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Switch to Vanguard.
Invest in VFIFX - Vanguard Target Retirement 2050 Fund, expense ratio 0.18%/year.
Or choose a mix of Vanguard ETFs - BND (total bond market ETF, exp ratio 0.08%) for bonds, VTI (total stock market ETF, largely large-cap stocks, exp ratio 0.05%) and VXF (mid- and small-caps, exp ratio 0.10%) for an overall expense ratio somewhere between 0.05% and 0.10%, less than half of their mutual fund. Choose your percentages. If you follow the same strategy as VFIFX, those would be about 65% VTI, 25% VXF and 10% BND. Then rebalance every year. You don't have to be too exact.
Note that I am purposefully omitting international stocks even though VFIFX contains them. This is because a lot fo them withhold taxes on dividends. You can claim these as tax credits on your 1040 if they are in a taxable account, but not in an IRA. So that's just wasted money.
Keep in mind that this is an extremely boring strategy that actually works. You will miss out on all the fun when your coworkers talk about penny stocks, Cramer's latest recommendations, how someone killed it in the market by doing Technical Analysis and so on. You will have to stand in the corner and keep quiet. Such is the curse of the plodder.
I can't speak specifically for Vanguard's retirement fund, but most of the retirement fund portfolio allocations I have seen are extremely conservative. The one in my 401k only has about 30% of the portfolio in equities/stocks 5 years after the target date and that slowly drops. If you are assuming the 4% withdrawal plan, like most suggest you are going to need to be much more exposed to the equities market.
If you plan to retire at 60 by 65 your portfolio will be almost all cash and bonds.
Keep in mind that this is an extremely boring strategy that actually works. You will miss out on all the fun when your coworkers talk about penny stocks, Cramer's latest recommendations, how someone killed it in the market by doing Technical Analysis and so on. You will have to stand in the corner and keep quiet. Such is the curse of the plodder.
Most of my co-workers, if they contribute beyond the automatic 1% put everything in the cash equivalent out of fear.
I can't speak specifically for Vanguard's retirement fund, but most of the retirement fund portfolio allocations I have seen are extremely conservative. The one in my 401k only has about 30% of the portfolio in equities/stocks 5 years after the target date and that slowly drops. If you are assuming the 4% withdrawal plan, like most suggest you are going to need to be much more exposed to the equities market.
If you plan to retire at 60 by 65 your portfolio will be almost all cash and bonds.
Yes, it is good to know the glide path if you're going to invest via target date funds.
Target Retirement Income never goes below 30% stocks.
All VG Target Retirement Funds eventually merge into TRI about 7 years after the target retirement date. Currently, TR 2010 is 41% equities.
I don't know that I will ever want to go below 40% equities. I think I will probably exchange out of my target retirement fund someday in favor of a lifestrategy fund. Those funds use the same underlying funds as the target retirement funds, but have permanent allocations. The moderate growth fund is 60/40, the conservative growth is 40/60.
But for now, the target retirement fund suits me just fine.
Yes, it is good to know the glide path if you're going to invest via target date funds.
Target Retirement Income never goes below 30% stocks.
All VG Target Retirement Funds eventually merge into TRI about 7 years after the target retirement date. Currently, TR 2010 is 41% equities.
I don't know that I will ever want to go below 40% equities. I think I will probably exchange out of my target retirement fund someday in favor of a lifestrategy fund. Those funds use the same underlying funds as the target retirement funds, but have permanent allocations. The moderate growth fund is 60/40, the conservative growth is 40/60.
But for now, the target retirement fund suits me just fine.
Hey, there is one scenario for me when I will be 100% in bonds - Return of the Volckernator.
If short term bonds start yielding above 10% due to rampant inflation and a "QT" (quantitative tightening) by a Fed with some cojones, I am buying the depressed long term treasuries. Not an ETF, but individual bonds, via treasurydirect.gov, for example. And keep them till they mature. Sure, the first few years will be painful if I look at asset prices, but since they are not for trading, I wouldn't care. Give me the 14%-ish interest (I assume 30Y would yield at least that, if 6mo yield 10%).
It is an extraordinarily high hurdle rate for any stock to beat.
I know this sounds like a Black Swan event for now. And probably will be for my lifetime.
having been around in the days of those high cd rates i can tell you that they were no bargain when inflation was going higher and higher. after taxes and inflation you still had a negative real return.
they only became nice when inflation broke and rates fell. if rates stayed up there they were a losing deal.
Yes, it is good to know the glide path if you're going to invest via target date funds.
Target Retirement Income never goes below 30% stocks.
All VG Target Retirement Funds eventually merge into TRI about 7 years after the target retirement date. Currently, TR 2010 is 41% equities.
I don't know that I will ever want to go below 40% equities. I think I will probably exchange out of my target retirement fund someday in favor of a lifestrategy fund. Those funds use the same underlying funds as the target retirement funds, but have permanent allocations. The moderate growth fund is 60/40, the conservative growth is 40/60.
But for now, the target retirement fund suits me just fine.
i can never see owning anything that does not take the changing world and big picture around us into the equation.
that is why i dislike target date funds.
to take a persons age or retirement date and nothing else in to consideration to me is just a disaster eventually waiting to happen.
shifting retirees heavy into conventional bonds were fine when rates stayed low. these retirees seeing losses in these income funds when rates rise will likely have them panicking.
besides there is no standardized allocation either for what is right at any point in time as far as fund to fund.
the same 2010 target date fund from wells fargo in 2008-2009 lost 11.5% while the t.rowe price 2010 target fund lost 26.5%. that is a target fund that had 2 years to go before retirement. in fact the t.rowe target date fund didn't fall to below 45% equities until 5 years after the target date.
as i say all the time , anytime there is a simple answer to a complex question the answer is usually the wrong answer.
most americans suck at investing and do so because eveyone is lead to believe no skills or knowledge is needed. just buy some funds and the money rolls in , the same way they look at real estate.
they end up with a hodge podge of stuff and no plan or strategy. they usually end up being invested far more aggressively than they can stand because someone told them what to do by age and they get poor results.
everyone has no problem being aggressive when markets go up . they also have a plan on how they will bail out just before the big downturn.
but as tyson said , everyone has a plan until they get punched in the face.
Last edited by mathjak107; 12-30-2014 at 07:13 AM..
^ Disagree. Complexity in your strategy does not guarantee superior returns. Discipline does.
Target funds buy low and sell high every time they rebalance - e.g. if the current target is 50% stocks, 50% bonds; and because of market fluctuations the actual mix is 60% stocks, 40% bonds; then they will sell stocks to buy bonds, which is the right thing to do.
You do know that Target funds != Money Market funds. They don't advertise a stable value. Just that if the market is going down, then an income-oriented target fund will go down less. Which in your example did (T Rowe Price down 26.5% while S&P 500 down what, 40+%?)
a plan does not have to be complex it has to be good and fit the person as well as the world around them. target date funds do neither. they look at age or retirement date and have a nice day.they are an awful products in my opinion .
they are terrible for dollar cost averaging in as well, just the way they are used too.. as time goes on stocks are usually up 2/3's of the time and down 1/3 so odds are you will be getting less and less shares as time moves on. that happens at the same time by design they are cutting back equities.
the end result is far less performance than a lump sum woiuld have given you or you anticipated.
they also do the wrong thing at the wrong times. the years following 2008 your target fund would have been shedding equities by design over the following years vs good investing skills says you should have been buying .
they were a quick attempt by wall street to bring to market a product to attract more money but it is not a very good product by design.
far better is pick an allocation you are comfortable with and find a fund to match. a good balanced fund would have been far better if you had no idea of your pucker factor yet.
not everyone can tolerate high allocations just because they are young or should be mostly bonds if they are older ,especially at this stage of the cycle.
Last edited by mathjak107; 12-30-2014 at 12:49 PM..
^ Disagree. Complexity in your strategy does not guarantee superior returns. Discipline does.
Target funds buy low and sell high every time they rebalance - e.g. if the current target is 50% stocks, 50% bonds; and because of market fluctuations the actual mix is 60% stocks, 40% bonds; then they will sell stocks to buy bonds, which is the right thing to do.
You do know that Target funds != Money Market funds. They don't advertise a stable value. Just that if the market is going down, then an income-oriented target fund will go down less. Which in your example did (T Rowe Price down 26.5% while S&P 500 down what, 40+%?)
the problem is they do not rebalance in the sense of rebalancing. they follow their own glide path downward.
vanguard rebalances daily but they are also cutting back equities based on a glide path they keep secret. instead of rebalancing say back up to 70% equities in the years following 2008 and buying more they may have been net sellers through those years as they glide the stock allocation downward.
a balanced fund would have rebalanced as you thought , not a target date fund with designed in downward glide path.
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