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Target date funds
Old 09-21-2009, 02:10 PM   #1
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Target date funds

What is the thinking on target date funds. I currently use them in my 401K. I'm thinking of RE next year and have been concerned about the best place to put the money. I learned years ago that I'm am not good at stock picking division of resources into different areas such as bonds, so it seems reasonable to let the target date fund do it for me.

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Old 09-21-2009, 02:46 PM   #2
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There is nothing wrong with target funds as an investment strategy, especially considering the many really bad alternatives . Some have stacked fees, however, so make sure that you understand the total expense ratio. Also you may want to look at their stock / bond allocation ratio and decide which target year best fits your own risk tolerance.

If you are buying outside an IRA or 401(k) it can be tax advantageous to use other strategies.

Like many here, I like Vanguard.
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Old 09-21-2009, 03:48 PM   #3
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Good question. It prompted me to take a look. During the crash, I had a big chunk of my portfolio in target funds. (Not all, because I didn't want to pay the capital gains taxes that would have been due had I exchanged my Total Stock Market shares.) I froze like a deer in headlights during the panic and did not rebalance until July, while the target funds presumably were rebalancing all the time. The target funds should have done better. Let's see.

I compared Vanguard's Target 2015 fund to the performance of a portfolio comprising its underlying funds. Well, almost. The target funds use institutional shares of the Total Bond Market fund, but let's assume they are similar, and anyway, if you are going to roll your own, you couldn't buy the institutional shares anyway. It seems that the target fund did benefit from rebalancing, losing only 2.77% year over year instead of the not-rebalanced portfolio's 5.35% loss.

On the other hand, you might have done better going your own way if you were very lucky about rebalancing.

Here are the numbers
 AllocationSep 23, 2008Sep 18, 2009Return
vtxvx 11.5711.25-2.77%
portfolio 19.9218.85-5.35%
The portfolio in the bottom row is composed of the same percentages of VTXVX's underlying funds, as shown in the second column.
This presumes that VTXVX did not change their AA very much during the year.
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Old 09-21-2009, 05:56 PM   #4
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I like Vanguard's Target Retirement funds. They don't stack fees, so you don't pay any more fees than you would if you built the portfolio yourself (I remember doing the calculation once, and the fees charged for the fund pretty much equal the fees charged to the component funds, in the allocated proportion).

It's a great place to start investing, because you can save on account maintenance fees and low balance fees when you're just starting out, i.e. it's cheaper to hold one fund with 10K in a target retirement fund rather than 4 funds of 2,500 each. As your assets grow this of course becomes less of a factor, but it's worth pointing out.

The automatic asset allocation is great for two reasons:

(1) your asset allocation will get more conservative over the years, as it should, even if you're lazy (or even if you're star-struck by great stock market returns); if people followed the simple advice about moving to a more conservative portfolio as they approach retirement, we wouldn't hear a gazillion sob stories every time the market crashes and another crop of 64 year olds suddenly realize that being 100% invested in the stock market is not a good idea

(2) it keeps your asset allocation in line even in the face of a tanking stock market, as happened last year; many people (myself included) who otherwise would not have had the guts to sell bonds and buy more stock when the market tanked were able to do so because the target funds automatically rebalance during market swings

All in all, it's really a solid investment for lots of reasons.
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