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Target date retirement funds
Old 12-30-2007, 12:33 AM   #1
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Target date retirement funds

I started my first Roth 401k this year and I invested in T.Rowe Prices's target date 2040 fund.

I'm really new to investing in mutual funds and didn't know what to invest in so I just put what I had into a target date fund.

I just wanted to see what others thought about the target date funds...if they are a good or bad idea..or if there is a better way I could have invested?

Thanks

Jim
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Old 12-30-2007, 01:09 AM   #2
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Originally Posted by summer2007 View Post
I started my first Roth 401k this year and I invested in T.Rowe Prices's target date 2040 fund.

I'm really new to investing in mutual funds and didn't know what to invest in so I just put what I had into a target date fund.

I just wanted to see what others thought about the target date funds...if they are a good or bad idea..or if there is a better way I could have invested?

Thanks

Jim
They are not only a good idea, they are better than a lot of ideas. A T Rowe Price Target Date Fund is a very good choice for a "newbie" investor, as well as for many experienced investors who like to keep things simple.

I do not know what you could have done better.
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Good Core Fund
Old 12-30-2007, 01:24 AM   #3
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Good Core Fund

The biggest fund I have is a target retirement type fund. It has a decent return and it has a much lower risk profile than most funds. And very low fees. Then you can add other funds later on like REITs, foreign funds,commodities and the like if you want. But a target retirement type fund is a great core fund.
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Old 12-30-2007, 02:59 AM   #4
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they are a better idea then most people can do on their own. the negative is they work much better with lump sum investing than doller cost averagng in over time . reason is the markets up 2/3 of the time while at the same time they are cutting stock exposure. this gives you a portfolio mix thats much more conservative than you may have wanted .

they also work best when you have no other funds to cloud the mix and get in the way of the strategy
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Old 12-30-2007, 08:29 AM   #5
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another negative i see is as the fund gets more and more bonds and fixed income denominated as time goes on the fees are very high. as an example fidelity fffax freedom income fund is the final level in the target series. fees are .55% on a mix thats 20% stock , 40% bonds and 40% money markets approx . while .55 on the equities is fair the .55 on money markets is huge
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Old 12-30-2007, 09:22 AM   #6
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another negative i see is as the fund gets more and more bonds and fixed income denominated as time goes on the fees are very high. as an example fidelity fffax freedom income fund is the final level in the target series. fees are .55% on a mix thats 20% stock , 40% bonds and 40% money markets approx . while .55 on the equities is fair the .55 on money markets is huge
Well maybe by then, the OP might be a little more experienced and want to manage it more himself. If not, paying .55 for someone else to manage his money might be well worth it to him.
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Old 12-30-2007, 09:36 AM   #7
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exactley, thats who these funds are best targeted for
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Old 12-30-2007, 10:19 AM   #8
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I just wanted to see what others thought about the target date funds...if they are a good or bad idea..or if there is a better way I could have invested?
You really can't go wrong with target funds. The two main downsides I've seen are:

1. In my 401K plan offerings, the target funds have a higher ER than I could achieve by slicing and dicing index funds to achieve a similar allocation; and

2. Some sophisticated investors prefer to weight some of their investments (such as a value, emerging markets, small cap, etc). You lose this ability if target funds are our only investments.

But for anyone relatively new to investing, I always suggest target funds until they (1) learn a lot more about investing and AA and (2) feel comfortable with their ability to pick and allocate funds.
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Old 12-30-2007, 11:42 AM   #9
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I have 2 T. Rowe-Price Target Retirement funds. My Roth IRA is the TRP Retirement 2020, and I have a Rollover IRA in the TRP Retirement 2030. I chose those because, as Ron Popeil says, "you can set it and forget it". Well, pretty much anyway. Like unclemick said in "An Honest Epitaph You Could Die With":

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Jan 2006 I switched to full autopilot - Target Retirement(auto rebalancing, sliding asset mix with age) with auto deduct to checking.
For my Roth & Rollover IRA's, I really like the "autopilot" aspect.

BTW....this week I'll be finishing up maxing out my Roth IRA for 2007......well, actually finished....FOREVER! For that, I'm sad AND happy. Sad, because with no more earned income I can't contribute anymore........and happy, because with no more earned income I can't contribute anymore! I'm much more happy being ER'd, than I was being a slave for 'earned income'.
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Old 12-30-2007, 01:44 PM   #10
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if they are a good or bad idea..or if there is a better way I could have invested?
As others have mentioned they can be good or bad, like anything else in the investing world.

Good~Already allocated into a relatively balanced fund, fund becomes more conservative as time goes by, fund costs relatively low, easy to become diversified.

Bad~May not be the proper AA for you, will fund adjust to what your needs change to, are fund costs really as low as possible.

I suggest that since this is in a tax deferred plan (401(K), that you enroll in it for now, but promise yourself to begin reading about investing and personal financial planning (there are many excellent books) so that you can efficiently evaluate on your own if this kind of fund is best for YOU in the long term.
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Old 12-30-2007, 06:40 PM   #11
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I have 20 percent in Vanguard's target 2010 fund (we have a much shorter horizon than the original poster--moved some assets into it I guess just because it was newly offered in our plan). Its one-year earnings right now are 3.6%, below all other of our funds, including money market (4.4) and bond fund (5.6), and several percentage points below the stock funds. I'm surprised it's not doing better but oh well. Vanguard's target fund for 2040 is showing 8.33 annual returns, by the way--don't know how the Vanguard targets' returns compare with T Rowe Price's. I know we won't keep the Vanguard 2010 when we pull the plug....

Totally agree with previous posters that you can learn a lot from these and other boards and then decide what's best for you. But CONGRATULATIONS on starting your first Roth 401K!!
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Old 12-30-2007, 07:25 PM   #12
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... Vanguard's target 2010 fund ... Its one-year earnings right now are 3.6% ...
You made me look. According to the Vanguard site:
Year to date (12/28/07) the fund is up 7.88%.
One year (11/30/07) the fund is up 8.65%.

I don't know which is right, but would like to know.

Dan
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Old 12-30-2007, 07:47 PM   #13
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Hmmm - I started learning making investments, studying, reading etc, 1966.

Forty years later I reached a conclusion - Jan 2006 - I bought Target Retirement 2015 - a lifecycle fund.

Oct 2006 I received a Curmudgeon certificate downloaded from this very forum.

I'm really tempted to say more but I won't.

heh heh heh - ok ok so I lied - don't read books! - There I said it!

"Do or do not. There is no try." - Yoda - 800 years is a pretty long ER.
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Old 12-30-2007, 07:50 PM   #14
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Never mind, I'm an idiot, and you're right--I used the Hewitt website provided for our company that shows my rate of return since 1/1/2007 for each investment, and we have earned 3.6 since investing in this fund in the spring and more in the fall. So mea culpa. I do see year to date through 12/28/2007 for this fund to be 7.88 on https://personal.vanguard.com/us/Fun...type=PIWANTTO1

Which makes a lot more sense considering the mix of holdings....

(insert embarrassed smiley here)....
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Old 12-30-2007, 08:24 PM   #15
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the negative is they work much better with lump sum investing than doller cost averagng in over time . reason is the markets up 2/3 of the time while at the same time they are cutting stock exposure. this gives you a portfolio mix thats much more conservative than you may have wanted .
These "target retirement" type funds (e.g. Vanguard, T Rowe Price, Fidelity, etc.) all follow a glide path that is described in the prospectus. The glide path describes what the stock/bond ratio will be at any time in the future until the "maturity" of the fund. You pick the glide path that you want at the outset. The funds automatically rebalance periodically (I assume at least anually or quarterly) to make sure that they do not stray from the glide path too far.

For these reasons, I do not get how you could end up with a mix that is much more conservative than desired, because for instance I know exactly what the stock/bond mix of say Target Retirement 2035 will be 10 years from now. What does dollar cost averaging versus lump sum have to do with anything? You have made this statement several times in the past, I'm a fairly smart guy (MSEE) but I tell ya I still don't see your point:confused: Are you saying that you should not shift more into bonds to reduce risk as you approach your retirement date? Maybe someone else can explain mathjak's point in real basic terms that I can understand?
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Old 12-30-2007, 08:35 PM   #16
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Hormones!



heh heh heh - do I get a gold star for my Curmudgeon Certificate?
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Old 12-31-2007, 03:55 AM   #17
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These "target retirement" type funds (e.g. Vanguard, T Rowe Price, Fidelity, etc.) all follow a glide path that is described in the prospectus. The glide path describes what the stock/bond ratio will be at any time in the future until the "maturity" of the fund. You pick the glide path that you want at the outset. The funds automatically rebalance periodically (I assume at least anually or quarterly) to make sure that they do not stray from the glide path too far.

For these reasons, I do not get how you could end up with a mix that is much more conservative than desired, because for instance I know exactly what the stock/bond mix of say Target Retirement 2035 will be 10 years from now. What does dollar cost averaging versus lump sum have to do with anything? You have made this statement several times in the past, I'm a fairly smart guy (MSEE) but I tell ya I still don't see your point:confused: Are you saying that you should not shift more into bonds to reduce risk as you approach your retirement date? Maybe someone else can explain mathjak's point in real basic terms that I can understand?


if you buy in ,in a lump sum with 1,000 bucks ,the share price is say 10.00 so you get 100 shares at say a starting mix of 90/10 stocks to bonds.

that now grows thru the years and 30 years later ends up eventually going down to a 20/80 mix all the while being cut from the origional 90/10 mix down to 20/80 bonds. thats how a target fund normally works.


same situation dollar cost averaging. you start with 10 bucks and buy 1 share with 100.oo a year going in every year . since historically over almost any long term time frame no matter what the events of the world ,67% of the time the markets are higher each year. your 100 bucks over time will be buying less than 1 share,getting lesser and lesser of a share as time marches on and the markets go higher and higher and your purchase price is 11 bucks, then 12 bucks then 13.00 etc. .

so while you may catch an occassional down year and actually buy more shares than the previous year odds are you will be buying less shares over time than each previous year. also thru the years the drops become less and less as the stock exposure becomes less and less which buys you less shares on the drops than in the early years.

at the end of 20 or 30 years you wil have much less accumulated shares than the amount of shares you would have had working for you for the same amount invested as a lump sum on day 1. so now you have less shares working for you as well as a mix thats cutting back on the stock allocations thru the years according to formula.


the end result is less bang for the same amount invested than you would in the lump sum scenerio.
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Old 12-31-2007, 04:15 AM   #18
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summer2007 - Good move. Those target funds are fine. Whether you chose to do what you did or some other broadly diversified strategy of stocks and bonds... you are on the right track. Just stick with it.

The target funds seem to be a bit lean in the international (developed and developing) market. That can be easily remedied by allocating some money to an international index fund.
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Old 12-31-2007, 07:25 AM   #19
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I have some target funds, (about 20%) and as others have said, it is a good place to start, and helps with rebalancing as we go forward.

Mathjak, that was a great explanation of your point, that I hadn't considered, and I may make take another look at the issue. For the OP, however, the target date is so far out, that I am not sure this is significant for the next few years, while she learns about other investment options. Certainly, better to start here than not start at all while still in the learning curve mode.

As for Unclemick, sounds like he moved into them as a lump sum, consistent with Mathjak's point, but since he is further down the road, so to speak, a different issue again.
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