VTSAX vs 2045 Target Retirement

[kenmoremmm]

I have funds split between VTSAX and 2045 Target Retirement Funds. I had figured that the 2045 fund would smooth out ups and downs, but lag VTSAX long term. When I looked today (probably something I should've done awhile ago), I saw:

Average annual performance—quarter end
    Vanguard Target Retirement 2045   Vanguard Total Stock Mkt Idx Adm           
YTD   -7.90%   -5.17%
YTD as-of date   12/31/2018   12/31/2018
1-year   -7.90%   -5.17%
3-year   6.78%   8.99%
5-year   5.13%   7.90%
10-year   10.26%   13.25%
1-, 3-, 5-, 10-year as-of date   12/31/2018   12/31/2018
Since inception   7.07%   6.00%
Inception date   10/27/2003   11/13/2000
SEC yield   2.51% B
30day      2.09% B
30day      
SEC yield as-of date   12/31/2018   12/31/2018


Basically, 2045 underperforms on all metrics, including the negative years. Is the reason for this the international weighting?

[FINate]

It's probably due to the bond component.

For about the past 10 years we've been in a bull market, not sure if recent events have changed this...in any case, for about 10 years stocks have mostly moved up, whereas bonds have performed less well. During market downturns the 2045 fund will be comparatively better off. But yes, you give up some long term gains for the reduced volatility, and the difference is even more dramatic in a super long bull market.

[JZinCO]

I have funds split between VTSAX and 2045 Target Retirement Funds. I had figured that the 2045 fund would smooth out ups and downs, but lag VTSAX long term.

My guess is that VTSAX has both higher returns and higher risk than VTIVX because the latter has incrementally been adding bonds whereas the former is just stocks. So as you expected, the latter has less volatility and lower returns.
This comparison illustrates the classic risk vs returns tradeoff.

edit: FINate beat me to it. I guess I'll add something worthwhile. A metric you are may want to look up (since you mentioned the smoothing effect of VTIVX) is standard deviation. Compare the 10-yr standard deviation of VTIVX (12.82) against VTSAX (14.02). If we were to look over a time period that included both recessions and bull markets we would except the spread in standard deviation to be even greater.

[Andy R]

1. Bonds are only 10%. They should have a modest effect on performance, and should be helping volatility more than the cost of performance.

2. International has severely under performed over the last decade. I would suggest being careful assuming this will continue indefinitely. What are you doing to do if you remove all international and international out performs over the next decade? Are you going to then switch back to international AFTER you missed out on the gain just in time for it to under perform for the next decade?
With diversification, you are always apologising about something since you will never be in the asset class that did the best, but you are also guaranteed of not being in the asset class that did the worst. The question really comes down to - do you want to invest or gamble.

[Dee18]

The expense ratios are quite different for the two funds.  I got out of date targeted funds after reading Collins’ articles about how much the expenses affect earnings. 

[MustacheAndaHalf]

International beat U.S. from 2000 - 2009 (which includes both the dot-com crash and the 2008 financial crisis - and international did worse during both crashes, and still beat the U.S. for that decade).  And then U.S. has beat international so far from 2010 - 2019.  Looking at the recent past does not predict the immediate future.  Even P/E ratios are only 0.40 correlated with stock prices 10 years later (10-20 year delayed impact).

VTSAX is much riskier than the target date fund, especially as you approach retirement.  If you retire 100% in U.S. equities, your retirement can end owing to "sequence of returns" risk.  You need the same amount to pay your rent each month, but stocks can drop fast and make your withdrawals unsustainable.  Target date funds seek to avoid that by allocating more bonds over time (but initially just 10%).

[Eric]

I don't think anyone specifically mentioned it, but you are aware that the 2045 fund already contains 54% VTSAX right?  It seems weird to buy VTSAX on top of that, since that's just skewing your international and bond allocation lower.  If you wanted to be in a TDF, then I think you should be all in.  That's kind of the whole point of them.

As far as the underperfomance claim, it's an apples to oranges comparison.  International has beaten the US for long periods in the past, but this last period as been pretty terrible for international returns, both because many areas were a lot slower to recover from the Great Financial Crash than the US was, and also because the US Dollar has been on a huge run up during this same time period.  (So when your foreign profits/gains are converted back into USD, they *seem* smaller due to the exchange rate).  This could reverse at any time.  And really, the fact that international has performed poorly for the last ~10 years is probably the exact reason you'd want to own it going forward.  Those markets have lower PEs and more room for growth.  Buy low, right?

It's always hard to know which sectors will perform the best, because they tend to jump around a lot.  Check out the chart here:

https://awealthofcommonsense.com/2019/01/updating-my-favorite-performance-chart-for-2018/

Personally, I still hold a fair amount of international (basically the same as your TDF, 35%) because I don't expect the US outperformance to continue forever and I also don't expect the USD to continue to get stronger forever.

[smoghat]

I guess I’m with Bogle. The US is the most solid country in the world and US firms are so tied to the global economy that you get international exposure as a result. My investment in ^AAPL has been creamed over the last few months due to conditions in China (although, fair enough, the cause is really the dotard in DC, so it’s complicated).

As for the 2045 fund vs VTSAX… Funds that are geared toward retirement dates are also based on past performances and, while VTSAX could see negative growth for a decade, sure, bonds are in a weird new space. Take a look at any chart of historic bond returns… are we due for a reversion to the mean? Or are bonds going to stay low for the foreseeable future? Heck, think about the conniption that the Commander in Chief had when the Fed wanted to raise rates. Sure as heck those rates aren’t going up any time soon. And that’s on Fed Rates. As far as Treasuries, my bet is that they are going to stay low for a looong time so as to reduce the amount the US has to spend on debt servicing. And then one day, out of the blue, when the national debt has surpassed some magic number, they will shoot way way up and not come down. But what is that magic number? And when? Ah, therein lie fortunes to be made.