 7:15 am

i agree with him -

His take on some of the more recent innovations in the fund industry met with equal derision. Target date funds? “I’m increasingly nervous about them,” Bogle said, pointing to the fact that two people retiring in, say, 2015, might need very different investment strategies depending on their eligibility for Social Security, pension availability and many other factors. Plus, he said, he doesn’t trust the allocations. “If your fund has a 60% equity allocation and it’s not selling as well as your competitor’s with a 70% allocation, there’s tremendous pressure to increase your stock allocation to 70%. His final point: Most target date funds are simply too expensive.

http://www.smartmoney.com/investing/mut ... ighlights/

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Post by Cody » Thu Jul 16, 2009 7:32 am

Could we here from people who have Target Funds. Are you nervous about this Bogle quote? Are you going to change anything?
Cody

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Post by SpringMan » Thu Jul 16, 2009 7:39 am

I agree too. Has anybody observed that Vanguard's Target Date funds for 2050, 2045. 2040 and 2035 are virtually identical in their holdings? And the expense ratios are .19% for two and .18% for the other two. I would have expected the funds to get more conservative as the target date gets closer. This is not the case for these funds. Morningstar xray shows the same for all four. However, these funds have low expense ratios and are excellent choices for retirement accounts as long as one understands what they are getting. Never just go by the target date but rather go by the desired asset allocation.
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Re: Bogle on Target Date Funds

Post by Beagler » Thu Jul 16, 2009 7:59 am

Gekko wrote: “If your fund has a 60% equity allocation and it’s not selling as well as your competitor’s with a 70% allocation, there’s tremendous pressure to increase your stock allocation to 70%."
Nah, VG wouldn't do that, would they? Ooopps, they did it several years ago.

I sure wish Mr. Bogle were back at the helm.
Last edited by Beagler on Thu Jul 16, 2009 8:19 am, edited 1 time in total.
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Post by vanguardinvestor » Thu Jul 16, 2009 8:05 am

After questions answered by members of the forum and research of past posts. Also reading numerous prospectus on the funds that I was considering, I have purchased them. Members of the forum brought to my attention that you should pay more attention to your allocation rather that the years to projected retirement. The only difference ( correct me if I'm wrong ) in say the 2045 to the 2040 is that that the current allocation stays put several of years longer. If the fund would start adjustig to soon for you could exchange for a more allocation appropriate target fund. The allocation shifts appear to be slow and steady, not a big chunk from one year to the next. With Vanguard you are getting very low expenses, extreme diversification and the index advantage. You can also feel that Vanguard has done some reserach on these vehicles. I don't believe that you can say that about to many othe fund company's.

Chad

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Post by norm » Thu Jul 16, 2009 8:09 am

I own VG Target Date Income which has an expense of 0.19. Is that high?

The AA is 29/62/8. Since only 6% of the fund is international I bought some VG Intn'l Stock Index to increase that sector. I will also be buying some of the TIPS fund to increase that area. None of the Target funds satisfy everyone's desired AA 100% so it's up to the investor to buy funds to get there.

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Post by nisiprius » Thu Jul 16, 2009 9:04 am

"If your fund has a 60% equity allocation and it’s not selling as well as your competitor’s with a 70% allocation, there’s tremendous pressure to increase your stock allocation to 70%." I think that's an implied criticism of Vanguard. I suppose it is too much to expect him to criticize Vanguard by name, or to wish that he had said this back in 2006.

The proper thing for Vanguard to have done in 2006 would have been to create a second set of target-date funds with a different set of names--Vanguard Aggressive Target Date 2020, etc. rather than to change the asset allocation of funds people were already committed to.

Of course, that would have exposed the fiction there is some well-understood, expert consensus about how to "invest well for retirement" and would have confronted 401(k) participants with the reality that they are responsible for judging how much risk to take on--which is exactly why they should have done it.

Now, as for my own investments, I have been very slow to realize that the strange goulash of a portfolio I've assembled over the years--currently, very roughly,
20% stocks, split 75/25 domestic/international;
30% nominal bonds (mostly Total Bond Market);
40% individual TIPS;
10% cash

--is really within striking distance of Vanguard Target Retirement Income Fund, roughly,
30% stocks, 80/20 domestic/international;
45% nominal bonds (Total Bond Market);
20% TIPS;
5% cash.

Since I want to get my portfolio and accounts consolidated and simplified over the next five to ten years, I need to do some thinking about this! My individual TIPS are not a well-organized ladder, and I've thought I should replace them with a mutual fund just for simplicity, particularly in making small withdrawals.

The problem is that if I pick a blended fund, like Target Retirement Income, or even Balanced Index, and then hold other funds to adjust the asset allocation, I'm managing just about as many funds as if I just hold Total Stock, Total Bond, Inflation Protected Index, and Total International Index separately. The big simplification only comes if I give up salting and peppering to taste and just decide that VTINX is good enough all by itself. I don't think I'm really ready for that.
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Post by Mel Lindauer » Thu Jul 16, 2009 9:13 am

Couple of thoughts:

1. We've always tried to tell folks to ignore the dates and choose the TR fund that most closely matches their desired asset allocation.
2. For those who don't even know what asset allocation is (many/most participants in retirement plans that offer the TR funds?), I've suggested that they come out with three funds for each year (2040 Aggressive, 2040 Moderate and 2040 Conservative) and each of these fund's asset allocation would be different to more closely match the fund's name. And the 2040 Conservative may well have the same asset allocation as the 2030 Moderate, etc.). That would be a huge service to know-nothing investors.
Last edited by Mel Lindauer on Thu Jul 16, 2009 9:13 am, edited 1 time in total.
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Post by ObliviousInvestor » Thu Jul 16, 2009 9:13 am

I use Vanguard's 2050 target date fund. I'm young, and very comfortable with volatility, so the glide path very closely matches what I would create on my own.

My question, however, is why isn't there an automatic rebalancing option available from brokerage firms. Why do we need to rely on funds to do it?

Just as a very simple example: If I wanted a 50/50 split between Vanguard's Total Stock Market Index and Vanguard's Total Bond Market Index, why isn't there an option available to set up an account with that allocation, and have it rebalance at whatever frequency I choose, on whatever date I choose?

It doesn't seem like it would be any more complicated than the automatic buy and automatic sell programs that are already in place. What am I missing here?
Mel Lindauer wrote:Couple of thoughts:

2. For those who don't even know what asset allocation is (many/most participants in retirement plans that offer the TR funds?), I've suggested that they come out with three funds for each year (2040 Aggressive, 2040 Moderate and 2040 Conservative) and each of these fund's asset allocation would be different to more closely match the fund's name. And the 2040 Conservative may well have the same asset allocation as the 2030 Moderate, etc.). That would be a huge service to know-nothing investors.
I suggested the exact same thing on my blog a few months back. It seems to make so much sense, and it doesn't seem like it would be that hard to do, right?
Last edited by ObliviousInvestor on Thu Jul 16, 2009 9:16 am, edited 1 time in total.
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Post by medgar » Thu Jul 16, 2009 9:15 am

Recently I passed on the Target Retirement funds. I was becoming OCD trying to figure the allocation out and when they adjust etc.

If you have the funds, it is easier, quicker, cheaper and simplier to choose Total Stock Market, Total market ex US, and Total Bond fund. For better or worse I control my future not the marketing dept.

I really was intrigued with the Total World but wasn't comfortable with 60% international.

Medgar

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Post by Munir » Thu Jul 16, 2009 9:20 am

Agree with nisiprius. I would like the TR Income to be the sole holding in my IRA, but have found it difficult to manage RMDs from this sole fund, and have broken it up to its individual holdings. If I get the opportunity before "I assume room temperature", I might revert to it for the sake of simplicity for my spouse to manage.

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Re: Bogle on Target Date Funds

Post by sewall » Thu Jul 16, 2009 9:21 am

Gekko wrote:i agree with him -

His take on some of the more recent innovations in the fund industry met with equal derision. Target date funds? “I’m increasingly nervous about them,” Bogle said, pointing to the fact that two people retiring in, say, 2015, might need very different investment strategies depending on their eligibility for Social Security, pension availability and many other factors. Plus, he said, he doesn’t trust the allocations. “If your fund has a 60% equity allocation and it’s not selling as well as your competitor’s with a 70% allocation, there’s tremendous pressure to increase your stock allocation to 70%. His final point: Most target date funds are simply too expensive.

http://www.smartmoney.com/investing/mut ... ighlights/
I'm so glad to hear this kind of sensible talk about the meaningful differences in need for risk. It is consistent with my way of thinking about investment planning. It actually isn't terribly hard to be precise about ability and need for risk (the math and logic are simple) and there are tremendous, lifelong benefits in doing so.

Nevertheless, if one ignores the date on the target funds they can be nice ways to make investing convenient and simple for the large class of folks who will not do any more work than it takes to select such a fund. So, they have some benefits if used sensibly.
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Post by Mel Lindauer » Thu Jul 16, 2009 9:30 am

ObliviousInvestor wrote:I use Vanguard's 2050 target date fund. I'm young, and very comfortable with volatility, so the glide path very closely matches what I would create on my own.

My question, however, is why isn't there an automatic rebalancing option available from brokerage firms. Why do we need to rely on funds to do it?

Just as a very simple example: If I wanted a 50/50 split between Vanguard's Total Stock Market Index and Vanguard's Total Bond Market Index, why isn't there an option available to set up an account with that allocation, and have it rebalance at whatever frequency I choose, on whatever date I choose?

It doesn't seem like it would be any more complicated than the automatic buy and automatic sell programs that are already in place. What am I missing here?
Mel Lindauer wrote:Couple of thoughts:

2. For those who don't even know what asset allocation is (many/most participants in retirement plans that offer the TR funds?), I've suggested that they come out with three funds for each year (2040 Aggressive, 2040 Moderate and 2040 Conservative) and each of these fund's asset allocation would be different to more closely match the fund's name. And the 2040 Conservative may well have the same asset allocation as the 2030 Moderate, etc.). That would be a huge service to know-nothing investors.
I suggested the exact same thing on my blog a few months back. It seems to make so much sense, and it doesn't seem like it would be that hard to do, right?
I really don't think it would add any more work for Vanguard, since so many funds with different names would actually use the same exact asset allocation. Actually, they could almost be considered to be different classes of the same identical fund. For example, one identical fund might actually be 2030 Aggressive, 2040 Moderate and 2050 Conservative.
Best Regards - Mel | | Semper Fi

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Post by unclemick » Thu Jul 16, 2009 10:27 am

Age 65. Target 2015 - so I fibbed about my age. :lol: :lol: :lol:

Actually I picked to compensate for pension/SS income stream. By my admitedly aggresive calculation my 65/35 ballpark stock/bond becomes 35/65 - close to age in bonds guideline.

Tweaked to fit my retirement? - Guilty as charged.

heh heh heh - 8)

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a bad tool for retirement

Post by bobcat2 » Thu Jul 16, 2009 10:50 am

Target date funds? “I’m increasingly nervous about them,” Bogle said, pointing to the fact that two people retiring in, say, 2015, might need very different investment strategies depending on their eligibility for Social Security, pension availability and many other factors.
Yes, such as are you married, do you have children, does your spouse work, does your spouse have a pension, do you own your home, etc.?

Target retirement funds are a fundamentally flawed product that should never be the center piece of retirement planning. These funds have inherent design problems that go beyond simply being equity heavy at or near retirement. Merely changing the stock-bond mix to age in bonds will not make target retirement funds a good choice to be the focus of an individual's retirement portfolio. The over arching problem is that they are too simplistic in design to be the focus of a retirement portfolio. The only target they hit in the target year is the percentage allocation between stocks and bonds. Big deal! This is a trivial retirement target. Here are two major problems with target retirement funds.

1) Suppose a 50 year old worker with a 401k plan is 15 years from retirement with a 50/50 allocation in his TR fund. Each year between now and retirement the TR fund increases the bond allocation by 1%. Let’s say that the fund’s expected return and the worker’s current portfolio size and expected future savings get him to his target retirement portfolio size of $1.1 million in 15 years. He expects stocks to return 6% real and bonds to return 2% real. So in the first year for his retirement portfolio to be on track he expects the portfolio to return 4% real.

Instead it is a banner year for stocks and bonds and the first year real return of the portfolio is 18%. He now finds himself on a path that will bring him in well above his targeted retirement portfolio size. Why should his portfolio be taking on a lot of extra risk in order to meet his desired portfolio size, which can now be met with much lower downside risk? To meet the meaningful portfolio size retirement year target the bond allocation for next year should be increased by a lot more than 1%. In other words, to meet a meaningful retirement target, the stock-bond portfolio mix must be contingent on portfolio PERFORMANCE, as well as the passage of time. Taking how portfolio performance deviates from expected performance is ignored by the simplistic target retirement fund strategy that only takes into account the passage of time in adjusting the stock-bond mix.

2) Another problem with TR funds is that the ‘safe’ bond portion has no fixed maturity date, which means the safe part isn’t all that safe when you actually need it. So you could have a TR fund that is 70% bonds one year from retirement that could fall far short of your target portfolio size next year, because in that last year the stock portion of the fund falls 25% real, and the bond portion of the fund falls 8% real. To make the bond portion safe from interest rate risk in a target year, the bond portion must mature in that year. To make the bond portion also safe from the ravages of inflation the bonds must be inflation-indexed.

While mutual funds that increase the bond percentage in the stock-bond asset mix over time can serve as a one stop selection for the risky portion of the retirement portfolio, they will never be a good choice to be the focal point for the entire retirement portfolio.

So why do they remain a popular product heavily promoted by the mutual fund industry? Here is what Graham Cook has to say on that point.
Cook, president of Nanaimo, B. C.-based Composite Finance Inc., rejects the premise that somehow, at enormous cost to users, an inherently risky tool can safely do a job it can't actually perform. "They are a bad tool for retirement," he says of target-date funds, adding there already exists a simple proven alternative in inflation-linked bonds and annuities.
The trouble with these, Mr. Cook says, is that they are not profitable enough for the financial industry to sell.
Link:
http://www.financialpost.com/personal-f ... id=1756717


Here are some highlights from a recent column in the Washington Post by Bodie and Treussard on how the basics of retirement planning should be restructered away from focusing on simplistic and risky target fund like strategies.
We think that the investment companies that now hold much of the retirement savings of the next generation of retirees have not done an adequate job of providing safe investment options for these customers. ...

Instead of focusing on the probability of “success” in meeting some assumed target level of assets by an assumed target date, fiduciaries should be required to address the potential severity of a failure to meet a minimum standard of living in old age. The old adage should be applied: “Hope for the best, but prepare for the worst.” If adopted, this new standard of prudence would rule out the Department of Labor's current regulations regarding QDIAs (Qualified Default Investment Alternatives) for auto-enrollment retirement plans.

An investment approach more aligned with consumer protection is to supplement Social Security benefits with a base layer of safe assets that guarantee principal adjusted for inflation — TIPS bonds issued by the U.S. Treasury. With this solid foundation, consumers can participate in more speculative assets like stocks, junk bonds, etc....

After a safer default option is in place, new guidelines should be issued for educating the public about investing for retirement:

* First, do no harm! Do not advise consumers to rely heavily on portfolios of stocks and conventional bonds to protect their retirement income against inflation. Make them aware of the terrible experience of those who retired in 1973 with their assets invested mostly in stocks, bonds, or mutual funds composed primarily of these two asset classes....

* Safety first. Help consumers prepare for the most important risks they will face in retirement: longevity risk, market risk, health care costs, and inflation. Show consumers how to create a layer of secure lifetime retirement income with guaranteed inflation-protected income annuities. Help them to buy a diversified portfolio of such annuities at minimum cost. Warn them that stocks are especially risky for those who are approaching retirement or drawing down their assets in retirement.

* Long-term care insurance. Make consumers aware of what Medicare does and does not cover. Urge them to supplement Medicare with long-term care insurance.

* Advise (consumers) to wait until age 70 to start drawing Social Security benefits so as to increase their level of benefits.

* Home equity conversion. Make consumers aware of the possible ways to convert their home equity into cash through a reverse mortgage.
Link:
http://voices.washingtonpost.com/hearin ... s_def.html

Bob K
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Post by Jack » Thu Jul 16, 2009 11:30 am

They ain't perfect but they are an order of magnitude better than the typical dog's breakfast of a portfolio that most new investors bring to this forum -- thirty or more funds with a half dozen different small cap value and technology funds, mostly actively managed with ridiculous expense ratios.

The Target Retirement funds do a good job of replicating Taylor's favorite couch potato portfolio -- some domestic, some international and some bonds. That's all most people need.

I've criticized Vanguard before for succumbing to marketing pressures to produce more aggressive equity allocations and one can argue all day about whether a 40% or 50% allocation is better near retirement, but it won't make all that much difference in the long run compared to other uncontrollable factors.

I would guess that at least 80% of all investors would be better off in a Target Retirement fund even given the flaws. I believe they are an excellent investment vehicle for the vast majority of people who will never bother to learn about market portfolio theory, the risks of stocks and bonds, tax efficiency, etc. And they really shouldn't have to. There are more important things in life as Bill Schultheis points out. For those who like to obsess about the optimal slice and dice portfolio, it's a fine hobby, but most people have no interest in that.

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Post by LesterFreamon » Thu Jul 16, 2009 11:32 am

Having an imperfect, but simple, portfolio designed by Vanguard is probably better than what 75% of investors could do on their own.

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Post by rapscallion » Thu Jul 16, 2009 11:39 am

SpringMan wrote:Has anybody observed that Vanguard's Target Date funds for 2050, 2045. 2040 and 2035 are virtually identical in their holdings? And the expense ratios are .19% for two and .18% for the other two. I would have expected the funds to get more conservative as the target date gets closer.
The TR funds don't begin to get more conservative until you are within 25 years of retirement. All four funds have the same allocation today, but in the future they will not.

You can see a graph of this here:

https://personal.vanguard.com/us/funds/ ... rgetAnchor

Rap

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Post by Levett » Thu Jul 16, 2009 11:46 am

Hi Cody,

Although I've been quite critical of many facets of TR funds, I am comfortable with TR Income in my tax-deferred account, as I am with Vanguard Wellesley Income. I'm comfortable with the overall allocation in both funds, reinvest all dividends, and like the fact that one is broadly diverse and the other concentrated.

I wouldn't go near any other TR fund myself, but there are a couple of younger members in our family who are strictly hands-off (totally focused on their careers), in which case I've tried to match them with a TR fund that reflects their wishes.

I've gone to great pains to explain to them how they should understand the TR date and its respective allocation. They understand that as they approach retirement many years from now that they will have to change their focus and think, in more depth, about secure sources of retirement income. Not even the TR Income fund (despite its name) provides a secure, predictable retirement income stream. Bob U.
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Post by Mel Lindauer » Thu Jul 16, 2009 11:56 am

Jack wrote:They ain't perfect but they are an order of magnitude better than the typical dog's breakfast of a portfolio that most new investors bring to this forum -- thirty or more funds with a half dozen different small cap value and technology funds, mostly actively managed with ridiculous expense ratios.

The Target Retirement funds do a good job of replicating Taylor's favorite couch potato portfolio -- some domestic, some international and some bonds. That's all most people need.

I've criticized Vanguard before for succumbing to marketing pressures to produce more aggressive equity allocations and one can argue all day about whether a 40% or 50% allocation is better near retirement, but it won't make all that much difference in the long run compared to other uncontrollable factors.

I would guess that at least 80% of all investors would be better off in a Target Retirement fund even given the flaws. I believe they are an excellent investment vehicle for the vast majority of people who will never bother to learn about market portfolio theory, the risks of stocks and bonds, tax efficiency, etc. And they really shouldn't have to. There are more important things in life as Bill Schultheis points out. For those who like to obsess about the optimal slice and dice portfolio, it's a fine hobby, but most people have no interest in that.
Well said! Couldn't agree with you more.
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Post by Mel Lindauer » Thu Jul 16, 2009 11:58 am

LesterFreamon wrote:Having an imperfect, but simple, portfolio designed by Vanguard is probably better than what 75% of investors could do on their own.
That's so true and precisely why the funds are desirable.
Best Regards - Mel | | Semper Fi

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Post by bmb » Thu Jul 16, 2009 12:10 pm

Perhaps there are not enough target funds. I find that the current funds are too aggressive by at least 15% too much in equities, and every fund family uses about the same allocation, no doubt because they fear that others will outperform them in the short run.
So there should be two classes: One for aggressive investors, and another for traditional investors, which would use more bonds and TIPS - perhaps closer to age in fixed income. I think the latter would come closer to Mr. Bogle's philosophy.

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Post by Mel Lindauer » Thu Jul 16, 2009 12:19 pm

bmb wrote:Perhaps there are not enough target funds. I find that the current funds are too aggressive by at least 15% too much in equities, and every fund family uses about the same allocation, no doubt because they fear that others will outperform them in the short run.
So there should be two classes: One for aggressive investors, and another for traditional investors, which would use more bonds and TIPS - perhaps closer to age in fixed income. I think the latter would come closer to Mr. Bogle's philosophy.
Precisely what I suggested earlier in this thread (and on other threads):
2. For those who don't even know what asset allocation is (many/most participants in retirement plans that offer the TR funds?), I've suggested that they come out with three funds for each year (2040 Aggressive, 2040 Moderate and 2040 Conservative) and each of these fund's asset allocation would be different to more closely match the fund's name. And the 2040 Conservative may well have the same asset allocation as the 2030 Moderate, etc.). That would be a huge service to know-nothing investors.
Best Regards - Mel | | Semper Fi

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Re: Bogle on Target Date Funds

Post by thepommel » Thu Jul 16, 2009 12:21 pm

Gekko wrote:“If your fund has a 60% equity allocation and it’s not selling as well as your competitor’s with a 70% allocation, there’s tremendous pressure to increase your stock allocation to 70%."

http://www.smartmoney.com/investing/mut ... ighlights/
Well, I see this point, but I kind of don't either. If you're a participant in your company's 401(K) plan, typically the TR funds are only from one fund family anyway. So, if I log into a Fido 401(K) plan and only see Fido Freedom Funds, I doubt the typical unsophisticated investor would compare Fido against TRP or VG.... s/he doesn't have a choice.

On the other side of the coin, I guess your company's HR may have already made that comparison b/t Fido, TRP and VG and that is why they chose that fund family for the 401(K) in the first place? The only thing is that this rubs against the grain of my experience... the HR appartaus and/or the investment committee could care less about such things. They care about two things (1) expense to the corporation for administering the plan and (2) the level of executive participation and/or other perks.

I can see where individual investors in an IRA would experience that choice and have that "pressure", but I thought TR funds typically went to market as part of 401(K) plans, no?

Regards,

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Post by Adrian Nenu » Thu Jul 16, 2009 12:39 pm

The TR funds should have had a 50% equity cap. The most aggressive TR fund would have 50% in equity and the rest gradually declining percentages.

The TR designers fell into the same trap novice investors did - they took on too much risk. Buy & hold only works with conservative asset allocations because stock returns (and losses) are so volatile.

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Post by Trev H » Thu Jul 16, 2009 12:44 pm

ObliviousInvestor said...

==
Just as a very simple example: If I wanted a 50/50 split between Vanguard's Total Stock Market Index and Vanguard's Total Bond Market Index, why isn't there an option available to set up an account with that allocation, and have it rebalance at whatever frequency I choose, on whatever date I choose?
==

I have mentioned the same before a few times.

If they added such a feature, then we could all build our own TR Fund with the exact allocations we wanted and set it on auto pilot.

I would add to your suggestion that they also include the ability for the individual to specify their own glide path (decreasing equity, increasing bonds, as X%, at X Frequency).

For those with IRA/Roth accounts, that would be nice.

Could not use in taxable location, would want the rebalancing there to happen with contributions or withdrawals or re-directing fund distributions, etc.

Most company retirement plans have such a feature (mine does) and I use it. Contributions come out of my check and are auto invested (like I specified), and the portfolio also auto-rebalances (yearly - my choice) and on the specific date I selected.

It would be nice if Vanguard added such a feature.

==

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Post by Beagler » Thu Jul 16, 2009 12:49 pm

Trev, interestingly the VG variable annuities have such a feature.
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Post by ObliviousInvestor » Thu Jul 16, 2009 12:50 pm

Trev H wrote: I would add to your suggestion that they also include the ability for the individual to specify their own glide path (decreasing equity, increasing bonds, as X%, at X Frequency).
Sign me up.

Also, good point about tax ramifications of rebalancing. Definitely makes sense to limit it to retirement accounts.
Mike Piper, author/blogger

thepommel
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Post by thepommel » Thu Jul 16, 2009 1:02 pm

Trev H wrote:ObliviousInvestor said...

==
Just as a very simple example: If I wanted a 50/50 split between Vanguard's Total Stock Market Index and Vanguard's Total Bond Market Index, why isn't there an option available to set up an account with that allocation, and have it rebalance at whatever frequency I choose, on whatever date I choose?
==

I have mentioned the same before a few times.

If they added such a feature, then we could all build our own TR Fund with the exact allocations we wanted and set it on auto pilot.

I would add to your suggestion that they also include the ability for the individual to specify their own glide path (decreasing equity, increasing bonds, as X%, at X Frequency).

For those with IRA/Roth accounts, that would be nice.

Could not use in taxable location, would want the rebalancing there to happen with contributions or withdrawals or re-directing fund distributions, etc.

Most company retirement plans have such a feature (mine does) and I use it. Contributions come out of my check and are auto invested (like I specified), and the portfolio also auto-rebalances (yearly - my choice) and on the specific date I selected.

It would be nice if Vanguard added such a feature.

==
Yep, I believe TRP has that... I would love VG to implement such a tool as well.

Regards,

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Post by Gekko » Thu Jul 16, 2009 3:23 pm

how about a universal time horizon graded sliding scale something like this -

Target Horizon Years . Equities % . Bonds+Cash %
50 . 100 . 0
45 . 90 . 10
40 . 80 . 20
35 . 70 . 30
30 . 60 . 40
25 . 50 . 50
20 . 40 . 60
15 . 30 . 70
10 . 20 . 80
5 . 10 . 90
0 . 0 . 100

Formula: Target Horizon Years x 2 = Equity %

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Post by KyleAAA » Thu Jul 16, 2009 3:49 pm

ObliviousInvestor wrote: My question, however, is why isn't there an automatic rebalancing option available from brokerage firms. Why do we need to rely on funds to do it?
I've been wondering this myself. Many 401k plans do this.

Fancy running into you here.

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Post by Opponent Process » Thu Jul 16, 2009 3:50 pm

Mel et al.,

although I strongly agree with the notion, the problem with the Aggressive, Moderate, Conservative (AMC) TR fund idea as a solution is that AMC funds already exist. along with balanced funds, etc...peoples' real problem is that they have no idea what A vs. M vs. C means, particularly with regard to the need to balance short- vs. long-term equity risks in retirement.

what we all seem to agree on is that TR funds in their current state can lend a dangerous false sense of security to retirees. I'm guessing there'll never be a single fund/formula that wouldn't tend to do this. no magic bullet. the prospects are even more dim once you consider bobcat's argument that any effective retirement portfolio will always require a certain amount of check-up and "intelligent steering" at constant intervals.
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Post by Munir » Thu Jul 16, 2009 4:06 pm

Opponent Process wrote:Mel et al.,

particularly with regard to the need to balance short- vs. long-term equity risks in retirement.

What are long term equity risks in retirement?

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Post by Mel Lindauer » Thu Jul 16, 2009 4:26 pm

Opponent Process wrote:Mel et al.,

although I strongly agree with the notion, the problem with the Aggressive, Moderate, Conservative (AMC) TR fund idea as a solution is that AMC funds already exist. along with balanced funds, etc...peoples' real problem is that they have no idea what A vs. M vs. C means, particularly with regard to the need to balance short- vs. long-term equity risks in retirement.

what we all seem to agree on is that TR funds in their current state can lend a dangerous false sense of security to retirees. I'm guessing there'll never be a single fund/formula that wouldn't tend to do this. no magic bullet. the prospects are even more dim once you consider bobcat's argument that any effective retirement portfolio will always require a certain amount of check-up and "intelligent steering" at constant intervals.
While the AMC TR fund choices might not be the cure-all for everyone, they certainly would help investors make the more appropriate choice. Regardless of investment knowledge, some folks consider themselves "aggressive", some "moderate" and still others "conservative", so it would help keep lots of folks out of the "aggressive" category, whereas all of them now get thrown into that category.
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Post by dbr » Thu Jul 16, 2009 4:26 pm

Munir wrote:
Opponent Process wrote:Mel et al.,

particularly with regard to the need to balance short- vs. long-term equity risks in retirement.

What are long term equity risks in retirement?
I don't know what that sentence means either, but . . .

as retirement progresses there is less and less long term risk. An interesting point is that as equities are actually riskier in the long term than in the short term, it might not be worrisome to have more equities late in retirement than early.

I would not fly with this hypothesis without careful consideration of the actual mechanics.

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Post by Opponent Process » Thu Jul 16, 2009 4:32 pm

dbr wrote:as retirement progresses there is less and less long term risk.
and more risk of running out of money. this risk is dampened by owning equities. I probably should have said "short- vs long-term risks related to equity exposure".
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Post by Levett » Thu Jul 16, 2009 4:48 pm

Opponent Process wrote:
dbr wrote:as retirement progresses there is less and less long term risk.
and more risk of running out of money. this risk is dampened by owning equities. I probably should have said "short- vs long-term risks related to equity exposure".
There is less and less long term risk because the clock is running down. As you age (as a retiree) you obviously don't have to provide for a longer time period. Your time horizon is winding down--says this retiree.

And to the assertion that risk is dampened by owning equities, I say: prove it going forward. If there is no need to take risk--however defined--it's foolish to take on more risk (however construed), all the more so if you take on equity risk believing it magically dampens risk. Bob U.
There are some things that count that can't be counted, and some things that can be counted that don't count.

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Post by Opponent Process » Thu Jul 16, 2009 5:08 pm

bob u. wrote:If there is no need to take risk--however defined--it's foolish to take on more risk (however construed), all the more so if you take on equity risk believing it magically dampens risk. Bob U.
true Bob, no one is recommending anyone take unnecessary risk. it's just that many, many people are forced to maintain a certain level of equity risk in retirement. if you don't have to, congratulations! but you can't project this privilege onto everyone, though, or probably even most people.
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Post by bmb » Thu Jul 16, 2009 5:15 pm

Ooops, Mel, sorry I missed it, you beat me to it.

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Post by Triple digit golfer » Thu Jul 16, 2009 6:34 pm

My comments:

How could Bogle say that TR funds are expensive? A 0.19% expense ratio is expensive? He can't be saying that, so what does he mean?

It would absolutelyinfuriateme if a fund I chose for simplicity for the long-term changed allocations. If I want 80/20 and I look at their "glidepath" and see that I'm satisfied with it, then they change it to 90/10 and the whole glidepath changes and the allocation is totally different, basically my whole plan is shot. And I would not be happy with that. I'd be pissed enough to switch fund companies, just on the principle of the matter.

Why do TR funds wait so long to switch? It kind of defeats the purpose of "don't pay attention to the date, pick one that matches your allocation." In that case, if my allocation is 90/10, I could pick basically any from TR 2050 down to 2035 or 2030. And in five years, when my desired allocation is changed, some of them may have changed, and some may have not. I just don't see how they could justify a 25 year-old having the same allocation as a 40 year-old. Why not make them all age in bonds, or age - 10 in bonds, or whatever...but increase bonds each year? Not wait 15 or 20 years.

I think TR funds are dangerous to uninformed or ignorant investors.

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Post by Triple digit golfer » Thu Jul 16, 2009 6:40 pm

Bob, I agree. People will point to efficient frontier charts and say that some stocks dampens risk. That's not true. It dampens volatility, or has in the past. Big difference. I don't believe you could lower risk of losing money by trading a low-risk investment for a high-risk investment. It doesn't make sense. 100% bonds will always be less risky than 90% bonds and 10% stocks. Maybe more volatile, depending on correlations going forward, but certainly less risky.

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Post by Munir » Thu Jul 16, 2009 6:54 pm

Hi Opponent Process:

I don't understand what you mean by short term and long term risks of equities. You seem to imply that there is less risk long term with equities. To me, there is risk with equites both long term and short term. How can there be less risk long term?

You also say there is less risk of running out of money long term if you have equities. Don't you think there is just as much risk of running out of money with equities as with fixed income assets? What is the difference between the two?

I understand and agree with bob u's explanation.

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Post by Beagler » Thu Jul 16, 2009 7:04 pm

"Bodie sagely points out that stocks do indeed become more risky with time, the proof of the pudding being that equity puts become more expensive with maturity, and not the other way around."

http://tinyurl.com/5w9jk2
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TARGET FUNDS

Post by STEVE21 » Thu Jul 16, 2009 7:44 pm

:shock: Are target funds better in a roth ira funded monthly or a rollover ira ?

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Re: TARGET FUNDS

Post by Taylor Larimore » Thu Jul 16, 2009 7:54 pm

STEVE21 wrote::shock: Are target funds better in a roth ira funded monthly or a rollover ira ?
Hi Steve:

Welcome to the Bogleheads Forum!

Target funds are suitable for any type IRA. They may not be suitable if you also have a taxable account. Target funds are generally not suited for taxable accounts because they are tax-inefficient.
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by STEVE21 » Thu Jul 16, 2009 8:10 pm

Thanks Taylor,
1st time on this site. very excited to
learn. i am a novice,but i just started reading 'The bogleheads guide to investing'. long live the bogleheads!

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Post by rapscallion » Thu Jul 16, 2009 8:56 pm

Triple digit golfer wrote:How could Bogle say that TR funds are expensive? A 0.19% expense ratio is expensive? He can't be saying that, so what does he mean?
Most mutual fund companies offer some sort of target retirement funds. I don't think Mr. Bogle was speaking specifically of Vanguard's funds when he said that many are too expensive.

Rap

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Post by redrock » Thu Jul 16, 2009 8:59 pm

Target Date Retirement Funds are probably better than most "ordinary"investors can put together themselves but confusion may arise when you bring up the TD Income Fund on the Vanguard site-touted for folks in retirement-and Vanguard also mentions the Managed Payout Funds. These funds have a much more risky equity allocation than the TD Income and seem to be looked at with a jaundiced eye by most on this forum. Even some of the more sophisticated posters on this forum have trouble understanding the Payout funds let alone much of the investing public who don't have any clue about funds. Is this just a marketing ploy? At least Vanguard has tweaked their Target Date Fund continuum to include the TD Income fund again. When the MP funds first came out, the TD Income fund fell off the radar for folks in retirement.

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Post by wander » Thu Jul 16, 2009 9:04 pm

I am using Price Target 2040. I am quite happy with it. Its YTD is 15.34 while VG-2040 is 8.06.

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Post by johnjtaylorus » Thu Jul 16, 2009 9:22 pm

Given longevity risk and inflation risk, many people will need a significant equity stake to fund a retirement 3 or 4 decades in length.

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