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the problem is target funds assume everyone of any given retirement date has the same pucker factor , goals and wants .
they also do not take in to consideration the world around you . why load retirees up in bonds if bond rates are being pounded once they start to go up .
they also do not work well dollar cost averaging in .
markets typically are up 2/3/s of the time and down 1/3 . you are buying less and less shares over time at the same time the target funds glide path is cutting back equity's .
you may end up much more conservative then you wanted .
MJ - That is an excellent analysis on Target funds.
OP - I would look to simplify.
I am 37 and I own 4 funds in my 401k. I am in for the long haul and can tolerate the risk with a 100% stock portfolio for now.
15% Vanguard Institutional Index Fund Institutional Shares
27% Vanguard Mid-Cap Index Fund Admiral Shares
27% Vanguard PRIMECAP Fund Admiral Shares
31% Vanguard Small-Cap Index Fund Institutional Shares
Allocation Asset Classes
67.34% Domestic Stock
15.53% Foreign Stock
12.18% Bonds
4.31% Short Term
0.64% Other
I agree with the poster above who said to dump funds with high expense ratios. You should not be paying more than 0.20%, and can get that down to 0.05% for some US funds.
I personally would simplify things to 2 funds: (1) total US stock market, (2) world stock market. Fund performances tends to mean-revert over time, and the mean they gravitate towards is the performance of the US total stock market, so you may as well just own it. Unless you live in Lake Wobegone, where all funds are above average.
the problem is target funds assume everyone of any given retirement date has the same pucker factor , goals and wants .
they also do not take in to consideration the world around you . why load retirees up in bonds if bond rates are being pounded once they start to go up .
...
you may end up much more conservative then you wanted .
I guess I'm trying to understand how pairing a target fund with something else is different from pairing any other balanced fund with something else. You could argue that Wellington assumes that everyone wants the same allocation, and that pairing it with another fund undermines that objective, when all you're really doing is shifting the allocation so that it does align with your personal pucker factor or desired allocation.
Is it the time-dimension of target funds that makes it a bad idea to pair with something else? If so, why?
a balanced fund maintains a fixed allocation regardless of age . if you are happy with the allocation be it 60/40 40/60 etc that is it . it will not change .
a target fund is different . they adjust the allocation to equity's on a glide path as they see fit based on retirement date or age .
today it can be 90% equity's and by 70 it can be greatly reduced .
if you own other things you negate the glide path they are trying to stick to . you are undoing the very reason you bought the target fund which is to have it on auto pilot self adjusting . .
my vote is go with a balanced fund and some bond funds , then you can season it to taste . if bonds are taking a hit you can always move the bond portion to other types of bond funds less interest rate sensitive .
if you like you can always make it more aggressive too .
it wouldn't make much sense buying more equity funds to make it more aggressive and at the same time the target fund is reducing equity's to lighten you up.
you don't want to have to make a change every time they do if their change is not what you wanted.
there is another issue too .
after a steep drop you may want to take advantage of buying at low prices , but if it is time for your built in glide path to reduce equity's , it may not only not buy equity's but they may actually sell equity's after the drop .
my vote is unless you are totally happy with the glide path don't bother with a target fund .
Last edited by mathjak107; 04-14-2016 at 12:54 PM..
a balanced fund maintains a fixed allocation regardless of age . if you are happy with the allocation be it 60/40 40/60 etc that is it . it will not change .
a target fund is different . they adjust the allocation to equity's on a glide path as they see fit based on retirement date or age .
today it can be 90% equity's and by 70 it can be greatly reduced .
if you own other things you negate the glide path they are trying to stick to . you are undoing the very reason you bought the target fund which is to have it on auto pilot self adjusting . .
Isn't it still just "offsetting" rather than negating?
If you put 90% in a regular balanced fund that's allocated 8:1 and 10% in a equity fund, you're offsetting it so that overall you're 9:1.
If you put that 90% in a target fund that changes 8:1 -> 7:2 -> 6:3 -> 5:4, then your overall portfolio would change 9:1 -> 8:2 -> 7:3 -> 6:4. You're still getting the benefit of the automatic reallocation, but you shifted the overall allocation (pucker factor) and have more flexibility over the equity exposure you have (ex. more healthcare, or small cap, or international, etc.)
If you put that 90% in a target fund that changes 8:1 -> 7:2 -> 6:3 -> 5:4, then your overall portfolio would change 9:1 -> 8:2 -> 7:3 -> 6:4. You're still getting the benefit of the automatic reallocation, but you shifted the overall allocation (pucker factor) and have more flexibility over the equity exposure you have (ex. more healthcare, or small cap, or international, etc.)
Ultimately you just want to figure out your allocation and pick the funds that best give you that, expense ratios considered as well. So I think what you're proposing is doable(figure out allocation of target date fund, supplement with something else to give you the exact allocation you want). The issue is the target date fund changes over time, so you have to keep track of that. It just makes things more complicated than it needs to be for most people. It's just easier to put it all in target date and never have to do anything or pick all non-target dates and typically get a lower ER and make the decision to shift allocations yourself over time.
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