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Learning, Sharing, and Teaching => Investor Alley => Topic started by: cbr shadow on May 16, 2013, 01:41:04 PM

Title: Index funds Vs.....
Post by: cbr shadow on May 16, 2013, 01:41:04 PM
My wife and I have about $24k in Roth IRA's, $50k in 401k's, and she has a standard IRA (rolled over 401k from previous job) with about $5k in it.  Right now we have our 401k's set up with the VFIFX (Vanguard 2050 Target Retirement Fund), and everything else in VTSAX.  Is this a bad idea? Is this too heavy in Index funds (VTSAX)?
Title: Re: Index funds Vs.....
Post by: NYD3030 on May 16, 2013, 02:18:24 PM
So one thing you'll need to know is that no, you're not too heavily invested in index funds, even though you are 100% invested in index funds.

The Target 2050 Fund itself holds three Vanguard index funds:

1   Vanguard Total Stock Market Index Fund Investor Shares           62.9%
2   Vanguard Total International Stock Index Fund Investor Shares   27.2%
3   Vanguard Total Bond Market II Index Fund Investor Shares        9.9% (

Those three funds comprise the entirety of your 2050 fund.  By holding VTSAX outside the 2050 fund, you are tilting your holdings towards this fund, so the returns of VTSAX are going to have an outsize impact on your returns vs if you only held 2050.

In reality you cannot be "too heavily invested in Index funds" because Index Funds are not an asset class in the way that stocks, bonds or REITs are.  The question you should be asking is "Am I holding the right mix of index funds for me?"  So what are your goals for this money, what sort of returns do you expect, and what sort of risk can you tolerate?  Is 2050 a realistic retirement date? (definitely not if you're shooting for FI!).  If the market were down and you lost 30%, 40% or even 50% of your money would you panic and sell, or hold for the long haul?  The answers to these questions will tell you what asset classes to hold.
Title: Re: Index funds Vs.....
Post by: cbr shadow on May 16, 2013, 03:02:07 PM
That's a good point.  I said "index funds" when i should have specified "stock index funds".  I forgot that there are also bond index funds.
My wife and I are young (29) and make good money ($150k roughly total) so we're fine with a good amount of risk.  I think if the market went way down and we lost 40% of our investments I would be super excited because I would do as MMM did and invest every penny I could to get the "discounted" stocks.
So maybe I answered my own question?  Yes I'm a bit heavy on the stock index funds, but because I'm willing to take a good amount of risk that's ok.
Title: Re: Index funds Vs.....
Post by: NYD3030 on May 16, 2013, 03:25:38 PM
Ahhh, okay.  So given that info I think you're allocation is good, especially given your age.  >10% bonds is extremely aggressive and you should expect some big swings, but in theory you'll get better returns than if you were 15% or 25% bonds, although not tremendously better, and volatility is going to be a lot higher.  Don't let it freak you out.

The only real criticism I can see is that some would feel you are too heavy in US and should hold more VGTSX, Vanguard Total International.  As it stands you're making a bet that the US will outperform the rest of the world over the long haul.  Historically this is not a terrible bet, but you'd hate to be wrong.  FWIW I am pretty even between US Total and Intl Total for this reason.
Title: Re: Index funds Vs.....
Post by: grantmeaname on May 16, 2013, 08:32:44 PM
Remember that holding US stocks is still investing in business worldwide -- just because a company is domiciled in the US doesn't mean its economic activity is all here. Look at how much business Coke and Pepsi do overseas, or think about how thoroughly today's Civic and Camry are American cars. You're obviously most exposed to the US, but no country with a GDP per capita in the quadruple digits or higher ( is an economic island.