Roth IRA Question

[ascZend]

My Roth IRA is 100% allocated into a Vanguard Target Date Retirement Fund with an expense ratio of 0.18%.  63.1% of this fund's holdings are in the Vanguard Total Stock Market ETF (VTI), which has an expense ratio of 0.05% and has outperformed the Target Date Retirement Fund over the last 10 years.  What's more, their performance has been almost identical through both bear markets and the global economic crisis.  Should I make the switch?

[Bruno]

Depends on what your other assets are. If they are tuned to your risk tolerance you could switch. Though .1% is not a lot in the fund industry.

[wtjbatman]

My Roth IRA is 100% allocated into a Vanguard Target Date Retirement Fund with an expense ratio of 0.18%.  63.1% of this fund's holdings are in the Vanguard Total Stock Market ETF (VTI), which has an expense ratio of 0.05% and has outperformed the Target Date Retirement Fund over the last 10 years.  What's more, their performance has been almost identical through both bear markets and the global economic crisis.  Should I make the switch?

I'm not a fan of Target Date Retirement Funds. If you're following a passive investing style, you don't want to throw away your money paying fund fees.  No, .20% doesn't sound like a lot, but it adds up. Whether you have a little bit or a lot of money invested, it would still be costing you four times as much as an index fund with a .05 expense ratio. Go to Bogleheads, and read up on the three fund portfolio. Once you understand the concept, you will be better off while still having the ease of investing in passive index funds.

[ascZend]

Thanks for the replies.

I'm not a fan of Target Date Retirement Funds. If you're following a passive investing style, you don't want to throw away your money paying fund fees.  No, .20% doesn't sound like a lot, but it adds up. Whether you have a little bit or a lot of money invested, it would still be costing you four times as much as an index fund with a .05 expense ratio. Go to Bogleheads, and read up on the three fund portfolio. Once you understand the concept, you will be better off while still having the ease of investing in passive index funds.

I agree.  I don't see the same upside with some of the Target Date Retirement Funds.  Not only do they have almost four times the expense ratio (albeit still very low), they are not outperforming less-diversified, riskier funds like the Total Stock Market Index over the last 10 years, even during market downturns.  Here's a side-by-side comparison:



I think I'll make the exchange today.

[foobar]

Why would you expect the target fund to outperform? After all it is like 90% stocks (combo of total market and some international fund). The 10% bond weighting doesn't matter much.

The goal of these funds isn't to outperform a stock fund. That isn't going to happen. What they are designed to do is reduce risk (i.e. switch to lower volatility instruments) when you approach retirement. You can debate if that makes sense or not.

Can you do the same thing yourself? Sure. Will you? Hard to say.

Personally I am not a fan but for a person that doesn't want to spend a couple hours a month, I have problem saying they are fine.