Vanguard total stock market vs target retirement funds

[brand new stash]

I'm interested in mustachian opinions about choosing between the vanguard total stock market fund vs the target 2035 retirement fund.  The target retirement fund has a mix to include the international markets and bond markets in addition to the stock market fund. 

Did any of your choose between these funds? which one did you pick and why?

[sherr]

I chose the total stock market index. Here, you should find this worthwhile:

http://badmoneyadvice.com/2012/07/target-date-funds-misunderstood.html

[randymarsh]

I'm currently in a target date fund. Eventually I'll switch to the funds that make up the target date fund when I have more assets. I'm in the target date because I don't have the minimum 3K to invest in the total stock fund.

You're asking 2 separate questions really. What do you want your asset allocation to look like? If you only invest in the total stock market fund, you're obviously 100% invested in stocks. If you choose a target date fund, you're investing in stocks and bonds. The percentages will vary based on the year you choose.

If you're extremely young, 100% stocks are not necessarily a bad choice if you can handle occasional drops. As you get older though, you'll likely want some % of your assets in bonds.

[the fixer]

The most important differentiator between a Mustachian ER plan and normal retirement is the timeline. We have a very short time to accumulate our stash, we have a lot of ability to take risk during that time because most of us will choose and not be forced into retirement at a young age, and our time in retirement is much longer. All of these things make target date funds suboptimal. It wouldn't totally ruin the plan if you wanted to use them, though.

If you still want a single-fund solution with bond/international diversification, try VASGX: https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT The difference between this Vanguard LifeStrategy fund and a target retirement fund is that LifeStrategy funds don't have a 10-15 year long glidepath, which makes them more appropriate for an early retiree. You would still need to reallocate at or near retirement manually to something more conservative.

[Frankies Girl]

I'm in a total stock market equivalent mutual funds (I use Fidelity instead, but they have near-as-dammit index funds to Vanguard) and have a few other index funds to balance out my portfolio based off of my asset allocation.

I personally think that target date funds are okay if you don't want to think about your investments that much. The advantage of them is that they are supposed to rebalance themselves - as you get closer to your target date, they'll go more conservative, so you really can just set it and forget it.

The disadvantage is that you're paying some fund manager more in expenses to do this, and they'll never be as profitable as just doing the basic rebalance yourself every once in a while, using the basic index funds available to everyone.

And the big disadvantage - you're not really getting in on how all of this stuff really works when placing all of your investing decisions in the hands of someone else. I'm not saying that a person should study the markets daily and read every book written on it out there, but with some basic reading and fiddling on your own, you can pretty much get a good idea of how everything works, and stay as much or as little involved as you feel comfortable with. But you have the basic knowledge to do what works best for your situation.

[wtjbatman]

Not sure why some people here ever recommend Target Date Funds. They are actively managed, which if you even have to ask, means you should avoid it. Like FG said, I kind of worry that just investing in a "Target Date Fund" and not paying attention to any details could be harmful as you are learning absolutely nothing about your own personal portfolio and allocations. At the very least, you should be able to understand something as simple as the three fund portfolio that you can read about at http://www.bogleheads.org

Not to mention putting your money in a Target Date Fund that has an expense ratio of around .80 (I believe that's pretty standard) is going to cost you hundreds or even thousands of dollars a year in unnecessary fees, as opposed to putting your money in index funds that have an expense ratio of .05. As an example, if your portfolio is worth $250,000, you are going to be losing around $125 a year in index fund fees. If that money was in a Target Date Fund/Target Retirement Fund charging .80, you would be losing $2,000 a year in management fees. That's $2,000 less every year, which is that much less money you will have in retirement.

Go ahead and try out this calculator at Vanguard's website, and see how badly high expense ratios can and will hurt your investments.

[the fixer]

A target date fund does not have to be "actively" managed. Active management means someone is constantly making tactical decisions about what the fund does. A target date fund doesn't (have to) work this way; rather, it's got a plan for a present asset allocation and how that allocation will change over time. What's important is whether or not the target date fund is composed of actively managed funds or not, and in this case the target date fund just has passively managed funds in it.

Vanguard's target date funds have higher expense ratios than the individual funds they contain, but they're still way lower than the 0.8% figure given.

[wtjbatman]

A target date fund does not have to be "actively" managed. Active management means someone is constantly making tactical decisions about what the fund does. A target date fund doesn't (have to) work this way; rather, it's got a plan for a present asset allocation and how that allocation will change over time. What's important is whether or not the target date fund is composed of actively managed funds or not, and in this case the target date fund just has passively managed funds in it.

Vanguard's target date funds have higher expense ratios than the individual funds they contain, but they're still way lower than the 0.8% figure given.

You're right, I googled a few other retirement date funds and they were coming in around .80, I see now that Vanguard's are much less, around .20.

That's still four times higher than an index fund, and assuming you are an intelligent individual and can do enough research to understand index funds and a balanced portfolio, it's a waste of money. You're paying .15 a year for the honor of someone else adjusting a slider and changing the fund's assets from 80% stocks/20% bonds, to 75% stocks/25% bonds (simplified, but you get the idea).

[foobar]

There are a couple things to think about
1) Do you think you should get more conservative as you age? In that case a target fund makes sense. Personally I would pick one out about 15 years from your real retirement date but I prefer to be a lot more aggressive

2)Do you believe in diversification?  VTSM covers the US market well.  The retirement funds (or lifecycle if you don't want to get more conservative) give you more international exposure and some bonds.

Long term I think you are better off buying the 4 funds that vanguard uses and handling the balancing yourself. But I am also not super aggressive about rebalancing (i.e. last year I didn't sell my stock gains. I just redirected dividends and future investments to bring it back to where I wanted it). 

I'm interested in mustachian opinions about choosing between the vanguard total stock market fund vs the target 2035 retirement fund.  The target retirement fund has a mix to include the international markets and bond markets in addition to the stock market fund. 

Did any of your choose between these funds? which one did you pick and why?

[Zoot Allures]

I had Vanguard's LifeStrategy Growth fund through my employer, which is a simple 80/20 fund made up of total US stock, total international stock, total US bond, and total international bond. Pretty low expense ratio--something like .15. I liked it. Unfortunately my employer is no longer offering this, and Vanguard is automatically replacing LifeStrategy with its target retirement fund (with the retirement year based on the age of the investor, a crude and inaccurate measure by mustachian standards) unless we move our money into other funds ourselves.

As others have noted, the target retirement funds tend to have higher fees. I think it's weird and inelegant that to get close to the asset allocation I want, I have to choose a year that isn't actually the year I'm going to retire. And I'm not interested in a fund that rebalances itself every year on its own, because I'm looking forward to performing that annual ritual myself.

So I decided to buy Total US Stock and Total US Bond directly, with an 80/20 AA. The institutional versions of these funds are available to me through my employer, and the expense ratios are close to zero. I don't have any international exposure now, but after reading JL Collins' thoughts on that, I feel comfortable without it.

[MissPeach]

If I had Vanguard funds as an option in my 401K I would do them. The expense ratios are usually some of the best in the industry.

I have been considering using a target date fund in my 401K. I can set up an investment account in my company's 401K to access Vanguard but the fees seem high. They charge $50/year, commissions, etc. They don't have these charges with the standard funds. I'm not sure if it's worth it yet. I'll have to run some numbers.

The reason why I had even considered target date funds is I was going to pick one out 40+ years that should be aggressively invested. It's earning about the same % as my current portfolio but the fees in the target date funds are lower than my 401K's other funds (i.e., large cap, small cap, etc.). The fees in my 401K are expensive and the lowest funds that are making decent returns are the target date funds.

I'm also in an unusual situation where I'm considering rolling my IRA into my 401K so I want to keep the fees down. I am investing a good chunk of money in a taxable account (after maxing everything else out) and I am running numbers to see if it's worth rolling my taxable accounts into a Roth as a long term tax strategy.