401(k) target date funds

[Phantom Spike]

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For those with employer-sponsored 401(k)s, do you believe the default retirement year-based multi-asset target date funds are too conservative? I'm wondering if I should switch to more aggressive, high growth potential equity funds since I don't anticipate needing that money for quite a while. Or would you limit that to taxable accounts and keep some bonds in your portfolio in case of a market crash?

 

[Chemist0157]

One of the threads floating around here contains a recent conversation about this. I decided target funds are too conservative for me so I’m 100% equities in my 401k right now.

 

[SigmaFS]

What's the mix between equities and bonds/cash in your target date fund? If you're target date fund 2050, probably 90/10 split which isn't conservative.

 

[Phantom Spike]

Roughly 80/20. The returns for last year were around 13%, which I guess isn't bad. Which is why I'm not sure it's worth making the changes necessarily. On the other hand, why not maximize potential gains if you don't plan to withdraw for at least five years?

 

[Mman]

On the other hand, why not maximize potential gains if you don't plan to withdraw for at least five years?

you should never put money in equities you might need in 5 years. Gotta have at least 10-20 years time frame for equities to make sense in case of prolonged bear market.

 

[Chemist0157]

Roughly 80/20. The returns for last year were around 13%, which I guess isn't bad. Which is why I'm not sure it's worth making the changes necessarily. On the other hand, why not maximize potential gains if you don't plan to withdraw for at least five years?

As above, it took about 7 years for the market to return to all time high after the 2000 crash and about 6 years for 2007-8 crash. I would expand your time frame to 8+ years.

I would also point out that sometimes people mix volatility with risk. Bonds are there to smooth out the ride, but the returns are lower. I can say with a lot of confidence that stocks will return about 10% a year based on historical numbers over the decades. There is volatility with stocks, but I don't consider them risky over long term, especially if you're in an investment product like index funds.

 

[SigmaFS]

Well, certainly didn't expect a 5-year investment horizon. Keep in mind that 50% decline requires a 100% gain to get to even. Too many have not experienced a correction and have developed an expectation that the market only returns 15%+ YOY.

 

[Mman]

I can say with a lot of confidence that stocks will return about 10% a year based on historical numbers over the decades.

Over the last 20 years, the S&P total return (including dividends) has been 9.60% annualized, or 7.27% after inflation.

Over long enough time frames going back, it has tended to run in the 6-7% range of real (after inflation) returns, although it has occasionally been in the 4-5% range for 30+ year time frames.

Over 20 years, the difference in account size between one growing at 7% and one growing at 10% is massive. And since we only care about real returns that account for inflation and not nominal terms, I would mentally adjust your planning way down from 10% long term. Personally I think 5% is more realistic, especially since the US population has been growing quite a bit slower than it was in the past (GDP gains = population gains + productivity gains), and gotta be prepared for it to be even lower if we had an unlucky sequence.

 

[Chemist0157]

Over the last 20 years, the S&P total return (including dividends) has been 9.60% annualized, or 7.27% after inflation.

Over long enough time frames going back, it has tended to run in the 6-7% range of real (after inflation) returns, although it has occasionally been in the 4-5% range for 30+ year time frames.

Over 20 years, the difference in account size between one growing at 7% and one growing at 10% is massive. And since we only care about real returns that account for inflation and not nominal terms, I would mentally adjust your planning way down from 10% long term. Personally I think 5% is more realistic, especially since the US population has been growing quite a bit slower than it was in the past (GDP gains = population gains + productivity gains), and gotta be prepared for it to be even lower if we had an unlucky sequence.

I tend to see 9-11% quoted from multiple sources so I say 10% for simplicity. This is also total stock market, not just s&p 500, and so the difference is probably made up by small cap, and perhaps more specifically small cap value, stocks.

It is smart to account for inflation, but I only account for inflation when thinking about retirement needs. It’s not very helpful to think about when comparing stocks and bonds. It is more helpful if you’re thinking about real estate where you would have cash flow, debt on the property, and appreciation to think about over time.

I think 5% is really low balling, but people can decide on their margin of safety. I’m very comfortable with 100% equities right now (and probably real estate within the next couple of years), but it will change as time goes on.

 

[Mman]

I tend to see 9-11% quoted from multiple sources so I say 10% for simplicity. This is also total stock market, not just s&p 500, and so the difference is probably made up by small cap, and perhaps more specifically small cap value, stocks.

No, real returns are in the 6-7% range long term for the entire market, not just the S&P. It's just easier to find calculators for the S&P to provide specific numbers.

I'm just pointing out that people should only ever care about real returns on their investments. It isn't intuitive, but it's important to think about it that way IMHO. There are people that feel better if they have a savings account earning 4% interest in an environment of 5% inflation than they do about earning 0.5% against 1% inflation.

Also worth thinking about demographic trends and how they likely work against future investment returns.

 

[Chemist0157]

No, real returns are in the 6-7% range long term for the entire market, not just the S&P. It's just easier to find calculators for the S&P to provide specific numbers.

I'm just pointing out that people should only ever care about real returns on their investments. It isn't intuitive, but it's important to think about it that way IMHO. There are people that feel better if they have a savings account earning 4% interest in an environment of 5% inflation than they do about earning 0.5% against 1% inflation.

Also worth thinking about demographic trends and how they likely work against future investment returns.

It’s just inflation adjusted vs not then. I did a similar exercise to see if I should finish paying my loans off. I wasn’t confident in the next few years of the market so I surmised I’m better off paying loans for a 4% “return” vs the real return of the market.

The demographics point is interesting, and I have reviewed that before. The counterpoint is there are other markets like India and China who are growing a middle class that will need products from global US companies so even if the population is expected to slow down over this century, improvement in living standards will still drive the market.

I think that is something really hard to account for as a retail investor, but yes, future cash flows need to be discounted to some degree. Different people have different margins of safety. I’d be a little surprised if that has a dramatic effect during my growth investment phase of only the next 25-30 years.

 

[FutureInternist]

Well, certainly didn't expect a 5-year investment horizon. Keep in mind that 50% decline requires a 100% gain to get to even. Too many have not experienced a correction and have developed an expectation that the market only returns 15%+ YOY.

View attachment 343330

This is what I have to explain to so many people.
As long as the highs and lows even out we’re good…. Heck NO!!!

 

[Mman]

It’s just inflation adjusted vs not then. I did a similar exercise to see if I should finish paying my loans off. I wasn’t confident in the next few years of the market so I surmised I’m better off paying loans for a 4% “return” vs the real return of the market.

the difference with loans vs investments is that 4% "return" on loans is simple interest, not compound interest as compared to investments that are compound interest.

With simple interest the interest paid decreases over time, whereas with investments it increases over time. A smaller compound return can outweigh a larger simple interest rate (depending on the difference and the tax details).

 

[zorcandpals]

You can probably recreate the target date fund with a 2 or 3 index funds that will have lower fees. You can figure out roughly the equity/bond split for each target date and then just buy like a SP500 Fund + a Small Cap stock fund+ a bond fund in the proportions. If you want something even simpler just do a total market fund + bond fund. I never use the target date funds for that reason alone. Being on the younger end though, I want to be 100% equity anyway.

 

[TraderDoc]

Unfortunately in my employed retirement accounts, I can only invest in index funds 😡. In my personal ROTH IRA / Taxable brokerages ->I'm 100% in equities. However, stock picking is historically tough and majority of investors do not outperfom SPY and they sure as hell aren't beating $QQQ over a decade. Stock picking is insanely hard and requires tons of research and little bit of luck. Some of my colleagues have asked me to help them stock pick -> I simply tell them to invest in QQQ (which has strongly outperformed SPY over the past 10 years btw).

Certainly past performance does not necessarily predict future results and tech is in a "bubble like" environment with stratospheric valuations for many companies ($TSLA / $NET etc). But web 3.0 is coming / the metaverse is coming / cybersecurity has never been more important and will only continue to receive increased revenue from enterprises. We are increasingly becoming even more reliant on AI / Robotics.

I expect a multi-year recession starting in mid 2022 that will be initiated by a series of interest rate hikes by the Fed, a flattening of the U.S. Treasury yield curve to wipe of this froth and end the last 10 year bull run. This is ultimately healthy for the overall economy and allows for a new bull market to emerge. If you invest consistently in $QQQ despite market corrections and "crashes", portfolio should compound beautifully over a 20 year period, all without lifting a finger and not worry about earnings reports / fundamental analysis / concerns of management etc that a stock picker would need to be aware of.

 

[Monocles]

Unfortunately in my employed retirement accounts, I can only invest in index funds 😡. In my personal ROTH IRA / Taxable brokerages ->I'm 100% in equities. However, stock picking is historically tough and majority of investors do not outperfom SPY and they sure as hell aren't beating $QQQ over a decade. Stock picking is insanely hard and requires tons of research and little bit of luck. Some of my colleagues have asked me to help them stock pick -> I simply tell them to invest in QQQ (which has strongly outperformed SPY over the past 10 years btw).

Certainly past performance does not necessarily predict future results and tech is in a "bubble like" environment with stratospheric valuations for many companies ($TSLA / $NET etc). But web 3.0 is coming / the metaverse is coming / cybersecurity has never been more important and will only continue to receive increased revenue from enterprises. We are increasingly becoming even more reliant on AI / Robotics.

I expect a multi-year recession starting in mid 2022 that will be initiated by a series of interest rate hikes by the Fed, a flattening of the U.S. Treasury yield curve to wipe of this froth and end the last 10 year bull run. This is ultimately healthy for the overall economy and allows for a new bull market to emerge. If you invest consistently in $QQQ despite market corrections and "crashes", portfolio should compound beautifully over a 20 year period, all without lifting a finger and not worry about earnings reports / fundamental analysis / concerns of management etc that a stock picker would need to be aware of.

This is my first time hearing about the Qs and it looks amazing. I might have to look into the expense ratios more but definitely the strongest argument in favour is the most recent 5 year gains of over 200% vs SP500's 100%. Just wow.

I guess if you are a believer that tech stocks will continue to soar, then it makes perfect sense to invest in Qs over sp500.

 

[Mman]

I guess if you are a believer that tech stocks will continue to soar, then it makes perfect sense to invest in Qs over sp500.

If history is any guide, anything that strongly outperforms the overall market in the recent past will underperform in the future.

 

[TraderDoc]

If history is any guide, anything that strongly outperforms the overall market in the recent past will underperform in the future.

They’ve been saying that for almost 20 years now about $QQQ vs S&P500 … and during that time it’s been 1600% returns for QQQ vs 450% for SP500. When markets correct, growth / tech corrects harder and thus more pain in short term.

But the best and most innovative companies in the world are tech companies in the US. Betting on $QQQ is betting on the next Apple / MSFT / Amazon / NVidia / Netflix to continue to innovate and that their future successors will be coming from the USA. It’s an excellent bet on American innovation, you will always make great money betting on America.

 

[Mman]

They’ve been saying that for almost 20 years now about $QQQ vs S&P500 … and during that time it’s been 1600% returns for QQQ vs 450% for SP500. When markets correct, growth / tech corrects harder and thus more pain in short term.

But the best and most innovative companies in the world are tech companies in the US. Betting on $QQQ is betting on the next Apple / MSFT / Amazon / NVidia / Netflix to continue to innovate and that their future successors will be coming from the USA. It’s an excellent bet on American innovation, you will always make great money betting on America.

Nobody was saying that 18-20 years ago during the massive tech crash.

And FWIW SPY has actually outperformed QQQ over the last 12 months.

Chasing the new hotness is not always a great long term strategy.

 

[TraderDoc]

Nobody was saying that 18-20 years ago during the massive tech crash.

And FWIW SPY has actually outperformed QQQ over the last 12 months.

Chasing the new hotness is not always a great long term strategy.

If you consider "investing" equivalent to last 12 months then sure...

SPY YTD: 24.05%-> Last 12 months: 40.08% -> last 5 years 115% -> since Jan 2010 299% -> since Jan 2002 289%
QQQ YTD: 24.08% -> Last 12 months 41.2% -> last 5 years 227% -> since Jan 2010 736% -> since Jan 2002 838%

Chasing the new "hotness" in tech has been a phenomenal long term strategy since 2002. But everyone has a different invest strategy and goals.

 

[Mman]

If you consider "investing" equivalent to last 12 months then sure...

SPY YTD: 24.05%-> Last 12 months: 40.08% -> last 5 years 115% -> since Jan 2010 299% -> since Jan 2002 289%
QQQ YTD: 24.08% -> Last 12 months 41.2% -> last 5 years 227% -> since Jan 2010 736% -> since Jan 2002 838%

Chasing the new "hotness" in tech has been a phenomenal long term strategy since 2002. But everyone has a different invest strategy and goals.

Like I said, over decades and centuries chasing the recent outperformer usually doesn't work out. But maybe you have different strategies and goals. Large tech has done phenomenally for nearly 20 years. It is quite unlikely that same group significantly outperforms for the next 20 years. That's just not how it tends to work.

I merely brought up the last year because it's possible tech's mega run in relation to the rest of the stock universe already ended. There is certainly massive push back politically against those companies across the globe.

 

[AD04]

Like I said, over decades and centuries chasing the recent outperformer usually doesn't work out. But maybe you have different strategies and goals. Large tech has done phenomenally for nearly 20 years. It is quite unlikely that same group significantly outperforms for the next 20 years. That's just not how it tends to work.

I merely brought up the last year because it's possible tech's mega run in relation to the rest of the stock universe already ended. There is certainly massive push back politically against those companies across the globe.

I'm in agreement with @TraderDoc. All sectors are not equal. Some are better than others. Tech is one of those sectors that is better and will continue to outperform. They need very little human capital and thus the "tax" on corporate income (corporate tax + employer portion of payroll tax + health insurance) is much lower compared to non-tech companies. In addition, tech companies enjoy network effect. As their ecosystems get more users, the more valuable it gets which leads to monopolies in their respective niche. The political push-back is just for show. In reality, tech companies and US government are too intertwined. Everything that the elites want (green energy, automation, propaganda, social profiling, distraction for the masses) is accomplished through tech. Both of them gain more money and power by working together. Wasn't our former president censored by a tech company?

 

[Mman]

I'm in agreement with @TraderDoc. All sectors are not equal. Some are better than others. Tech is one of those sectors that is better and will continue to outperform. They need very little human capital and thus the "tax" on corporate income (corporate tax + employer portion of payroll tax + health insurance) is much lower compared to non-tech companies. In addition, tech companies enjoy network effect. As their ecosystems get more users, the more valuable it gets which leads to monopolies in their respective niche. The political push-back is just for show. In reality, tech companies and US government are too intertwined. Everything that the elites want (green energy, automation, propaganda, social profiling, distraction for the masses) is accomplished through tech. Both of them gain more money and power by working together. Wasn't our former president censored by a tech company?

it is unknowable how sectors will perform over the long term future. Also worth pointing out there is lots of non tech within the Nasdaq 100 world



Don't get me wrong, I love technology. But if your bet is on the largest of the large cap tech outperforming for decades, well there is an old saying about how trees don't grow to the sky that might be applicable. Also future tech companies that turn into mega cap will not be a part of it until the largest of their growth is likely over so you miss out on them.

 

[Financial Advisor Justin]

For those with employer-sponsored 401(k)s, do you believe the default retirement year-based multi-asset target date funds are too conservative? I'm wondering if I should switch to more aggressive, high growth potential equity funds since I don't anticipate needing that money for quite a while. Or would you limit that to taxable accounts and keep some bonds in your portfolio in case of a market crash?

Healthcare organizations have some of the worst 401k/403b plans I have seen across the U.S. in terms of investment selection. If you have zero investment experience and are not willing to learn or seek help from a professional its a fair option. The further out the "date" is on the fund the more aggressive the fund is going to be. However if you are wanting to maximize your benefit and financial future find an advisor that specializes in working with Healthcare Professionals get a free consultation if you decide you like and trust them start working together. Statistically professionals who work with an advisor have 15-25% more money in retirement!

 

[cincincyreds]

For those with employer-sponsored 401(k)s, do you believe the default retirement year-based multi-asset target date funds are too conservative? I'm wondering if I should switch to more aggressive, high growth potential equity funds since I don't anticipate needing that money for quite a while. Or would you limit that to taxable accounts and keep some bonds in your portfolio in case of a market crash?

you need to look at the expense ratios. I've noticed with target dated funds they really take a larger chunk out each year versus you just by bonds in your age and stocks for the rest.

 

[Mman]

you need to look at the expense ratios. I've noticed with target dated funds they really take a larger chunk out each year versus you just by bonds in your age and stocks for the rest.

Vanguard charges around 0.14-0.15% expense ratio for target date funds

 

[cincincyreds]

Vanguard charges around 0.14-0.15% expense ratio for target date funds

remember not everyone has access to vanguard funds in their 401k so it's important to look at the expense ratios. at .14 trying to get down to .1 won't be a deal breaker in life. An extra .75% a year is a giarnt dealbreaker that could cost you 100s of thousands of dollars over 30 years.

 

[Mman]

remember not everyone has access to vanguard funds in their 401k so it's important to look at the expense ratios. at .14 trying to get down to .1 won't be a deal breaker in life. An extra .75% a year is a giarnt dealbreaker that could cost you 100s of thousands of dollars over 30 years.

Vanguard dominates the target date fund space in terms of dollars under management. Nobody else even close in size. There are definitely some that aren't as good, but those are in the minority.