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Learning, Sharing, and Teaching => Investor Alley => Topic started by: jsloan on August 10, 2012, 06:27:16 AM

Title: Disadvantages of Vanguard Target Retirement Fund
Post by: jsloan on August 10, 2012, 06:27:16 AM
My wife and I are both in the process of rolling over and consolidating our 401k plans with previous employers.  I have been doing some research and am reading the Bogleheads Guide to Investing.  We are planning to roll everything into Vanguard Funds.  I keep reading about the possibility of setting your target retirement date and using the Vangaurd Target Retirement Fund and forgetting about selecting individual funds and asset allocation.  This seems really tempting to me because I like the idea of selecting one fund and then forgetting about it but, I am wondering if there are any disadvantages to this approach?  If the Target Retirement Fund is such a good option, then why doesn't everyone use it?  Can anyone please explain what I may be missing?  Thanks!
Title: Re: Disadvantages of Vanguard Target Retirement Fund
Post by: Nancy on August 10, 2012, 07:06:32 AM
Thanks for the post! I am also interested in this. From reading the Shortest Book Ever on Saving for Retirement, I think the target date fund doesn't get you exposure to REITs or commodities. I was planning on going with Vanguard Target Date funds and then allocating some of my Roth to the two above. I'm not sure if this will cut it, however, so I'm interested in how others will respond.
Title: Re: Disadvantages of Vanguard Target Retirement Fund
Post by: smalllife on August 10, 2012, 07:09:40 AM
What I don't like about my target date retirement fund is if you add up all of the major holdings in each of the indexes, you end up over-exposed to certain companies - Apple, Pepsi, etc. - because they show up on several funds.  Or at least that's  how my Fidelity fund works.   I'm planning on switching to the "thirds" rule of investing when my account gets big enough.  I also have my eye on the Fidelity 4-in-1 as an intermediate mutual fund.  I should hit the minimum for that sometime next year.
Title: Re: Disadvantages of Vanguard Target Retirement Fund
Post by: JohnGalt on August 10, 2012, 08:28:17 AM
I believe the vanguard target date funds are pretty simple - they have 4 or 5 broad funds to cover total stock market, total bond market, international, and short term.  As long as you're comfortable with the underlying asset allocation (and how it will change over time), then there is nothing wrong with going with this option.  They are low fee and you won't have to think about it.  I would encourage you to look at the asset allocations to decide rather than picking based on date.  The target dates tend to be way more conservative than I'd want to be - so I would bump out the date of the fund I picked if I were to go this route.

Who wouldn't go with them?  Anyone who doesn't find an AA they like with one or anyone who wants to more directly control their investments. 

Title: Re: Disadvantages of Vanguard Target Retirement Fund
Post by: COguy on August 10, 2012, 09:26:30 AM
I use a Vanguard Target Date fund in my 401k.  It is easily the best option in my opinion.  The over-exposure that smalllife talks about should not exist in the Vanguard target date funds.  Although it wouldn't surprise me if other companies who get more fancy with their funds do have this.
Title: Re: Disadvantages of Vanguard Target Retirement Fund
Post by: RoseRelish on August 11, 2012, 06:32:13 AM
The biggest problem with target date funds (and asset allocation advice in general) is that they become too conservative too quickly. Pushing the target date further out mostly fixes the problem.

And on being overexposed to Apple, Pepsi, etc - that's not true. If AAPL is 3% of two funds that make up 15% each of your allocation, that's the same as having just one fund where AAPL is 3%. you do end up overexposed to large companies because they make up the biggest chunk of most indexes, but this is not due to holding multiple funds.
Title: Re: Disadvantages of Vanguard Target Retirement Fund
Post by: carolinakaren on August 11, 2012, 07:18:04 AM
I have a Fidelity Freedom Fund that has a target date (IRA rollover from previous job)  but have wondered if it would become too conservative before I was ready.....thanks for the information on this issue.  I also am thinking about changing over to Vanguard.
Title: Re: Disadvantages of Vanguard Target Retirement Fund
Post by: arebelspy on August 11, 2012, 09:41:13 AM
Agree on them becoming conservative too fast. 

Especially for us Mustachians.  We retire early, but necessarily should be keeping more invested in stocks and such if we want to beat inflation over a 40+ year retirement.  ER means your investing horizon is a lot longer.
Title: Re: Disadvantages of Vanguard Target Retirement Fund
Post by: the fixer on August 15, 2012, 03:16:19 PM
The biggest disadvantage in my mind of target date funds is that you can't optimize for tax efficiency. For instance, claiming the foreign tax credit, keeping bonds in tax-deferred or tax-free accounts, etc. Tax loss harvesting is also much less precise. But I think of these as pretty advanced investing concepts that may be more than you want to deal with, and the advantages of target date funds doing most of the work for you can easily outweigh these disadvantages.

It's also worth noting that these same drawbacks of target date funds apply to any index fund, compared with doing your own tracking of an index. By buying individual stocks and balancing them yourself, you could theoretically keep higher-dividend stocks in tax-advantaged accounts and low- or no-dividend stocks in your taxable account. You could also do slightly better tax loss harvesting by only selling stocks that have taken a loss, and not an equal portion of the entire index. But these reasons by themselves don't mean it's a good idea to attempt this. Weigh the trade-offs of each approach to decide what works best for you.