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Learning, Sharing, and Teaching => Investor Alley => Topic started by: MVal on August 28, 2015, 08:47:26 AM

Title: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: MVal on August 28, 2015, 08:47:26 AM
I previously bought Target Retirement Fund 2045 with my fairly new Roth IRA when I opened it and so far that's all I have in it. However, with the recent downtown in the market, I am going to buy VTSMX today for the first time. I know I can get to the Admiral shares when I hit $10K in that fund, so should I sell the target 2045 funds to buy more VTSMX? Or should I wait for the market to come back up before doing something like that? I am just beginning to learn about all this.
Title: Re: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: forummm on August 28, 2015, 08:53:33 AM
Generally, just pick an AA and stick with it. You can make changes to the AA if you realize you want something different, but don't do it because of what's been happening in the market.

www.bogleheads.org/wiki/investment_policy_statement

https://personal.vanguard.com/us/FundsInvQuestionnaire
https://personal.vanguard.com/us/funds/tools/recommendation
https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk
https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations
Title: Re: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: NP on August 28, 2015, 09:02:55 AM
I previously bought Target Retirement Fund 2045 with my fairly new Roth IRA when I opened it and so far that's all I have in it. However, with the recent downtown in the market, I am going to buy VTSMX today for the first time. I know I can get to the Admiral shares when I hit $10K in that fund, so should I sell the target 2045 funds to buy more VTSMX? Or should I wait for the market to come back up before doing something like that? I am just beginning to learn about all this.

Replacing the target retirement fund with VTSMX would significantly change your asset allocation and reduce diversification of your IRA. The Vanguard target retirement funds are good, broadly diversified funds with a very sensible asset allocation. They're safe choices for anyone who isn't experienced enough to make asset allocation decisions themselves, and even many experienced people prefer them.

I suggest you don't try to react to market movements or mess with asset allocation until after you've learned a great deal more. Read a lot and give yourself at least half a year to absorb and process the information. The only reason to do otherwise would be if the investments your currently owned were bad but the Vanguard target retirement funds are among the very best.
Title: Re: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: MVal on August 28, 2015, 09:16:39 AM
I previously bought Target Retirement Fund 2045 with my fairly new Roth IRA when I opened it and so far that's all I have in it. However, with the recent downtown in the market, I am going to buy VTSMX today for the first time. I know I can get to the Admiral shares when I hit $10K in that fund, so should I sell the target 2045 funds to buy more VTSMX? Or should I wait for the market to come back up before doing something like that? I am just beginning to learn about all this.

Replacing the target retirement fund with VTSMX would significantly change your asset allocation and reduce diversification of your IRA. The Vanguard target retirement funds are good, broadly diversified funds with a very sensible asset allocation. They're safe choices for anyone who isn't experienced enough to make asset allocation decisions themselves, and even many experienced people prefer them.

I suggest you don't try to react to market movements or mess with asset allocation until after you've learned a great deal more. Read a lot and give yourself at least half a year to absorb and process the information. The only reason to do otherwise would be if the investments your currently owned were bad but the Vanguard target retirement funds are among the very best.

Thanks, good advice! Do you still think it's okay for someone inexperienced to buy outside of a target fund? I was drawn to VTSMX because it seems to have a higher return over the long term and still a cheap expense ratio.
Title: Re: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: NP on August 28, 2015, 10:09:34 AM
Thanks, good advice! Do you still think it's okay for someone inexperienced to buy outside of a target fund? I was drawn to VTSMX because it seems to have a higher return over the long term and still a cheap expense ratio.

One the one hand, VTSMX is a quite safe choice, so if you really want to buy it, go ahead, you won't be making a big mistake. On the other hand, you clearly don't fully understand what you'd be doing. Buying VTSMX instead of the target date fund decreases your international exposure and also your allocation to bonds. Do you have a good reason to do either?

Do you really think that this most recent minor downturn has made U.S. stocks a better deal than international stocks? Have you looked at the relative valuations? Many believe that international stocks are on sale right now while U.S. stocks are overpriced. They could be wrong though, for example, if U.S. stocks are headed for a long rally.

The Vanguard Target Retirement 2045 fund consists of approximately 90% stocks and 10% bonds. Some claim that a 10% bond allocation is unnecessary for people far away from retirement and argue for having 100% stocks instead, and there are some convincing arguments in favor of this. However, a 90%/10% split is generally considered by most a very agressive portfolio that's on the riskiest end of what's recommended for young people who have the nerves to ride out market crashes. Why specifically would you want to decrease your bond allocation below 10%? Are you sure you're in the tiny minority who have the mental fortitude to handle an even more agressive portfolio, should another 2008 or 1929 come?

My point is that you'd be flying blind if you started to tweak your asset allocation right now or in the near future. Don't rush, there's no need. It's not like you'd be missing out on a lot of gains if you only start customizing your investments a year from now, should you still believe then that it's a good idea.
Title: Re: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: MVal on September 01, 2015, 01:48:58 PM
Thanks, good advice! Do you still think it's okay for someone inexperienced to buy outside of a target fund? I was drawn to VTSMX because it seems to have a higher return over the long term and still a cheap expense ratio.

One the one hand, VTSMX is a quite safe choice, so if you really want to buy it, go ahead, you won't be making a big mistake. On the other hand, you clearly don't fully understand what you'd be doing. Buying VTSMX instead of the target date fund decreases your international exposure and also your allocation to bonds. Do you have a good reason to do either?

Do you really think that this most recent minor downturn has made U.S. stocks a better deal than international stocks? Have you looked at the relative valuations? Many believe that international stocks are on sale right now while U.S. stocks are overpriced. They could be wrong though, for example, if U.S. stocks are headed for a long rally.

The Vanguard Target Retirement 2045 fund consists of approximately 90% stocks and 10% bonds. Some claim that a 10% bond allocation is unnecessary for people far away from retirement and argue for having 100% stocks instead, and there are some convincing arguments in favor of this. However, a 90%/10% split is generally considered by most a very agressive portfolio that's on the riskiest end of what's recommended for young people who have the nerves to ride out market crashes. Why specifically would you want to decrease your bond allocation below 10%? Are you sure you're in the tiny minority who have the mental fortitude to handle an even more agressive portfolio, should another 2008 or 1929 come?

My point is that you'd be flying blind if you started to tweak your asset allocation right now or in the near future. Don't rush, there's no need. It's not like you'd be missing out on a lot of gains if you only start customizing your investments a year from now, should you still believe then that it's a good idea.

These are all good questions I did not think about, or even realize I should consider. I am really at the very beginning of understanding investing. The only thing I was looking at it on Vanguard's site, upon comparing Target 2045 and VTSMX, I just noticed that the long term return was higher for VTSMX and the expense ratio was similar to the target fund, so I assumed it was a better option.
Title: Re: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: Argyle on September 01, 2015, 01:54:29 PM
The expense ratio for VTSMX is 0.17%, and for the cheaper Admiral Shares of the same, 0.05%.  Admiral shares require a minimum of $10,000.  So if you're at all close to that, I'd invest a bit more to get the lower expense ratio if you have $10,000 in the fund, that gives you an extra $120 every year, or basically $1200 every decade for absolutely the same investment. 
Title: Re: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: MVal on September 01, 2015, 03:25:01 PM
The expense ratio for VTSMX is 0.17%, and for the cheaper Admiral Shares of the same, 0.05%.  Admiral shares require a minimum of $10,000.  So if you're at all close to that, I'd invest a bit more to get the lower expense ratio if you have $10,000 in the fund, that gives you an extra $120 every year, or basically $1200 every decade for absolutely the same investment.

That's kind of what I was hoping for... although if I invested my whole Roth deposit for the year in VTSMX, I'd have to either sell $4500 worth of my target fund or wait until 2016 to buy up to $10,000 worth. Those Admiral shares seem pretty attractive.
Title: Re: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: Eric on September 01, 2015, 03:40:53 PM
The expense ratio for VTSMX is 0.17%, and for the cheaper Admiral Shares of the same, 0.05%.  Admiral shares require a minimum of $10,000.  So if you're at all close to that, I'd invest a bit more to get the lower expense ratio if you have $10,000 in the fund, that gives you an extra $120 every year, or basically $1200 every decade for absolutely the same investment.

That's kind of what I was hoping for... although if I invested my whole Roth deposit for the year in VTSMX, I'd have to either sell $4500 worth of my target fund or wait until 2016 to buy up to $10,000 worth. Those Admiral shares seem pretty attractive.

In the short term, there's basically no difference between the two expense ratios.  Long term, sure, but short term, it matters not.  If you have $5000, the expense ratio of .17% is $8.50.  If that was .05%, it's $2.50.  So that's a difference of $6.00 over a year.

So while you generally want to strive for the lowest expense ratios, rushing to get there isn't going to make much of a difference.  Just wait until next year.
Title: Re: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: Ohio Teacher on September 01, 2015, 08:05:08 PM
The expense ratio for VTSMX is 0.17%, and for the cheaper Admiral Shares of the same, 0.05%.  Admiral shares require a minimum of $10,000.  So if you're at all close to that, I'd invest a bit more to get the lower expense ratio if you have $10,000 in the fund, that gives you an extra $120 every year, or basically $1200 every decade for absolutely the same investment.
Your numbers are only correct if there were a 1.2% difference between the expense ratios as 1.2% of $10,000 is $120. 

Since the difference is actually only 0.12%, the correct savings is $12 per year, or $120 per decade. 
Title: Re: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: MDM on September 01, 2015, 10:22:47 PM
See also http://forum.mrmoneymustache.com/investor-alley/seeking-some-financial-advice/ for a very similar question.
Title: Re: Buying VTSMX for the first time - should I sell Target fund 2045 to get more?
Post by: Kaspian on September 03, 2015, 12:19:13 PM
I previously bought Target Retirement Fund 2045 with my fairly new Roth IRA when I opened it and so far that's all I have in it. However, with the recent downtown in the market, I am going to buy VTSMX today for the first time. I know I can get to the Admiral shares when I hit $10K in that fund, so should I sell the target 2045 funds to buy more VTSMX? Or should I wait for the market to come back up before doing something like that? I am just beginning to learn about all this.

Does your personal investment plan say somewhere to sell Target 2045 if VTSMX is down 4%?  Did you think about doing this maneuver 4 or 5 months ago?  If the answers are 'No', then stop tinkering.  :)