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Question re funds for new IRA
Old 03-13-2012, 11:53 AM   #1
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Question re funds for new IRA

I apologize if this thread is redundant. A search didn't reveal any discussion of these specific funds since 2006.

I'm planning to retire in 25 years. My husband and I have little saved so far. I was going to go with Fidelity Freedom 2040 but then saw an old thread here commenting on the much lower expense ration of the Fidelity Spartan Index Fund, which I also see outperformed the Freedom 2040 over the last 10 years.

The Fidelity rep recommended Freedom 2040. I'm kinda at others' mercy b/c I know so little about money management I can have no valuable opinions That's why I'm here!

What would you recommend? Do you think the Freedom 2040 is likely to outperform the Spartan Index Fund over a longer horizon (25 years)? Are they both good choices? Any help is appreciated!!

Thanks!
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Old 03-13-2012, 12:03 PM   #2
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There are different factors involved in the relative performance of FFFFX and the Spartan index fund. For one, obviously, the Spartan fund is basically 100% U.S. equities whereas FFFFX is about 82% equities or all kinds. In a mostly strong market for US stocks since the early 2009 lows, one would expect a fund with a higher concentration of US equities to outperform.

But perhaps the main reason for the recent lagging of FFFFX isn't even the higher expense ratio or the lower allocation to equities in a mostly up market for domestic equities -- it's that international stocks have been a major drag for the last couple years; FFFFX has 21% in international equities and the Spartan S&P index has none. The lousy market for international equities (especially in Europe) has effectively depressed the returns of all "lifecycle" funds compared to pure domestic equity plays since lifecycle funds pretty much always maintain an allocation to foreign stocks.

So to me, it's less about the difference in performance in the last several years, and more about which meets your objectives. If you are comfortable being 100% in U.S. large cap equities and you have a cast-iron stomach for market risk, certainly an S&P index fund would be fine, especially with 25 years to go before retirement. But if you want a more diversified portfolio -- with some bonds and international equities -- and you want an easy "set and forget" approach, the lifecycle fund might be a better choice.

You will find, though, that most of the folks here are more "hands on" investors and more actively manage their own asset allocation rather than rely on a lifecycle fund manager to do this. But the concept of the lifecycle fund is little different than what many of us do here: maintain a particular asset allocation appropriate for our own situation, often gradually becoming a bit more conservative over time. And there's nothing wrong with letting fund managers manage the allocation if you have no desire to do so yourself (again, that's not most of the people on this board, but different strokes and all).
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Old 03-13-2012, 12:37 PM   #3
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Yes to all Ziggy said.
If I were going to pick just one fund and forget about it for the next 25 years, between these two funds I'd pick FFFFX because it does have the foreign stocks in it.

If you've got access to other fund families and you still want a simple option that has US stocks, foreign stocks, bonds, etc all wrapped up in a single fund, I'd choose Vanguard's Target Retirement 2030 fund instead of Fidelity FFFFX. They have a similar mix of US stocks, foreign stocks, and bonds, but the Fidelity fund will charge you .78% in expenses every year while the Vanguard fund charges just .18% per year. As a result, you can expect to earn .60% more each year in the Vanguard fund--that's a notable difference over a 25 year span, and you get it without adding any extra risk. (If you have $10K in the account, the difference in expenses add up to a few thousand dollars at the end of 25 years). The Fidelity fund is still a good choice, but I'd go with Vanguard and their lower costs. It all adds up.

In time, if you decide that you want to learn more about investing, you may decide to tailor your asset allocation (how much money in US stocks, foreign stocks, etc) to suit your needs. As Ziggy noted, that's what most folks on this board do. But if you stick with any of these "set it and forget it" funds you'll be way ahead of the vast majority of "active" investors over the long haul. Just keep adding money regularly, that's the key.
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Old 03-13-2012, 12:44 PM   #4
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Thanks. I have a Roth IRA with Vanguard Target 2035 (with only about 15K in it, haven't been able to add to it for awhile b/c of the income cap, and when I WAS earning that little, I couldn't contribute much!). My hubby and I thought maybe it'd be a good idea to open the next one with a different company. But just glancing at Morningstar they too rate Vanguard higher, and it's cheaper, so maybe I should stick with them.
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Old 03-13-2012, 12:52 PM   #5
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Quote:
Originally Posted by Rupee View Post
Thanks. I have a Roth IRA with Vanguard Target 2035 (with only about 15K in it, haven't been able to add to it for awhile b/c of the income cap, and when I WAS earning that little, I couldn't contribute much!). My hubby and I thought maybe it'd be a good idea to open the next one with a different company. But just glancing at Morningstar they too rate Vanguard higher, and it's cheaper, so maybe I should stick with them.
One thing you will find out about this place: You will never be second-guessed by critics for going with Vanguard.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 03-13-2012, 01:08 PM   #6
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Quote:
Originally Posted by Rupee View Post
Thanks. I have a Roth IRA with Vanguard Target 2035 (with only about 15K in it, haven't been able to add to it for awhile b/c of the income cap, and when I WAS earning that little, I couldn't contribute much!). My hubby and I thought maybe it'd be a good idea to open the next one with a different company. But just glancing at Morningstar they too rate Vanguard higher, and it's cheaper, so maybe I should stick with them.
There's almost no advantage to deliberately setting up accounts with different mutual fund companies. All of the big companies are very safe and secure--your investment is really "secured" by the stocks within the mutual fund. You might also find that having everything at Vanguard is more convenient for you--one web site, one password, etc. In addition, when you have enough money at Vanguard you'll qualify for some extra benefits.
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