Vanguard funds

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Target funds with short horizons (like 2010 funds) did drop a lot in the recent market downturn because they were fairly heavy in stocks, probably heavier than someone within 2 years of retirement should have been. But that isn't the fund's fault. It is the investor's fault for not understanding what they were investing in.

I disagree with both of you here. . .you are buying that fund to "forgeddaboutit."

There's no excuse for a Target Fund 2010 to be heavily in stocks, so much so it would produce a significant loss that would result in you "missing your target." I have target funds for our college educations and I hope the managers are being appropriate.

If it's 2008, and the Target is 2010, the name of the game is "capital preservation", not "performance."

You guys are too easy on these companies/financial advisors.

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Vanquish, your sentiment is understandable, but I don't think it's Target Retirement you are referring to.

First and foremost, if you look at Vanguard's Target Retirement performance, you will see that the 2015 fund performed +2.43%, and the 2010 fund performed -0.48% since their inception. Yes, it's not great, but is it the 40% loss that you are referring to? No. In fact, those who have invested properly in Vanguard should have been well-protected by the huge dip in 2008.

Even if you only want to look at last year's performance, it's still nowhere near the 40% loss, and if Vanguard's own numbers are to be believed, they even out-performed the industry average.

However, I have read similar articles that you have mentioned, and they referred to mostly people who were essentially unaware or miscalculated the amount of risk they were exposing their portfolio relative to their true risk tolerance and target horizon. As such, they took on more risk than they should have, and consequently, went down with the market. And the fact that they blamed their fund companies and the funds that they themselves chosen (or perhaps a commission-based sales rep had picked for them) only indicates the level of ignorance they had for their own risk exposure. Sorry to put it bluntly like that, but that's the truth.

We are our own worst enemy. Investor risk is the biggest risk to our portfolio.

Passive investing takes away this biggest risk for you, index funds take the concept one step further, and Target Retirement takes it a step further still. Had these people invested properly with Vanguard's Target Retirement fund (or similar funds with proper asset allocation), the loss would have been more than manageable.

[disneysteve]

Of course it is the investors fault but the main reason for getting into these funds is that you don't have to monitor them. I doubt that anyone who knows how, or cares to, pick and choose funds and how to re-adjust their allocations would much bother with these.

I definitely disagree with the bolded text. I don't think there is ANY investment that you don't have to monitor. Even "safe" things like CDs should be monitored because each time they mature, you need to shop around again for the best rates, not just blindly roll them over. Certainly, when it comes to stock investments, regular monitoring is a must.

As for the value of target funds, keep in mind that not all are the same. If you look at the offerings from Vanguard, T. Rowe, Fidelity, etc., even in funds with the same target year, the allocations within those funds can vary quite a bit. Some are more aggressive, some less. A potential investor needs to evaluate the choices and pick the fund that fits their needs and risk tolerance best.

I don't have a target fund in my retirement accounts but I do have an age-based portfolio in my daughter's college fund. Earlier this year, I decided that their allocation was overly aggressive for our remaining time line and I shifted some of my money to a more conservative fund within the account. Those investing for retirement should be doing the same monitoring and making the same adjustments as they become necessary.

Finally, I do think we all need to keep in mind that these target funds are a pretty new concept. To evaluate them based on short-term performance in the worst market conditions in 70 years really isn't fair. In the recent market downturn, everything lost money - large cap, small cap, growth, value, domestic, international, etc. It is quite unusual for every area to crash at the same time. Asset allocation didn't help much at all. That doesn't mean that it is no longer a good way to invest.

[elessar78]

How do you monitor your investments without becoming too reactionary?

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I definitely disagree with the bolded text.

Let me re-phrase that. The atrtraction of these is that the company is doing the asset allocation and rebalancing for you. I didn't mean you should never pay attention to them, though that is what many do.

Those that do go this route are better off than those that randomly buy funds and never look at them. I'm sure that's why these funds were created.

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Hmm, I just looked through the 2015's fund holdings, and I have to say, I'm a little bit surprised at how aggressive it is... for Vanguard. I'm more of a Bogle-purist in this case, because the 2015 is basically 60/40 in stocks/bonds, whereas Bogle would have suggested 40/60 instead. (Founder Jack Bogle is no longer at the helm of Vanguard. Jack Brennan was, and now, William McNabb is the current CEO.)

But another factor to consider is that growth investing should continue well into retirement. That's because retirees can be expected to live as long as three decades, perhaps more. Once retired, one of the biggest risk is longevity risk (or out-living your money).

As such, unless you have already accumulated a considerable nest egg, growth investing is still necessary, which means exposure to the stock market and all of its volatility and risk.

Still, there's nothing wrong with being even more conservative (or aggressive) than cookie-cutter solutions such as Target Retirement. That's why I've also recommended using Target Retirement like a core fund, and if you insist, build on top of that. For example, Vanguard's Total Bond Market Index Fund (VBMFX) has an average return of +6.81% since its inception, and even the one year performance is +6.13%. That's a bit surprising to me too since bonds have also taken a hit....

But yeah, those who are planning to retire soon should at least consider "tilting" their portfolio towards more bond funds if they feel that their portfolio is still too aggressive. VBMFX, for example, has performed admirably throughout this recession.

[disneysteve]

Hmm, I just looked through the 2015's fund holdings, and I have to say, I'm a little bit surprised at how aggressive it is... for Vanguard. I'm more of a Bogle-purist in this case, because the 2015 is basically 60/40 in stocks/bonds, whereas Bogle would have suggested 40/60 instead.

Someone slated to retire in 2015 would be 56-59 years old now roughly. I do think 60% in stocks is high at that age. That has really been the chief criticism of target funds. I'm really not sure how they justify that allocation.

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Someone slated to retire in 2015 would be 56-59 years old now roughly. I do think 60% in stocks is high at that age. That has really been the chief criticism of target funds. I'm really not sure how they justify that allocation.

Well, believe it or not, but it goes back to something I've stated earlier. When Jack Bogle was at the helm, he steadfastly defended that a portfolio's asset allocations should be much more conservative than what his peers believed. In fact, he was often quoted for his simple "age rule". As in, your bond allocation should be roughly equivalent to your age.

However, during the "better" days of the housing bubble, it was hard to convince many individual investors that. Most investors only saw the bottom line, which was that more aggressive allocations were getting better returns than conservative ones, and assumed that Vanguard's conservative Target Retirement funds were somehow under-performing.

Of course, what people were not factoring in was the level of risk that they were exposing themselves. But again, it's very difficult to convince regular people that when all they see is the bottom line where competing funds were getting better returns.

During this time, Jack Brennan was the CEO, and he had a lot of transformative ideas, both big and small. One of the big ones was the introduction of their index ETF, but a smaller one was to increase the aggressiveness of the Target Retirement allocation.

When asked about it, Jack Bogle was always polite about the change in policy, but remains adamant in his personal belief of risk management over chasing gains.

On a more academic level, there are also several studies that have been done regarding basic asset allocation and subsequent performance versus risk. What was interesting in the studies is that both 60/40 (stocks/bonds) had very similar performance levels as 40/60. And what's even more interesting than that is that both also shared a very similar Sharpe ratio (for risk)! The conclusion of these studies showed that, after 60/40, you are perhaps past a certain point of diminishing returns in terms of stock/bond allocation. (Of course, standard disclaimer over other factors such as exact % in cap funds and fees and charges not being included in order to create the controlled studies apply.)

My own interpretation of the studies, however, was that it was based on back-testing of historical performances where "extraordinary events" such as this recession is averaged out. This is fine for those with a relatively long horizon, but for people who are about to retire, this recession that we are in is breaking a lot of conventional rules and norms of investing. Therefore, to follow these studies word-for-word is a potential danger in itself. All things being equal, I think prospective retirees should stick with a more Bogle-esque conservative investing. Yes. The allocation Vanguard had before people got upset with them for not being aggressive enough.

That said, I'm not entirely ready to pass judgment that even the current Target Retirement is too aggressive to be unhealthy. Not especially when it's compared to the aggressiveness of its industry peers. This is especially in light of the fact that growth investing is still a necessity for most investors, even-- and perhaps, especially-- when one is retired. Again, retirees may still be investing for as long as three decades!

I know what I've written is very convoluted. What I am trying to say is that Vanguard really isn't that bad, even if you are about to retire. However, if you find that Target Retirement is still too aggressive for your liking, feel free to add more bonds (or other conservative investments) to your mix.

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https://personal.vanguard.com/us/funds/snapshot?FundId=0027&FundIntExt=INT#hist=tab%3A1

You know, this whole downturn really illustrates the importance of bonds in a portfolio and I'll admit, I have been one to look down upon them, even with bondholders getting screwed in the GM Debacle.

I see that the allocation that most balanced funds go for is 60/40 stocks but I think the above fund goes with 60% bonds and 40% stocks and the idea behind the fund was quantifying risk and reward ratio and this was the "magic mix" they came up with. That is. . .going with 60% stocks didn't really result in a much greater performance overall but the risk went up. . .let's compare the other Vanguard Balanced Fund (Wellington):

https://personal.vanguard.com/us/funds/snapshot?FundId=0021&FundIntExt=INT#hist=tab%3A1

Almost a 10% return since 1970 vs. a 4% return since 1929 (apples and oranges to a certain extent but you can see the volatility doesn't match performance). . .and not with nearly the risk the average investor assumes in equities.

It's off the subject a bit but all a Target Fund really is a "balanced fund" and Wellsely is probably my favorite balanced fund. If I had my choice and just needed a "balanced fund", why go with all the Fancy/Schmancy Target Funds? I'd just stick it in Wellsely.

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Well, the Target Retirement is a fund of funds (FoFs) with automated asset allocation that changes over time, whereas balanced funds such as the venerable Wellesley does not shift allocation.

Asset allocation is (or is suppose to be) one of the biggest factors to portfolio performance. More so than individual fund performance. Having an asset allocation that shifts over time also makes it more age-appropriate if you want to call it that? (Or rather, it's suppose to be once it is fine-tuned.) For example, I've been assuming that this discussion centered around people who are about to retire, say, within 5 years or so. If it is a different age group, my responses would have been slightly different....

That said though, I've heard of good things about Wellesley, and personally, I have nothing against such an allocation myself. For prospective retirees, I think the Wellesley fund is a great option to consider.

[red92s]

One thing to consider about the "since inception" figures for a lot of target date funds, is that they are relativity new investment options. Many don't have 10 or 20 years of gains to help buoy the performance like older funds do. Pretty much anything created in the last 5 years is lucky to in the green at all.

[disneysteve]

One thing to consider about the "since inception" figures for a lot of target date funds, is that they are relativity new investment options. Many don't have 10 or 20 years of gains to help buoy the performance like older funds do. Pretty much anything created in the last 5 years is lucky to in the green at all.

You know, this is something that I've wondered about. Reports keep saying how folks about to retire lost so much in their Target fund. I just checked. The Vanguard 2010 fund began in June 2006. Why would anyone who was within a couple of years of retirement dump their money into a Target fund like that? Surely, they already had a portfolio of investments. Why change everything with such a short timespan? It doesn't make sense to me. It means that folks planning to retire in 2010 shifted money into this fund within 4 years of retirement.

I expect that when I'm within 4 years of retirement, my portfolio should be pretty well set. That won't be a time when I'm looking to make major changes.

[am_vanquish]

One thing to consider about the "since inception" figures for a lot of target date funds, is that they are relativity new investment options. Many don't have 10 or 20 years of gains to help buoy the performance like older funds do. Pretty much anything created in the last 5 years is lucky to in the green at all.

The since inception numbers mean nothing to me. My comments were driven more by the 2008 single-year returns for these funds. As usual, DS makes a strong point ... why were people moving their funds around at such a pivotal time. My knee-jerk response would be because they fell for the marketing ploy of a "safer" investment. This is my biggest problem with Target Date funds. I don't feel like they're being properly marketed and the disclosure is lacking.

[disneysteve]

The since inception numbers mean nothing to me. My comments were driven more by the 2008 single-year returns for these funds. As usual, DS makes a strong point ... why were people moving their funds around at such a pivotal time. My knee-jerk response would be because they fell for the marketing ploy of a "safer" investment. This is my biggest problem with Target Date funds. I don't feel like they're being properly marketed and the disclosure is lacking.

I haven't really seen them being marketed as being safer. The focus seems to be much more on the convenience factor and diversification. The problem, as we've said, is you need to determine if the allocation of the fund meets your needs.