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Do Vanguard Target Retirement funds need to be "juiced up"?
Old 02-10-2008, 11:01 AM   #1
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Do Vanguard Target Retirement funds need to be "juiced up"?

Hi all,
In this article, William Bernstein states that Vanguard Target Retirement funds could/should be juiced up with the addition of small value, large value, and REIT index funds (he does not give specific percentages):
Holy Grail

I have about 30 years until "normal" retirement age (65) although hope to FIRE, and have 1/2 my stash invested in Vanguard Target Retirement 2035 which has the following holdings as of 12/31/07:

71.9% Total Stock Market Index
10.1% Total Bond Market Index
10.0% European Stock Index
4.40% Pacific Stock Index
3.60% Emerging Markets Stock Index

Questions:
1) Do you think Vanguard Target Retirement Funds need to be "juiced up" with additional asset classes or tilts, or are they "perfect" as is (i.e. don't mess with the recipie)?

2) If you're in the "juicer" camp, say you had $200,000 in Vanguard Target Retirement 2035, what other asset classes/tilts would you juice it with and why, and how much would you put in each?

I like the auto-balancing balanced-index approach, but wonder if the Vanguard TR funds are missing any important ingredients.

Very interested in your thoughts and opinions on this. Thanks.

- Dude
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Old 02-10-2008, 12:14 PM   #2
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I think TR funds are a great option for those that do not want to deal with the interplay of different asset classes... but they may be lacking in some areas. The problem is, its impossible to know in advance what that ideal mix would be.. but if we are to rely somewhat on history to guide us then TR funds may suffer from:

1) Exposure to TIPS
2) Underallocation to foreign markets
3) Underallocation to emerging markets
4) No separate REIT exposure (REITS compose ~2.5% of TSM, though).

I feel most comfortable with a foreign allocation 30-40% of equities. This is based on historical correlations that show a reduction of risk and enhanced returns when coupled with domestic assets. I can't recall where I read it, but if you are at 10% foreign, you have a 98% chance of improvement, and if 20% foreign, you have a 90% chance of enhancing returns and lowering risk by increasing your foreign holdings. Of course, this benefit diminishes as the foreign allocation increases.

To think of it in another light, US accounts for ~45% of world output and foreign 55%. This data may be old.. its probably lower than that now.

I like a 10% separate REIT allocation, split 5/5 domestic/foreign. A lot of controversy here, but REITs tend to behave so differently from other equities as to consider it its own asset class.

I'm debating a separate commodity holding. Commodities have a negative correlation to both stocks and bonds, so they tend to prop up your portfolio at the worst of times. Downside here is they are hard to get access to - you'd probably have to buy ETFs unless you can get at the PIMCO commodity fund.

Besides all that, I am a proponent of tilting the portfolio to small and value, value being more important that small.

Finally, on the fixed side, I avoid TBM. I'm of the school of thought that for an accumulating investor, bonds are for portfolio stability. To put another way, I'm 80/20 stocks/bonds. My bonds are 50/50 intermediate treasuries and TIPS - I feel that by choosing the safest bonds I can take more risk on the equity side WITHOUT having to increase my overall equity percentage.

Bottom line? I enjoy the subject, and for me its not onerous to deal with multiple holdings because I'm convinced of the possible benefits. I also acknowledge that my contribution rate is magnitudes of times more important that my sub-asset class holdings (dont miss the forest for the trees!).

I'll link to a FundAdvice article that explains some of why I do what I do. You can decide for yourself.
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Old 02-10-2008, 12:27 PM   #3
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In order for these fund-of-funds to appeal to the masses that they are developed for, they need to be as simple as possible. While TIPS, REIT and others added to the mix may increase diversification elements, they may scare away the clients that they are reaching out for. Of course, one can always S/D it up by adding TIPS, REIT etc to the TR 2035 for those who feel a need for excitement.
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Old 02-10-2008, 01:50 PM   #4
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I would include all the major asset classes and divide them equally.

80/20 (equity/fixed income)
7.27% Vanguard 500 Index (VFINX)
7.27% Vanguard Value Index (VIVAX)
7.27% Vanguard Small Cap Index (NAESX)
7.27% Vanguard Small Cap Value Index (VISVX)
7.27% Vanguard Developed Markets Index Fund (VDMIX)
7.27% Vanguard Emerging Market Index (VEIEX)
7.27% Vanguard International Value (VTRIX)
7.27% Vanguard International Explorer Fund (VINEX)
7.27% Vanguard REIT Index (VGSIX)
7.27% Vanguard Precious Metals (VGPMX)
7.27% Vanguard Energy Fund (VGENX)
10% Vanguard Total Bond Market
10% Vanguard Inflation-Protected Securities Fund (VIPSX)

60/40 portfolio
5.45% Vanguard 500 Index (VFINX)
5.45% Vanguard Value Index (VIVAX)
5.45% Vanguard Small Cap Index (NAESX)
5.45% Vanguard Small Cap Value Index (VISVX)
5.45% Vanguard Developed Markets Index Fund (VDMIX)
5.45% Vanguard Emerging Market Index (VEIEX)
5.45% Vanguard International Value (VTRIX)
5.45% Vanguard International Explorer Fund (VINEX)
5.45% Vanguard REIT Index (VGSIX)
5.45% Vanguard Precious Metals (VGPMX)
5.45% Vanguard Energy Fund (VGENX)
20% Vanguard Total Bond Market
20% Vanguard Inflation-Protected Securities Fund (VIPSX)
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Old 02-10-2008, 07:32 PM   #5
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It ends up being quite a hassle managing a portfolio split among many asset classes. If you can figure out something simple like a target fund plus one more fund that adds a high performing (yet volatile) asset class that you feel is underrepresented - such as small value, for example, your investing life will be much simpler.

The more you try to "enhance" the more you have to tinker, and the less likely you'll stick with a simple investing approach. Tinkering can get out of control quickly.

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Old 02-10-2008, 08:16 PM   #6
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I'm waiting for a few years, I think the jury is still out. A good balanced fund could get you there with a lot less volatility IMHO............
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Old 02-10-2008, 08:34 PM   #7
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Absolutely no - hell no even (with emphasis ) - next thing you know they will be calling a Ford a Chevy.

They need to be made simpler if anything - combine the foreign into one - and cut the turnover even more. Let the small grow big, the big fade into dust, sectors/industries/countries rise and fall - all within broad cap weighted indices - the fewer the better.

why. why if we wanted stinking slice and dice - we could well just - Psssst Wellesley or something.

Bernstein's a nice guy - he should go off and write another Birth of Plenty or something.

heh heh heh - of course I'm trying not read books anymore.

One all world cap weighted stock/fixed index fund - now there's the ticket. Age adjusted of course!
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Old 02-10-2008, 08:46 PM   #8
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I like the way you think, unclemick.
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Old 02-10-2008, 09:06 PM   #9
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Quote:
Originally Posted by FinanceDude View Post
I'm waiting for a few years, I think the jury is still out. A good balanced fund could get you there with a lot less volatility IMHO............
I'm confused:confused:.....I thought that Vanguard Target Retirement 2035 was a balanced fund because it holds both stocks and bonds, and it also re-balances itself automatically?

What did you have in mind when you said "a good balanced fund"? Could you name one or two that I could go look at for comparison?

I have access to Fidelity Balanced Fund (FBALX) and Oakmark Equity & Income CL I (OAKBX) in my 401(k), and my Roth IRA is at Vanguard.
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Old 02-10-2008, 09:25 PM   #10
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I just wanted to point out - as has been done many times before - that these balanced funds and TR funds are really not tax-efficient for taxable accounts because they have that bond fraction. Stick those bonds/TIPS/REITs in a tax-advantaged account.

Some would say that value funds also are not tax efficient. Anyways, as long as we must deal with the tax laws as written, we must also choose which asset classes are located in which accounts.
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Old 02-10-2008, 09:31 PM   #11
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Essentially all of my retirement funds are tax-deferred or tax-free, half in 401(k) and half in Roth IRAs, about $400k total.
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Old 02-10-2008, 10:02 PM   #12
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Quote:
Originally Posted by innova View Post
TR funds may suffer from:

1) Exposure to TIPS
2) Underallocation to foreign markets
3) Underallocation to emerging markets
4) No separate REIT exposure (REITS compose ~2.5% of TSM, though).

I[/url]
My major retirement fund is in a target retirement type (Fed Govt TSP) fund and I 'juice' it up by increasing my foreign stocks by 15%. I do not worry about TIPS as my pension should be COLAd and the TSP includes the G Fund which is sort of a stable value fund. I am not interested in adding REITs at this time but may if the asset class falls more. Not sure about emerging markets, I would like to hold more but its peak may have passed.
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Old 02-11-2008, 08:15 AM   #13
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Quote:
Originally Posted by Dude View Post
I'm confused:confused:.....I thought that Vanguard Target Retirement 2035 was a balanced fund because it holds both stocks and bonds, and it also re-balances itself automatically?

What did you have in mind when you said "a good balanced fund"? Could you name one or two that I could go look at for comparison?

I have access to Fidelity Balanced Fund (FBALX) and Oakmark Equity & Income CL I (OAKBX) in my 401(k), and my Roth IRA is at Vanguard.
FBALX is a pretty good fund. I thought that the premise of a "Target" fund is that as you get closer to retirement, it goes heavier into bonds. I prefer a balanced fund that has flexibility to got MORE into bonds or LESS into them as the portfolio manager sees fit, rather than one that automatically puts you more and more into fixed income as you get closer to the target............
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Old 02-11-2008, 09:08 AM   #14
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I like the way you think, unclemick.
Me too. Vanguard already dorked with the Target Retirement funds once. Don't do it again.

Disclosure: I don't even own any TR funds. It's just the principle of the thing.
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Old 02-11-2008, 09:37 AM   #15
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I hold a Vanguard TR fund as the core of my retirement portfolio, but I tweak it along the lines that have been mentioned in this thread:

- increased international equity exposure through Total Int'l Stock Market Index fund
- separate REIT investment in REIT Index fund

I like the forced asset allocation balancing of the TR funds, but at some point when I have more time and interest in managing the portfolio myself I may switch over to a custom mix of index funds instead of my current TR + tweaks. For now, it does the trick.
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Old 02-11-2008, 10:59 AM   #16
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FBALX is a pretty good fund. I thought that the premise of a "Target" fund is that as you get closer to retirement, it goes heavier into bonds. I prefer a balanced fund that has flexibility to got MORE into bonds or LESS into them as the portfolio manager sees fit, rather than one that automatically puts you more and more into fixed income as you get closer to the target............
Check out VG Asset Allocation Fund (VAAPX). My Roth is in this fund, performs a lot like the S&P500 with a bit more return & a bit less risk in the time I have owned it. Mostly I like the asset allocations the manager chooses. No perfect funds out there just ones that are comfortable. DW's primary IRA fund is Wellesley. For me, the key is to keep it simple and as automatic as possible.
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Old 02-11-2008, 09:18 PM   #17
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Thank you all for taking the time to reply. You are a very helpful bunch. Need to go off and ponder your suggestions for a while.....
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