Author Topic: I have $2500 to contribute to Roth IRA. Do these funds look good?  (Read 3772 times)

xclonexclonex

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Hey guys,

As the title states, I have $2500 I want to invest in Roth IRA. This will max out my contribution for 2015. These are the only two funds I have in portfolio.

Vanguard Target Retirement 2055 Fund (VFFVX) - $1250
https://personal.vanguard.com/us/funds/snapshot?FundId=1487&FundIntExt=INT

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) - $1250
https://personal.vanguard.com/us/funds/snapshot?FundId=0085&FundIntExt=INT

Should I stick to these funds? Should I invest in different funds? Any advice is appreciated.

Thanks.

xclonexclonex

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #1 on: February 04, 2016, 08:32:41 AM »
I don't like to use Target Retirement funds.  I'm more of a tinkerer myself with my asset allocation.

Total Stock Market Index looks like a solid fund.

I am not really into tinkering, so I would like to hold onto an index fund. Is that a terrible idea?

hm13hm13

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #2 on: February 04, 2016, 08:38:07 AM »
What is the aversion to target date funds? I'm new to investing and that's currently where my 401K contributions reside.

dandarc

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #3 on: February 04, 2016, 08:39:51 AM »
Do you already have VTSMX in your Roth IRA?  Because the minimum initial purchase on that is $3K.

If you are 50/50 between those two, your overall allocation is like 77% VTSMX, 18% Total International, 5% Bond.  If that's the allocation you want, this is a way to do it with relatively little money, and more power to you.  At some point it will be cheaper to shift away from a target-date fund to a 3-fund portfolio (I'm personally not sold on international bonds being necessary, particularly at under 2% of a portfolio).

xclonexclonex

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #4 on: February 04, 2016, 08:53:32 AM »
Do you already have VTSMX in your Roth IRA?  Because the minimum initial purchase on that is $3K.

If you are 50/50 between those two, your overall allocation is like 77% VTSMX, 18% Total International, 5% Bond.  If that's the allocation you want, this is a way to do it with relatively little money, and more power to you.  At some point it will be cheaper to shift away from a target-date fund to a 3-fund portfolio (I'm personally not sold on international bonds being necessary, particularly at under 2% of a portfolio).

Yes, VTSMX is already in my Roth IRA. I paid the minimum last year to be able to invest in the fund. So far, it hasn't given me much in return, but whatever...

Jack

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #5 on: February 04, 2016, 08:55:31 AM »
The whole point of a target date fund is that it's supposed to be simple: you put 100% of your portfolio in the one that corresponds to your retirement date* and forget about it, and the fund manager handles adjusting your asset allocation for you as you age. Easy-peasy.

Holding a target date fund as part of your portfolio along with other funds defeats that purpose -- at that point, you might as well just buy the constituent funds to replicate the AA yourself and save some fees.

For example, VFFVX is constructed as follows (from the page the OP linked):

symbolnamepercentage of AAexpense ratio
VTSMXVanguard Total Stock Market Index Fund Investor Shares54.0%0.17%
VGTSXVanguard Total International Stock Index Fund Investor Shares35.9%0.22%
VBMFXVanguard Total Bond Market II Index Fund Investor Shares†7.1%0.20%
VTIBXVanguard Total International Bond Index Fund Investor Shares3.0%0.23%

The target-retirement fund expense ratio is 0.16%, which is better than the weighted average of the constituent funds. However, those are all Investor share-class funds. The ETF (and Admiral share-class) versions are cheaper.

In other words, even if you just wanted to replicate the target-date allocation -- and you clearly don't, because otherwise it makes no sense to buy extra VTSMX along with it -- you could save money by managing the AA yourself.

(* IMO, Mustachians should pick a target-date fund set for their "normal retirement" -- i.e., the year they turn 65 -- not the date they actually plan to FIRE.)

AZDude

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #6 on: February 04, 2016, 08:56:18 AM »
How long until you retire? 2055 is 39 years from now. Might not make sense unless you really do plan on retiring at that time. I would go with VTSMX.

dandarc

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #7 on: February 04, 2016, 09:06:43 AM »
symbolnamepercentage of AAexpense ratio
VTSMXVanguard Total Stock Market Index Fund Investor Shares54.0%0.17%
VGTSXVanguard Total International Stock Index Fund Investor Shares35.9%0.22%
VBMFXVanguard Total Bond Market II Index Fund Investor Shares†7.1%0.20%
VTIBXVanguard Total International Bond Index Fund Investor Shares3.0%0.23%

The target-retirement fund expense ratio is 0.16%, which is better than the weighted average of the constituent funds. However, those are all Investor share-class funds. The ETF (and Admiral share-class) versions are cheaper.
Minor point - the Total Bond Market II ER is 0.1%.  So the ER is the weighted average of the constituent funds, but your analysis holds due to not being able to actually buy Total Bond Market II outside of the target-date funds.
« Last Edit: February 04, 2016, 09:13:58 AM by dandarc »

xclonexclonex

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #8 on: February 04, 2016, 09:28:18 AM »
Holding a target date fund as part of your portfolio along with other funds defeats that purpose -- at that point, you might as well just buy the constituent funds to replicate the AA yourself and save some fees.

So did I make a $3000 mistake buying VTSMX found even though I have this fund as a part of index fund? Should I sell it when the fund goes above water?

Also, based on your point, I will contribute 100% to the target date fund.

How long until you retire? 2055 is 39 years from now. Might not make sense unless you really do plan on retiring at that time. I would go with VTSMX.

I will be 72 years old in 2055. I think I am not sure if I will be working until then or not. I picked this fund at the time I didn't really understand retirement, and I know my grandfather worked into this 70s, and I thought I will retire in my 70s as well. My outlook has changed since then...

Vertical Mode

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #9 on: February 04, 2016, 10:07:55 AM »
Assumptions: (I'd feel remiss if I didn't confirm what the whole picture was before offering my $0.02)

- The OP has determined they are comfortable investing this money in stocks, as opposed to shoring up emergency funds or killing any high-interest debt liabilities
- OP has determined that a Roth strategy suits them based on personal income/tax situation
- OP has a 10+ year time horizon for leaving the money invested (Buy + Hold strategy) Otherwise, if one foresees tapping the principal before then, stocks may not be the best choice

I don't like to use Target Retirement funds.  I'm more of a tinkerer myself with my asset allocation.

Total Stock Market Index looks like a solid fund.

I am not really into tinkering, so I would like to hold onto an index fund. Is that a terrible idea?

No, that could actually be a very good idea. What is the time horizon for which you plan to remain invested in these positions? Index funds tend to be low-fee and extremely tax-efficient, which is good because a higher Expense Ratio (ER, or in some cases called MER) can significantly erode your returns over time.

What is the aversion to target date funds? I'm new to investing and that's currently where my 401K contributions reside.

Usually, the aversion to them here stems from the higher Expense Ratio that accompanies a fund that is managed. Target funds automatically adjust asset allocation over time based on one's assumed position relative to retirement/age 65, which requires work on the part of (Fund Administrator), which necessitates management fees. In Vanguard's case these are usually pretty minimal, and I've seen folks around here say they are invested in them, but one would be paying for a service that some don't feel they need. One should note that there is a strong tendency toward DIY'ing things in general around the forum, so some folks feel like the hand-holding of a Target Date fund insults their intelligence ;-)

Holding a target date fund as part of your portfolio along with other funds defeats that purpose -- at that point, you might as well just buy the constituent funds to replicate the AA yourself and save some fees.

So did I make a $3000 mistake buying VTSMX found even though I have this fund as a part of index fund? Should I sell it when the fund goes above water?

Also, based on your point, I will contribute 100% to the target date fund.

How long until you retire? 2055 is 39 years from now. Might not make sense unless you really do plan on retiring at that time. I would go with VTSMX.

I will be 72 years old in 2055. I think I am not sure if I will be working until then or not. I picked this fund at the time I didn't really understand retirement, and I know my grandfather worked into this 70s, and I thought I will retire in my 70s as well. My outlook has changed since then...

I don't think buying VTSMX should be considered a mistake per se, but as Jack notes here, the purpose of a Target Date fund is to be an "all inclusive" product because it includes a mix of stock and bonds. Investing directly in the Stock and Bond Index Funds that make up the Target Fund may be a cheaper way to own the same stocks in the long term due to the lower ER's, was his point.

Should also say, good job maxing out the Roth! It's money you'll never have to pay taxes on again.

Jack

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #10 on: February 04, 2016, 10:23:53 AM »
Minor point - the Total Bond Market II ER is 0.1%.  So the ER is the weighted average of the constituent funds, but your analysis holds due to not being able to actually buy Total Bond Market II outside of the target-date funds.

Whoops, sorry -- I just did a search for the bond name, Vanguard returned the page for VBMFX and I didn't double-check to make sure I got the right one.

Holding a target date fund as part of your portfolio along with other funds defeats that purpose -- at that point, you might as well just buy the constituent funds to replicate the AA yourself and save some fees.

So did I make a $3000 mistake buying VTSMX found even though I have this fund as a part of index fund? Should I sell it when the fund goes above water?

Not even slightly!

First of all, it's not a mistake because even 100% VTSMX is a perfectly-reasonable asset allocation in the first place. (That's basically what I had, except in the Admiral-share version, until I added some international at the beginning of January.)

Second, it's not a $3000 mistake even if it is a different AA than you really wanted because you haven't lost much of anything anyway -- all you could possibly "lose" is the difference in return between VTSMX and VFFVX over the period that you held the "wrong" one. Considering that they're 54% the same anyway, that's already small. Moreover, looking at a comparison chart of the two over the past 5 years, it looks like you've probably come out ahead holding VTSMX anyway (note: that is not to say that looking at past returns is a valid way to pick one over the other -- it isn't!).

Also, based on your point, I will contribute 100% to the target date fund.

My overall point was that the DIY asset allocation (including holding VTSMX) is better than the target-date fund as long as you're willing to put in the tiny amount of work to tell Vanguard what you want and (more importantly) the larger amount of work to understand what you want -- in other words, the opposite of what you concluded. But if you like the AA and don't mind spending a few basis points for ease-of-use, then by all means, feel free to go for the target-date fund.

How long until you retire? 2055 is 39 years from now. Might not make sense unless you really do plan on retiring at that time. I would go with VTSMX.

I will be 72 years old in 2055. I think I am not sure if I will be working until then or not. I picked this fund at the time I didn't really understand retirement, and I know my grandfather worked into this 70s, and I thought I will retire in my 70s as well. My outlook has changed since then...

The important feature of target-date is that they're designed to gradually shift their asset allocation over time, to become more conservative at the point where normal people reach retirement age. This is done for several reasons:

  • normal retirees (or relative to the people here, "late" retirees) spend a long time in the accumulation phase, so they rely strongly on investment returns to get their portfolio large enough
  • "late" retirees have little flexibility in retirement to earn more money to compensate for dips in the market and thus need need to minimize potential losses
  • "late" retirees have a shorter time horizon than Mustachians, so they aren't that concerned with maximizing gains

[Warning: at this point I stray away from cut-and-dried math and into opinion]

Very early retirees are different: if you retire in your 30s, then you could realistically have a 60+ year time horizon. That's plenty of time for market dips to rebound, and that's way too long to expect a very conservative portfolio to last, given that you have compensate for withdrawals and inflation. Conversely, a mustachian's accumulation phase is so short that portfolio growth during it is dominated by contributions, not returns.

In other words, a target-date fund is almost the opposite of what you want: as a mustachian, it almost makes sense for your asset allocation to become less conservative over time instead of more conservative!

Of course, since mustachians have lots of flexibility in their FIRE date, we don't "need" the preservation of capital during the accumulation phase, so lots of us (myself included) just plan to keep basically the same aggressive asset allocation our whole lives. For example, I'm currently 100% stocks, and although I plan to add other asset classes to that (e.g. real estate), I never intend to hold more than 10% bonds.

hm13hm13

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #11 on: February 05, 2016, 08:15:02 AM »
Maybe I'm missing something. I see a different expense ratio attached to Vanguard target date funds through my company sponsored 401K. I see 0.06% for gross expense ratio**. I thought that was pretty low. Here are my available options... AGH! Do I switch? What do you think?


« Last Edit: February 05, 2016, 08:16:47 AM by hm13hm13 »

Jack

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Re: I have $2500 to contribute to Roth IRA. Do these funds look good?
« Reply #12 on: February 05, 2016, 08:33:17 AM »
Maybe I'm missing something. I see a different expense ratio attached to Vanguard target date funds through my company sponsored 401K. I see 0.06%. I thought that was pretty low. Here are my available options... AGH! Do I switch? What do you think?

What you're missing is that Vanguard funds (and mutual funds in general) are offered in different share classes* with different expenses. For example, Vanguard's S&P 500 index fund is offered in "investor shares" (VFINX) at 0.17% ER, "admiral shares" (VFIAX) at 0.05% ER, and "institutional plus" shares (VIIIX) at 0.02% ER (and also as an ETF).

Apparently, the Vanguard Target 2055 fund at 0.06% ER offered through your 401k isn't the same VFFVX the OP has available, but rather a different (cheaper) share class. (Even the institutional shares -- VIVLX -- are quoted at a 0.10% ER, so your share class is extremely cheap!)

(* note that page is out-of-date; the minimums for investor and admiral shares are lower than it claims)