Index Funds vs. Dated Funds

[badassprof]

Hi, all:

My partner and I are in a situation where we can place an extra 1000 a month into some kind of investment.  We are vacillating between an index fund like vanguard's total index fund (or maybe a comb of that and a bond fund--we are about 5 years from FI) or one of those dated funds (say, 2025).  Any thoughts on which is better and why?

[Nothlit]

http://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/

In the end, Vanguard's target date funds are ultimately just made up of various percentages of underlying funds that you can buy directly (VTSMX, etc.).

Some reasons you might want to buy a target date fund:
- Simplicity
- Don't have to think about rebalancing
- Automatically becomes more conservative as the target date approaches

Some reasons you might want to buy the underlying funds directly:
- Lower fees (buy Admiral shares instead of Investor shares which make up the target date fund)
- More hands-on control of your asset allocation
- Divvy up asset classes for tax-efficient placement in various accounts (IRA, 401k, taxable, etc.)

Bottom line is either approach can work just fine - it's mostly a trade off between simplicity vs. manual control. In the end the differences are probably not worth losing sleep over.

[MustacheAndaHalf]

An investor with no preference should start with a target date fund, in my opinion, because in a single purchase they gain Vanguard's insights about a retirement portfolio.  I mention Vanguard specifically because their Target Date funds have about 0.16% expense ratios, while I've seen Fidelity have some (all?) higher than 0.50%.  People shouldn't have to second guess which Target Date fund will charge them too much in fees, in my view.

With a target date fund you avoid delays - you pick the fund and invest.  Then, with money already working for you, you can read up on doing it yourself and see if you prefer that approach.

You didn't mention any retirement plans.  If you have a retirement plan with employer matching, invest in that up to the match.  Get the free money.  You might also be able to invest in an IRA.  An IRA could be better than investing in a taxable account.

[TheAnonOne]

The biggest downside is that TDFs become conservative and bonds are basically a financial boat anchor.

Sincerely, most people on this forum.

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[badassprof]

Thanks all for you advice.

In terms of retirement, we currently have about 820,000 in our 401ks and 85,000 in company stock. No debt except our mortgage.  It is high (680,000), but at the moment (which, of course, could change radically) we have about 800,000 in equity.

just shy of 300,000 income, which includes salaries (260,000), side hustles (8,000, but will be closer to 10,000 this year, I think)  and rental income (32,000--househack--MIL apartment).