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.