Shifting away from Vanguard Target Retirement Fund

[agammaglobulin]

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Hey all,

I'm thinking about shifting away from my Vanguard target retirement fund and thought I would ask all of your thoughts about it. I feel the fund is too large cap heavy for me given I have a 30+ yr time horizon until retirement and think a more heavily weighted small/med cap would be more aggressive. The fund currently has 60% invested in 'total stock market index' with the vast majority being lg cap stocks. I was considering transitioning to a 20% small, 20% med, 20% lg cap, 20% emerging, 10% bonds, 10% europe portfolio. Thoughts?

 

[doc05]

do you have any reasoning for the switch?

 

[Plastikos]

I spent a good bit of time trying to find an article, Im pretty sure it was on the reformed brokers or investors field guide blog in the last couple months...but no luck finding it. It basically showed that large caps have been outperforming all other sectors over a long term trend, or the rich get richest as its becoming harder and harder to disrupt companies with large infrastructures and asset bases that will have easier transitions into emerging markets, etc....Of course it could be totally full of it, but it was interesting.

You have everything in one fund? You could alternatively just add a small/midcap fund and split it between the target and the small/mid cap one by some dividing amount.

 

[Hercules]

Hey all,

I'm thinking about shifting away from my Vanguard target retirement fund and thought I would ask all of your thoughts about it. I feel the fund is too large cap heavy for me given I have a 30+ yr time horizon until retirement and think a more heavily weighted small/med cap would be more aggressive. The fund currently has 60% invested in 'total stock market index' with the vast majority being lg cap stocks. I was considering transitioning to a 20% small, 20% med, 20% lg cap, 20% emerging, 10% bonds, 10% europe portfolio. Thoughts?

Plastikos' suggestion sounded good since its your overall asset allocation that is important. Have you read The Intelligent Asset Allocator by William Bernstein (or his newer book the Four Pillars of Investing)? It has some pretty solid advice as far as asset allocation.

 

[SClENCE]

If you are 30 years from retirement and looking to be aggressive why even have any bonds at all?

I am:
25% Small cap index
25% Mid cap index
25% Large cap growth
25% Global fund (This fund is about 50% domestic)

100% stocks with only about 12.5% foreign exposure lol. Maybe if you want to capitalize on future pullbacks in the market or something you could reserve some money by holding bonds.

 

[sazerac]

If you are asking if managing 6 funds is a good idea, the answer is no. It is exciting at first, but it quickly becomes a hassle. You should be able to meet your goals with two funds, three tops.

If you are looking for something more aggressive, have you thought about just moving the money to a target retirement year that is further out than the year you have chosen right now? It might be the simplest solution.

 

[SClENCE]

If you are asking if managing 6 funds is a good idea, the answer is no. It is exciting at first, but it quickly becomes a hassle. You should be able to meet your goals with two funds, three tops.

If you are looking for something more aggressive, have you thought about just moving the money to a target retirement year that is further out than the year you have chosen right now? It might be the simplest solution.

How do index funds require any active management at all? Heck my 401k will even redistribute the funds to the selected % automatically if one grows faster than the other.

 

[ThoracicGuy]

Hey all,

I'm thinking about shifting away from my Vanguard target retirement fund and thought I would ask all of your thoughts about it. I feel the fund is too large cap heavy for me given I have a 30+ yr time horizon until retirement and think a more heavily weighted small/med cap would be more aggressive. The fund currently has 60% invested in 'total stock market index' with the vast majority being lg cap stocks. I was considering transitioning to a 20% small, 20% med, 20% lg cap, 20% emerging, 10% bonds, 10% europe portfolio. Thoughts?

As the Bogleheads suggest, I follow the 3 or 4-fund philosophy. If you wanted to have a small/med cap tilt, you could do something like:

50% Total stock fund
20% Total International Fund
20% Small/Med index fund (or 10% Small Cap + 10% Med Cap)
10% Bond

The more funds you put in, the more complicated it gets. I'm not sure all the breakouts that you want will really give you that much benefit.

 

[SClENCE]

As the Bogleheads suggest, I follow the 3 or 4-fund philosophy. If you wanted to have a small/med cap tilt, you could do something like:

50% Total stock fund
20% Total International Fund
20% Small/Med index fund (or 10% Small Cap + 10% Med Cap)
10% Bond

The more funds you put in, the more complicated it gets. I'm not sure all the breakouts that you want will really give you that much benefit.

Two questions: Is there any advantage of buying small mid and large cap funds as opposed to just buying a total market index fund? Or is the only reason to buying a small/mid/large cap fund to tilt?

Second question: I know nothing about international funds and my 401k offers 3 options: TFEQX, VDIPX, and RNPGX. All three of these options are very different from one another and I have no clue what to choose. The global fund has had by far the best performance but is only 50% international. I lack an understanding of what these funds represent to be honest.

 

[Plastikos]

A later dated target retirement date fund is a good idea. Bonds are almost always over weighted in those funds. Given the yield curve, age from retirement etc...bonds are not likely to do well for some time. You dont really need a volatility hedge at this point in time you need to accumulate, so stocks are your boy. No need to overthink it if youre indexing. A US fund, an ex US fund, and maybe a factor or two of your liking (small, mid, etc cap, reit, healthcare, etc..). You can bring bonds along as you progress through your career.

Most peoples investment arc as far as aggressiveness goes...not enough, too much, backing off again. You really want to start out more aggressive and slowly add in things like bonds to bring the volatility down. I'll probably never do more than 80-75% bonds (currently 100% equities, plan to remain for some time) as anything else limits growth and increases the rate your money goes away.

 

[ThoracicGuy]

Two questions: Is there any advantage of buying small mid and large cap funds as opposed to just buying a total market index fund? Or is the only reason to buying a small/mid/large cap fund to tilt?

Second question: I know nothing about international funds and my 401k offers 3 options: TFEQX, VDIPX, and RNPGX. All three of these options are very different from one another and I have no clue what to choose. The global fund has had by far the best performance but is only 50% international. I lack an understanding of what these funds represent to be honest.

The Total Market fund (at least at Vanguard) can be approximated by 80% of the Vanguard 500 Index and 20% of the Vanguard Extended Market Index. Another approximation would be 81% Vanguard 500, 6% Vanguard MidCap, 13% Vanguard SmallCap. So with the Total Market, you own a bit of everything. The way I see it, buying either small or midcap indexes would be done solely to be able to tilt.

As for the second question, I'm not too familiar with those particular funds, but looking up the details I see this:

TFEQX: ER 0.78%, with a Giant Value/Blend focus of funds. 95% is foreign stock
VDIPX: ER 0.06%, with a Giant Value/Blend/Growth focus of funds. 98% is foreign stock
RNPGX: ER 0.45%, with a Giant Growth focus of funds. 44% is US stock, 50% is foreign stock

Just based on this alone, for an international stock, I would pick VDIPX. The costs are by far the lowest and it appears to be indexed to approximate the same index as TFEQX. The reason that RNPGX has the best performance right now of the three is that US stocks appears to have done better the last quarter or so compared to International stocks.

Now you also don't have to do a 3/4 fund portfolio in each account. If you have a 401k and an IRA, you can utilize both to make your mix. So if you don't have a good international fund in the 401k, get it in your IRA. Or if your domestic options are bad, put that in your IRA.

 

[ThoracicGuy]

A later dated target retirement date fund is a good idea. Bonds are almost always over weighted in those funds. Given the yield curve, age from retirement etc...bonds are not likely to do well for some time. You dont really need a volatility hedge at this point in time you need to accumulate, so stocks are your boy. No need to overthink it if youre indexing. A US fund, an ex US fund, and maybe a factor or two of your liking (small, mid, etc cap, reit, healthcare, etc..). You can bring bonds along as you progress through your career.

Most peoples investment arc as far as aggressiveness goes...not enough, too much, backing off again. You really want to start out more aggressive and slowly add in things like bonds to bring the volatility down. I'll probably never do more than 80-75% bonds (currently 100% equities, plan to remain for some time) as anything else limits growth and increases the rate your money goes away.

I'm currently at 20% bonds and I wonder if that's too much sometimes.

 

[agammaglobulin]

I spent a good bit of time trying to find an article, Im pretty sure it was on the reformed brokers or investors field guide blog in the last couple months...but no luck finding it. It basically showed that large caps have been outperforming all other sectors over a long term trend, or the rich get richest as its becoming harder and harder to disrupt companies with large infrastructures and asset bases that will have easier transitions into emerging markets, etc....Of course it could be totally full of it, but it was interesting.

Good to know, I appreciate all the advice. I decided to look at the past 10 years (before fees) of the difference in returns between Vanguard target retirement 2045 and the combined return of funds I was thinking of changing to (20% small, 20% mid, 20% large, 20% emerging, 10% Europe, 10% bonds). The difference comes out to about 0.4%/yr. I don't think this is convincing enough/long enough time period to convince me to switch. Thanks all.

 

[Mman]

Hey all,

I'm thinking about shifting away from my Vanguard target retirement fund and thought I would ask all of your thoughts about it. I feel the fund is too large cap heavy for me given I have a 30+ yr time horizon until retirement and think a more heavily weighted small/med cap would be more aggressive. The fund currently has 60% invested in 'total stock market index' with the vast majority being lg cap stocks. I was considering transitioning to a 20% small, 20% med, 20% lg cap, 20% emerging, 10% bonds, 10% europe portfolio. Thoughts?

I'd be more concerned about the fees you are paying for funds. A longterm target retirement fund at a low cost is a reasonable vehicle for almost anybody. You'd have to get some mighty good lower cost options to want to consider tweaking it.