Author Topic: Lifecycle or Total Market?  (Read 8882 times)

MilStachian

  • 5 O'Clock Shadow
  • *
  • Posts: 91
  • Location: New England
Lifecycle or Total Market?
« on: October 10, 2013, 10:12:14 PM »
Mustachians,
First, I'm glad I've found a community of like-minded individuals. This forum is great.

I currently have much of my retirement (I'm 27) in a Vanguard Lifecycle fund. After reading MMM and jlcollinsnh blog, I'm considering exchanging the fund for Vanguard's Total Stock Market Admiral shares (VTSAX). While I'll lose the international exposure I currently have (except for the many US companies that do business overseas, so I would get indirect exposure) I'll drop the silly bonds they include in the Lifecycle. What do you all think?

Michread

  • Stubble
  • **
  • Posts: 212
Re: Lifecycle or Total Market?
« Reply #1 on: October 11, 2013, 05:46:43 AM »
Mustachians,
First, I'm glad I've found a community of like-minded individuals. This forum is great.

I currently have much of my retirement (I'm 27) in a Vanguard Lifecycle fund. After reading MMM and jlcollinsnh blog, I'm considering exchanging the fund for Vanguard's Total Stock Market Admiral shares (VTSAX). While I'll lose the international exposure I currently have (except for the many US companies that do business overseas, so I would get indirect exposure) I'll drop the silly bonds they include in the Lifecycle. What do you all think?

I don't like the Lifecycle funds.  I think they are fine for a VERY conservative investors.

You're young! 

I think that asset allocation is overblown.  We've been in 90% stocks for the last 20 years.  It's only with our savings at Vanguard that we're more conservative - STAR for many years.

Go with Total Stock Market!  I have a chunk of VTSAX in my IRA along with a few others.
« Last Edit: October 12, 2013, 05:12:30 AM by Michread »

Kriegsspiel

  • Guest
Re: Lifecycle or Total Market?
« Reply #2 on: October 11, 2013, 06:04:33 AM »
The Total World fund from Vanguard includes worldwide stocks. Or, you can just use Total Stock Market + Total International Stock Market.

I don't really like the lifecycle funds either, but I don't think bonds are silly.

MilStachian

  • 5 O'Clock Shadow
  • *
  • Posts: 91
  • Location: New England
Re: Lifecycle or Total Market?
« Reply #3 on: October 11, 2013, 10:14:28 AM »
Thanks for the replies.  It was probably a bit melodramatic to say bonds are silly.

Like Michread said, being a bit younger I should probably tilt my portfolio towards riskier investments since my investing horizon is so long.

I'll go ahead and exchange those Vanguard LifeCycles for the VTSAX.

Brandon Curtis

  • 5 O'Clock Shadow
  • *
  • Posts: 12
  • Age: 32
  • Location: Berkeley, CA
  • Progress! Progress!
    • And Higher Still
Re: Lifecycle or Total Market?
« Reply #4 on: October 11, 2013, 11:32:44 AM »
I was all ready to jump to the defense of the importance of asset allocation, since I just published a big ol' article on the subject.  "They say that asset allocation accounts for 90% of returns—it must be important!"

But then I thought a little more about it, and began wondering what, exactly, that even means.

Google reveals that this statement is an overblown myth:

Wikipedia: Asset Allocation#Academic Studies
CBS News: A Misconception - 90 percent of return comes from Asset Allocation
Ibbotson Associates: The True Impact of Asset Allocation on Returns
Ibbotson Associates: Does Asset Allocation Policy Explain, 40, 90, or 100 Percent of Performance?
CFA Institute: Setting the Record Straight on Asset Allocation

Costs have a far more significant impact on total returns, so if you're with Vanguard, you've already won three-quarters of the battle.

For international exposure, VGTSX/VTIAX/VXUS (Total International ex-US) is probably preferable to VFWIX/VFWAX/VEU, since it does sample international small-caps.

How much money are you talking about moving, and what kind of account is it?  If your retirement plan is something like a Vanguard IRA that offers a brokerage window, you could switch to VTSAX and pick up some VXUS as an ETF on the side.


kyleaaa

  • Bristles
  • ***
  • Posts: 327
    • Kyle Bumpus
Re: Lifecycle or Total Market?
« Reply #5 on: October 11, 2013, 01:08:52 PM »
I certainly wouldn't call bond funds "silly." The Lifestrategy Growth Fund is only 20% bonds and it's FAR more diversified than the total stock market fund.  If you MUST go 100% stocks, either use the total world fund or at least buy buy the Total International Index Fund as well. I would not recommend what you're contemplating to anybody.
« Last Edit: October 11, 2013, 01:10:37 PM by kyleaaa »

MilStachian

  • 5 O'Clock Shadow
  • *
  • Posts: 91
  • Location: New England
Re: Lifecycle or Total Market?
« Reply #6 on: October 11, 2013, 01:33:36 PM »
Kyleaaa,
You're right.  As I said two posts above, I was being melodramatic when I called bonds silly.

However, don't bonds go up when interest rates go down?  And since interest rates really can't get much lower, if I purchase bonds now aren't I literally buying at their lowest point?  Would it make sense to buy them later in life when I'm trying to preserve more of my wealth?

I appreciate your help!

EDIT: Let me clarify; when I said buy at their lowest point, I meant lowest value.  If bonds only go up when interest rates go down, and interest rates are currently at the lowest they can get, wouldn't it make sense to buy bonds when interest rates are higher?  Appreciate the education on this topic.
« Last Edit: October 11, 2013, 01:42:49 PM by MilStachian »

kyleaaa

  • Bristles
  • ***
  • Posts: 327
    • Kyle Bumpus
Re: Lifecycle or Total Market?
« Reply #7 on: October 11, 2013, 03:45:22 PM »
However, don't bonds go up when interest rates go down? 

Yeah, but you also get higher interest payments. The worst-case scenario for bonds is very, very, very mild. The medium-bad case for stocks is about 10 times worse than the worst-case scenario for bonds. It's silly to buy stocks instead of bonds if you're worried about risk. No matter what state the bond market is in, it's always far, far, far, far, far, far less risky than stocks.

And since interest rates really can't get much lower, if I purchase bonds now aren't I literally buying at their lowest point?

No. But if you're really worried about it, stick to low-duration bonds. A short-term bond fund will lose practically nothing even if interest rates rise dramatically. An intermediate-term bond fund would lose relatively little in such a scenario and the break-even point would be far sooner than you'd think. For long-term investors, these fluctuations are inconsequential. And even if they weren't, what would you invest in instead? Stocks? They're a billion times riskier than bonds.

Would it make sense to buy them later in life when I'm trying to preserve more of my wealth?

Yes, but that says nothing about whether or not it makes sense to buy them now.

If bonds only go up when interest rates go down, and interest rates are currently at the lowest they can get, wouldn't it make sense to buy bonds when interest rates are higher?  Appreciate the education on this topic.

Market timing doesn't work.
« Last Edit: October 11, 2013, 03:48:22 PM by kyleaaa »

MilStachian

  • 5 O'Clock Shadow
  • *
  • Posts: 91
  • Location: New England
Re: Lifecycle or Total Market?
« Reply #8 on: October 11, 2013, 03:55:43 PM »
Thanks for the feedback.  I'll dig into the topic myself and see what I come up with.  I understand the principle that bonds are much safer than stocks, but not sure if I'm willing to trade any future gains for some stability now.

Brandon Curtis

  • 5 O'Clock Shadow
  • *
  • Posts: 12
  • Age: 32
  • Location: Berkeley, CA
  • Progress! Progress!
    • And Higher Still
Re: Lifecycle or Total Market?
« Reply #9 on: October 11, 2013, 04:08:18 PM »
It really comes down to A) how long until you want to access this money and B) how much you'll freak out if the markets take a big hit between now and then.

I like all of the positive talk around here of Stock Market As Best Friend, as that's a good long-term view to have.  Just don't forget how crazy the short-term can be, and plan accordingly.

Petunia 100

  • Stubble
  • **
  • Posts: 136
Re: Lifecycle or Total Market?
« Reply #10 on: October 11, 2013, 04:39:27 PM »
I think that the LifeStrategy funds are excellent.  If there is one which matches your AA, then it is a fine choice.   It is also fine to choose etfs or admiral shares of the individual components.

Regarding currently being at a low point for interest rates.  Yes, we are.  When will interest rates rise significantly?  We just don't know.  It could be decades before interest rates rise, or it could start happening tomorrow.  In the meantime, bonds continue to earn interest.

My portfolio recovered nicely after 2008, in large part because I rebalanced by selling bonds and buying stocks.   If I had been 100% stocks, how would I have put any significant new money into stocks at that nice low?

There are good reasons to own bonds as well as stocks.

Kriegsspiel

  • Guest
Re: Lifecycle or Total Market?
« Reply #11 on: October 11, 2013, 06:20:58 PM »
Am I missing why people think the Lifecycle funds are good? You are paying a higher ER just to get the inferior (non-Admiral) shares of the funds you can buy on their own as easy as buying the Lifecycle fund. The only advantage looks like they will maintain your asset allocation for you, but where's the fun in that?

RobertBirnie

  • 5 O'Clock Shadow
  • *
  • Posts: 77
  • Age: 33
  • Location: San Jose, CA
Re: Lifecycle or Total Market?
« Reply #12 on: October 11, 2013, 07:43:04 PM »
However, don't bonds go up when interest rates go down? 

Yeah, but you also get higher interest payments. The worst-case scenario for bonds is very, very, very mild. The medium-bad case for stocks is about 10 times worse than the worst-case scenario for bonds. It's silly to buy stocks instead of bonds if you're worried about risk. No matter what state the bond market is in, it's always far, far, far, far, far, far less risky than stocks.

If bonds only go up when interest rates go down, and interest rates are currently at the lowest they can get, wouldn't it make sense to buy bonds when interest rates are higher?  Appreciate the education on this topic.

Market timing doesn't work.

First, if interest rates go up, a bonds value goes down to compensate. The holder of the bond doesn't get the higher interest payment, they just flat loose out on value.

Secondly, kyleaaa is right that market timing doesn't work but you are right that you have a higher chance of loosing money on the bonds right now. But its still worth buying some bonds IMO because you're trading a slightly higher risk of loosing a little money on the bonds with the chance to rebalance into stocks if stocks take a dive ( of which a slight stock dive is much worse than any bond loss) which could make you quite a lot. 

beltim

  • Magnum Stache
  • ******
  • Posts: 2964
Re: Lifecycle or Total Market?
« Reply #13 on: October 11, 2013, 10:39:23 PM »
Another option is to just hold cash in place of bonds. You'll receive smaller interest payments (although with savings accounts around 1%, not by much compared to short-medium duration government bonds after expenses), but you'll still be able to rebalance after movements in stocks.

Brandon Curtis

  • 5 O'Clock Shadow
  • *
  • Posts: 12
  • Age: 32
  • Location: Berkeley, CA
  • Progress! Progress!
    • And Higher Still
Re: Lifecycle or Total Market?
« Reply #14 on: October 11, 2013, 10:52:33 PM »
Am I missing why people think the Lifecycle funds are good? You are paying a higher ER just to get the inferior (non-Admiral) shares of the funds you can buy on their own as easy as buying the Lifecycle fund. The only advantage looks like they will maintain your asset allocation for you, but where's the fun in that?

Lifecycle/Target Date funds can be a decent choice for those who never want to have to touch anything in their account.  They can also be a decent option when someone is first starting out and doesn't yet have the capital to meet the minimums on multiple Vanguard funds while still maintaining a sane asset allocation.

grantmeaname

  • Magnum Stache
  • ******
  • Posts: 4978
  • Age: 28
  • Location: Cincinnati
  • Cast me away from yesterday's things
Re: Lifecycle or Total Market?
« Reply #15 on: October 12, 2013, 06:49:51 AM »
First, if interest rates go up, a bonds value goes down to compensate. The holder of the bond doesn't get the higher interest payment, they just flat loose out on value.
That's only true if you hold individual bonds. If you hold a bond mutual fund your interest payments will start to increase as rates increase.

Kriegsspiel

  • Guest
Re: Lifecycle or Total Market?
« Reply #16 on: October 12, 2013, 07:39:05 AM »
Lifecycle/Target Date funds can be a decent choice for those who never want to have to touch anything in their account.  They can also be a decent option when someone is first starting out and doesn't yet have the capital to meet the minimums on multiple Vanguard funds while still maintaining a sane asset allocation.

Granted, the Lifecycle ERs are still only what, 0.16%, but you are still paying someone to  re-balance a 3 Fund Portfolio, which doesn't really jive with Mustachin.

ETFs don't have a minimum buy-in.

Brandon Curtis

  • 5 O'Clock Shadow
  • *
  • Posts: 12
  • Age: 32
  • Location: Berkeley, CA
  • Progress! Progress!
    • And Higher Still
Re: Lifecycle or Total Market?
« Reply #17 on: October 12, 2013, 11:32:48 AM »
You can't trade partial shares or set up automatic investments with an ETF; from my experience, this is exactly what someone just starting out does not want to deal with.

As for expense ratios:

Target Date: 0.18%

VTSMX—0.17%VGTSX—0.22%VBMFX—0.22%VTIBX—0.23%
VTSAX—0.05%VTIAX—0.16%VBTLX—0.10%VTABX—0.20%

Based on these values and the asset allocation used in the Target Date funds, a three-fund portfolio will have a net expense ratio of 0.20% if it's composed of Investor-Class shares, and 0.10% if it's composed of Admiral-Class shares.  If a beginner investor wants to hold bonds as 20% or less of their portfolio, they'd need a minimum $15,000 to cover the minimums of the Investor-Class shares, and a good deal more than that to cover the minimums of the Admiral-Class shares.  For those who have less than around $20,000 invested, the Target Date funds will likely be cheaper.  Many of us are far beyond that, but it's good to keep the appeal of simplicity in mind when working with people who are just getting started.

Once you have enough to go all-in on Admiral shares, the expense ratio drop of 0.08% from the Target Date funds will save you $80 per $100,000 invested per year.

kyleaaa

  • Bristles
  • ***
  • Posts: 327
    • Kyle Bumpus
Re: Lifecycle or Total Market?
« Reply #18 on: October 13, 2013, 10:10:09 AM »

First, if interest rates go up, a bonds value goes down to compensate. The holder of the bond doesn't get the higher interest payment, they just flat loose out on value.

They do if they're reinvesting interest payments, which is what bond funds do.

Sebastian

  • Stubble
  • **
  • Posts: 209
  • Age: 33
Re: Lifecycle or Total Market?
« Reply #19 on: October 15, 2013, 09:06:48 AM »
Hold the phone! I got into a Life Cycle fund a half a year ago. I bough into the Vanguard 2060 fund. 90%(something like 75% domestic 15% international) stocks 10%bonds.

What is wrong with that asset allocation? It's the most aggressive target fund they have. Help me out if I'm missing something. I also have a 401K that is with Charles Schwab that is allocating 100% to S&P500 index fund. Thanks!

Michread

  • Stubble
  • **
  • Posts: 212
!
« Reply #20 on: October 15, 2013, 11:01:00 AM »
Hold the phone! I got into a Life Cycle fund a half a year ago. I bough into the Vanguard 2060 fund. 90%(something like 75% domestic 15% international) stocks 10%bonds.

What is wrong with that asset allocation? It's the most aggressive target fund they have. Help me out if I'm missing something. I also have a 401K that is with Charles Schwab that is allocating 100% to S&P500 index fund. Thanks!

Nothing is wrong with it!  It depends on your level of comfort and involvement in your funds.  I MIGHT have done better with  something like this fund when I first started with Vanguard 20 yrs ago.  I do NOT like them for MY retirement target date (WAY too conservative).

Vanguard 2060 was started in 2012 - VERY short history! I don't like funds with short histories.
« Last Edit: October 15, 2013, 11:06:55 AM by Michread »

Sebastian

  • Stubble
  • **
  • Posts: 209
  • Age: 33
Re: Lifecycle or Total Market?
« Reply #21 on: October 15, 2013, 03:06:19 PM »
But isn't it just index funds bond funds mixed together?

RobertBirnie

  • 5 O'Clock Shadow
  • *
  • Posts: 77
  • Age: 33
  • Location: San Jose, CA
Re: Lifecycle or Total Market?
« Reply #22 on: October 15, 2013, 03:29:17 PM »
But isn't it just index funds bond funds mixed together?

Yep, so although the fund itself has not much history you could infer it based on the holdings.

1   Vanguard Total Stock Market Index Fund Investor Shares   63.2%
2   Vanguard Total International Stock Index Fund Investor Shares   26.9%
3   Vanguard Total Bond Market II Index Fund Investor Shares†   7.9%
4   Vanguard Total International Bond Index Fund Investor Shares   2.0%

more4less

  • 5 O'Clock Shadow
  • *
  • Posts: 85
  • Age: 35
  • Location: SF Bay Area
Re: Lifecycle or Total Market?
« Reply #23 on: October 17, 2013, 06:57:38 PM »
Geetings mustachians,
I have about about 30% of savings in 401k managed by Fidelity. Currently all of it is in Fidelity Freedom 2050 (FFFHX). It is has expense ratio of 0.82% and underperforms S&P 500. I'm thinking about exchanging it.

About me:
- I'm 28
- The rest of my investments in VTSAX.
- I don't mind taking risks since my age permits.

Here are available funds for my 401k:


I'm personally leaning to Fidelity Spartan 500 Index Institutional (FXSIX). As far as I understand, it's Fidelity's analog of VTSAX. Any advice?

Many thanks in advance!

grantmeaname

  • Magnum Stache
  • ******
  • Posts: 4978
  • Age: 28
  • Location: Cincinnati
  • Cast me away from yesterday's things
Re: Lifecycle or Total Market?
« Reply #24 on: October 18, 2013, 04:58:32 AM »
It's more like an equivalent of VFIAX. You'd also want to hold a little of Vanguard Small Cap Index Signal in your 401k with it or hold something like a Russell 2000 or S&P completion index in another account.