Index funds vs. Target retirement funds

[PaperMate30301]

Ok. I am a total newbie to this thread. Please be nice.

I am about to open a Roth IRA account, but I have no idea what to do with it. Some SDNers have suggested target retirements funds (through Fidelity or Vanguard), but how about index funds/ETFs?

Since target retirement funds have much higher net expense ratios (i.e. 0.8% for Fidelity Freedom 2050), index funds/ETFs seem to be a better option (i.e. <0.1%). What do you people think?

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[The White Coat Investor]

Ok. I am a total newbie to this thread. Please be nice.

I am about to open a Roth IRA account, but I have no idea what to do with it. Some SDNers have suggested target retirements funds (through Fidelity or Vanguard), but how about index funds/ETFs?

Since target retirement funds have much higher net expense ratios (i.e. 0.8% for Fidelity Freedom 2050), index funds/ETFs seem to be a better option (i.e. <0.1%). What do you people think?

Target Retirement Funds are Funds-of-Funds that hold various other mutual funds and rebalance them automatically, becoming more conservative as you get closer to retirement. You'll be pleased to know that Vanguard's target retirement funds are composed entirely of index funds, and have an expense ratio of 0.21%. The fidelity funds are composed of active funds and are notably more expensive. Remember in investing that you get what you DON'T pay for.

ETF will be along shortly to argue that Fidelity's active management is worth paying more for, but there is no evidence that is true, and plenty of evidence that it is not.

The index fund vs ETF decision is a separate discussion. Generally, if you are investing a large chunk of money at once, ETFs are a good idea. If you're buying a little each time, an index fund is better.

Good luck investing. To be honest, the amount of money you put into your Roth IRA matters much more than what you invest it in. See this thread on diehards.org called The Savings Rate for more details:

http://www.diehards.org/forum/viewtopic.php?t=6887&view=previous

 

[PaperMate30301]

Target Retirement Funds are Funds-of-Funds that hold various other mutual funds and rebalance them automatically, becoming more conservative as you get closer to retirement. You'll be pleased to know that Vanguard's target retirement funds are composed entirely of index funds, and have an expense ratio of 0.21%. The fidelity funds are composed of active funds and are notably more expensive. Remember in investing that you get what you DON'T pay for.

ETF will be along shortly to argue that Fidelity's active management is worth paying more for, but there is no evidence that is true, and plenty of evidence that it is not.

The index fund vs ETF decision is a separate discussion. Generally, if you are investing a large chunk of money at once, ETFs are a good idea. If you're buying a little each time, an index fund is better.

Good luck investing. To be honest, the amount of money you put into your Roth IRA matters much more than what you invest it in. See this thread on diehards.org called The Savings Rate for more details:

http://www.diehards.org/forum/viewtopic.php?t=6887&view=previous

Thanks for this great info!

I think I am going to take your advice and have Vanguard handle my IRA with either target retirement fund 2045 (0.19% expense ratio) or 2050 (0.21%).

I really like the fact that these target retirement funds are composed of various index funds and are conservative (more % bonds than stocks) later on. Vanguard has a higher minimum ($3000 as opposed to $2500 Fidelity), but that's okay. No more lattes, I guess.

Thanks again.

 

[etf]

ETF will be along shortly to argue that Fidelity's active management is worth paying more for, but there is no evidence that is true, and plenty of evidence that it is not.

haha, you know me too well - i'm as much a fidelity fan as you are a boglehead. actually, when it comes to my ira, i was about to go with the vanguard target retirement fund, but went with t rowe price instead - it had the most equity exposure.

in terms of active vs. index funds, i agree that overall, index funds will probably beat most actively managed funds, and that it is the best bet for most investors: whether you have $1000 or $10,000,000, you can't really go wrong with an index fund. i personally own a few actively managed funds and only those with exposure to sectors i'm not too familiar with or are uncomfortable investing in/have no access to (i.e. emerging markets small-cap, china a-shares, etc). the bulk of my equity holdings are in individual stocks i've selected myself, and have done research on, and believe strongly in (hell, i even go to annual meetings). only time will tell if i would have been better off just sticking to index funds, but at least for the relatively short time i've been investing, i've consistently and handedly beat the indexes.

 

[The White Coat Investor]

the bulk of my equity holdings are in individual stocks i've selected myself, and have done research on, and believe strongly in (hell, i even go to annual meetings). .

We've had this discussion before, but I just wanted to point out that this is why you're different from 99.5% of the physician investors out there. Nothing wrong with that approach (and I'm not surprised you're beating the indexes) but individual stocks are a poor choice for #1 beginners and #2 busy people. Index funds are never a poor choice, they're average at WORST, but usually significantly better than average over the long haul.

T. Rowe Price is also a good choice for target retirement funds, but be careful if you decide to compare TRP and VG target retirement funds' performance. TRP will usually come out ahead due to their slightly higher equity exposure. If you want more equities...just pick a later target retirement fund.

 

[IceMan0824]

ETF will be along shortly to argue that Fidelity's active management is worth paying more for, but there is no evidence that is true, and plenty of evidence that it is not.

The index fund vs ETF decision is a separate discussion. Generally, if you are investing a large chunk of money at once, ETFs are a good idea. If you're buying a little each time, an index fund is better.

While I understood the context, it might be a little easier to understand if you had made the distinction between etf the poster, and ETF the fund.

 

[The White Coat Investor]

While I understood the context, it might be a little easier to understand if you had made the distinction between etf the poster, and ETF the fund.

Blame him for the name. It could be worse, he could have called himself Fidelity Target Retirement ETF.

 

[etf]

Blame him for the name. It could be worse, he could have called himself Fidelity Target Retirement ETF.

haha, maybe i should just change it to peter lynch

 

[walrustooth]

OP

I was a financial advisor, broker or whatever the heck they call them these days....anyhow, I wasn't very good. The firm always pushed those target funds and I thought they were crap...too much "ribbons and bows"...i highly doubt the fund will be called the Target 45 or it may not even be around for another 35-40 years

you can't hurt yourself too much with vanguard s&p index funds...

the arguments over investments is endless, i'm sure there will be 300 people who instantly disagree with me.

 

[anisocoria]

some target funds are crap because they have 40 different funds with all kinds of overlap, etc, and charge a fee of >1%. I like the Vanguard Target Retirement funds because they are basically funds of ~5 index funds, and the whole thing only costs 0.21 TER. I don't see how that's crap!

 

[Doctor Bagel]

some target funds are crap because they have 40 different funds with all kinds of overlap, etc, and charge a fee of >1%. I like the Vanguard Target Retirement funds because they are basically funds of ~5 index funds, and the whole thing only costs 0.21 TER. I don't see how that's crap!

Also, having my money in a Target Retirement Fund is good for me because I don't fall into the temptation to move it around too much, which I'm really prone to doing. I just put there, check it occasionally and don't mess with it.