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Target retirement or.....
Old 04-12-2010, 08:42 AM   #1
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Target retirement or.....

5 years ago I set up roths for my 2 kids in VG Target Retirement 2035. This year is the first year there seems to be some gains. It is now up 20%.over the initial investment.
Three and 1/2 years ago I set up an account for my grandkids inn VG Target Ret. 2020 and it is still at a loss.
I know these are well diversified but I have been disappointed in their performance. I was thinking about switching them to the VG Wellesley Income fund but open to others thoughts and suggestions before coming to a decision.
Thanks Larry
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Old 04-12-2010, 08:48 AM   #2
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Nothing wrong with the Target Retirement fund. If you want to tone it down a little, couldn't you add an additional fund in the account e.g. total bond market?

Full disclosure: I manage my mother's retirement funds and have her at about 33% Wellesley.
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Old 04-12-2010, 09:05 AM   #3
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You need a baseline from which to compare. Betting on recent winners is a losing strategy.

Sure performance has been lousy recently for the target date funds compared to an income fund. Any fund with equity exposure suffers compare to funds with high bond exposure.

Who knows what the future will bring, However In 25 years (until 2035) I would expect the target date fund to beat the pants off an income fund. Also keep in mind the general expectation for inflation and how that will effect a bond heavy income fund.

I would say your choice was correct but the market took a big dive along with your fund.
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Old 04-12-2010, 09:27 AM   #4
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Target funds are fine for people who want a single "set and forget" investment, but I think most of the folks here prefer to "roll their own" asset allocation with appropriate rebalancing at fixed intervals (most research suggests that a rebalance every 12-18 months is optimal or when actual allocations vary more than 5% from the target).

Having said that, I think *most* target funds are a little too conservative relative to their retirement date. But if one thinks that is the case for their target retirement date, there's no reason why you can't go out another 5-10 years to make it a little more aggressive. That's more relevant for early retirees because most of these "target" retirement date funds assume retirement at 65 which also serves to make them seem too conservative relative to an early target retirement date.
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Old 04-12-2010, 12:20 PM   #5
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Target funds are fine for people who want a single "set and forget" investment ...
I agree, but I'll also chime in to add that Target Retirement funds are also good for those people who think they might not have to stomach to rebalance into a plummeting stock market, when every day is bringing new fears of financial armageddon, and suspect they may react with a deer-in-the-headlights response to asset allocation.

Not that this recently happened to anyone I know ...
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Old 04-12-2010, 12:37 PM   #6
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Quote:
Originally Posted by bigla View Post
5 years ago I set up roths for my 2 kids in VG Target Retirement 2035. This year is the first year there seems to be some gains. It is now up 20%.over the initial investment.
Three and 1/2 years ago I set up an account for my grandkids inn VG Target Ret. 2020 and it is still at a loss.
I know these are well diversified but I have been disappointed in their performance. I was thinking about switching them to the VG Wellesley Income fund but open to others thoughts and suggestions before coming to a decision.
Thanks Larry
If it is up 20% since you opened it in 2005 then that is a year on year ROI of 4.65%. That don't seem too bad given the recession. My 5 year return (as of 1/1/10) is only 3.3% - Sounds like I'd have done better with the 2035 fund. When you started the fund you were looking 30 years out, 5 years have passed and you are up 20% so may be your cup is half full
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Old 04-12-2010, 01:32 PM   #7
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Pssst. Where's Uncle Mick?

Seriously, I've not followed it as closely as I should to give advice - so I won't. I'm thinking, however, some combo - of from 0 to 100% of Wellsley and Wellington - might have some advantages over most of the Target Funds. I say that only because the small amounts of each that DW holds, seem to have done relatively well compared to the market as a whole. Again, haven't run the numbers so check for yourself (or ask Uncle Mick!!) Just always been a fan (or at least for the past few years) of Wellsley/Wellington. YMMV, etc.

Glad to see you're giving kids/grandkids a head start. I'm trying to do this for my kids - on a small scale. I like the idea of starting kids in their early 20s with Roth IRAs. What a great legacy that could outlive us!!
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Old 04-12-2010, 03:01 PM   #8
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Pssst. Where's Uncle Mick?

Seriously, I've not followed it as closely as I should to give advice - so I won't. I'm thinking, however, some combo - of from 0 to 100% of Wellsley and Wellington - might have some advantages over most of the Target Funds. I say that only because the small amounts of each that DW holds, seem to have done relatively well compared to the market as a whole. Again, haven't run the numbers so check for yourself (or ask Uncle Mick!!) Just always been a fan (or at least for the past few years) of Wellsley/Wellington. YMMV, etc.

Glad to see you're giving kids/grandkids a head start. I'm trying to do this for my kids - on a small scale. I like the idea of starting kids in their early 20s with Roth IRAs. What a great legacy that could outlive us!!
I have held Wellesley for over 8 years and my personal IRR year on year for that fund is 3.9% for last 5 years, 6.05% for the last 8 years, which is why I said above that OP's 5 year return on his target fund is pretty decent.
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Old 04-12-2010, 05:43 PM   #9
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You know what they say... timing is everything.

Those Target funds are both fund of funds (index funds). They are going to reflect the market's performance of their assets more or less. You bought in on the 2020 fund a little before the stock market peaked (near the top). You bought into the 2035 fund when the market was lower.

As far as what funds to use... you need to better understand your goals and appetite for certain types of risk.
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Old 04-12-2010, 06:01 PM   #10
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I have held Wellesley for over 8 years and my personal IRR year on year for that fund is 3.9% for last 5 years, 6.05% for the last 8 years, which is why I said above that OP's 5 year return on his target fund is pretty decent.
I hold a diversified portfolio of 17 funds including a MM fund. All of them are low cost funds. Whenever I look at the long term performance of Wellesley/Wellington against my diversified portfolio I feel like applying 2X4 against forehead because (long term) Wellsi/Welltn does much better than my particular selection. What keeps me from converting wholesale is that I keep thinking last ten years - 2 major bear markets, the great recession, negative growth.... how likely is that to happen again the next ten years?
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Old 04-12-2010, 06:23 PM   #11
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I hold a diversified portfolio of 17 funds including a MM fund. All of them are low cost funds. Whenever I look at the long term performance of Wellesley/Wellington against my diversified portfolio I feel like applying 2X4 against forehead because (long term) Wellsi/Welltn does much better than my particular selection. What keeps me from converting wholesale is that I keep thinking last ten years - 2 major bear markets, the great recession, negative growth.... how likely is that to happen again the next ten years?
I know, it's tough isn't it?
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Old 04-13-2010, 05:09 AM   #12
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Thanks for the input, it will help me with my decision making.
Larry
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Old 04-13-2010, 08:22 AM   #13
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I hold a diversified portfolio of 17 funds including a MM fund. All of them are low cost funds. Whenever I look at the long term performance of Wellesley/Wellington against my diversified portfolio I feel like applying 2X4 against forehead because (long term) Wellsi/Welltn does much better than my particular selection. What keeps me from converting wholesale is that I keep thinking last ten years - 2 major bear markets, the great recession, negative growth.... how likely is that to happen again the next ten years?
Yeah, that's the thing. I think investors would like to think the last ten years have collectively been an outlier and not expected future results.

You could even use a Wellesley/Wellington combo (close to a 50/50 allocation when equal amounts are held) as an asset allocation that gradually gets more conservative over time (like a target fund) by reinvesting some of Wellington's distributions into Wellesley shares.
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Old 04-13-2010, 09:42 AM   #14
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If you compare a Target Retirement fund to Wellesley, then be sure to compare a TR fund with the same asset allocation. For example, Wellesley is about 62% fixed income and 38% equities. Even the Target Retirement 2010 is 50% fixed income and 50% equities, so it cannot be compared to Wellesley.

It turns out that Target Retirement 2005 has 36% equities, so it is the closest TR fund to Wellesley. TR Income has only 30% equities.

The moral of the story is that have an asset allocation of lots of bonds helps you when stocks go down. Duh! Another moral of the story is that perhaps your risk tolerance is not as high as you thought it was. Maybe you want to think harder about the stock:bond ratio in your asset allocation.


Of course, how you split up the stocks is important as well, but I left that out to simplify things. For example, it appears that Wellesley has quite a value tilt, but the TR funds do not.
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Old 04-13-2010, 10:21 AM   #15
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It turns out that Target Retirement 2005 has 36% equities, so it is the closest TR fund to Wellesley. TR Income has only 30% equities.


Of course, how you split up the stocks is important as well, but I left that out to simplify things. For example, it appears that Wellesley has quite a value tilt, but the TR funds do not.
Interesting that the 1,3,5 year return numbers are substantially higher for Wellesley. I guess the value tilt must account for that or else, there really is value added from stock picking
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