financial manager

[target2019]

For my in-laws who are 80, I guess I should use Vanguard Target Retirement Income Fund (VTINX) as a benchmark. The e/r is 0.16% for acquired funds.

"The Target Retirement Income Fund is designed for investors already in retirement. The fund seeks to provide current income and some capital appreciation by investing in three Vanguard index funds, the Inflation-Protected Securities Fund, and the Prime Money Market Fund. The fund holds approximately 30% of assets in equities, 65% in bonds, and 5% in short-term reserves. This is also the allocation that all Target Retirement Funds are expected to assume within seven years after their designated retirement dates. Investors in this fund should be willing to accept modest movement in share price and be able to tolerate the market risk that comes from the volatility of the stock and bond markets."

The statement of 30/65/5 seems about right for those deep into retirement. I'm sure Fidelity and TRP have similar funds, just not that familiar with their lineups.

If just going into retirement I would use VG's 2010 Fund (also 0.16% e/r) as a benchmark. This holds 45% in equities and 55% in bonds.

 

[travelover]

..........
If just going into retirement I would use VG's 2010 Fund (also 0.16% e/r) as a benchmark. This holds 45% in equities and 55% in bonds.

Of course, if you have both taxable and tax deferred accounts, it is worthwhile to keep your bonds in tax deferred to the extent possible.

 

[target2019]

Of course, if you have both taxable and tax deferred accounts, it is worthwhile to keep your bonds in tax deferred to the extent possible.

Good point to make. But answer may depend on type of bonds. For instance, we hold about 5% of our portfolio in tax-free muni fund. Here's one tax-efficiency list:

15 Hi-Yield bonds (least tax-efficient)
14 TIPS
13 Taxable bonds
12 REIT stocks
11 Stock trading accounts
10 Balanced funds
9 Small-Value stocks
8 Small-Cap stocks
7 Large Value stocks
6 International stocks
5 Large Growth stocks
4 Most stock index funds
3 Tax-Managed funds
2 EE and I-Bonds
1 Tax-Exempt bonds ( most tax-efficient)


For now I was just commenting on what benchmark to use to evaluate an advisor. But tax-efficiency should definitely be in the strategy.

 

[DeborahB]

I know this seems to go against the general trend in this group, but I use a regular stockbroker (who doesn't charge me the full commission because he's a friend) and mostly manage my own money. I have very little in bonds right now because they are paying almost nothing, and will go down if interest rates go up.

I don't in general like mutual funds although there are always exceptions. I'm averaging a 6% return and could get more if I took on more risk. I did a lot of buying when the market went way down but there are still utility stocks out there paying excellent dividends. But I don't pay a fee, just a commission on trades. It works for me - I have a lot of financial background, which helps I guess. And I'm not risk-averse - but I'm careful about it. I don't do options trading at all.

 

[travelover]

Good point to make. But answer may depend on type of bonds. For instance, we hold about 5% of our portfolio in tax-free muni fund. ........

But this wouldn't be a case with a Target fund - the bonds would not all be tax free municipal bonds.

 

[target2019]

But this wouldn't be a case with a Target fund - the bonds would not all be tax free municipal bonds.

The target fund was proposed as a baseline for comparison to what results you may get from an advisor.

 

[Animorph]

I know this seems to go against the general trend in this group, but I use a regular stockbroker (who doesn't charge me the full commission because he's a friend) and mostly manage my own money. I have very little in bonds right now because they are paying almost nothing, and will go down if interest rates go up.

I don't in general like mutual funds although there are always exceptions. I'm averaging a 6% return and could get more if I took on more risk. I did a lot of buying when the market went way down but there are still utility stocks out there paying excellent dividends. But I don't pay a fee, just a commission on trades. It works for me - I have a lot of financial background, which helps I guess. And I'm not risk-averse - but I'm careful about it. I don't do options trading at all.

I was in individual stocks for a while, but when I wanted international diversity including emerging markets and frontier markets with small/large and growth/value allocations it just wasn't feasible for me. I went all funds then.

 

[travelover]

The target fund was proposed as a baseline for comparison to what results you may get from an advisor.

I fear this may have confused the person we were trying to help.

To summarize:

A Target fund can be a low cost replacement for an ongoing adviser.

In general, bonds should be held in a tax deferred account for tax efficiency. Target funds hold both stocks and bonds, so holding a target fund in a taxable account is not tax efficient.

If one must hold bonds in a taxable account, holding municipal bonds get around this tax inefficiency.

 

[target2019]

I fear this may have confused the person we were trying to help.

To summarize:

A Target fund can be a low cost replacement for an ongoing adviser.

In general, bonds should be held in a tax deferred account for tax efficiency. Target funds hold both stocks and bonds, so holding a target fund in a taxable account is not tax efficient.

If one must hold bonds in a taxable account, holding municipal bonds get around this tax inefficiency.

I believe you're summarizing what I posted. If not, then I apologize.

The ONLY point I was trying to make was that the e/r of a Target fund could be used for comparison sake. For example, an investor has an advisor that charges X% for funds held under an AUM. A target fund also makes changes to investments over time to maintain an allocation and charges Y%. Does advisor outperform the target fund? If so, then a case can be argued that the advisor may have earned the extra e/r.

 

[youbet]

A Target fund can be a low cost replacement for an ongoing adviser.

.

It could be. But you must be satisfied with blindly following the algorithm their computer is using for customers your age. If your particular situation is not typical or average for your age, then the target algorithm might not be optimum for you.

My order of preference would be:

1. DIY (Strongly my preference)

2. Advisor

3. Target Fund

Some folks have suggested to me that a target fund could be used but that you should know what AA they're using and monitor that against your current situation and desires. But heck, if you're going to do that, why not just DIY with a simple 3 - 5 fund approach?